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Alternative Specifications of Intertemporal Fiscal Policy in a Small Theoretical Model

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  • Ralph C. Bryant
  • Long Zhang

Abstract

In this second of a series of three working papers, we use a simple neoclassical growth model to illustrate how consumption, investment, and output -- more broadly, the entire dynamic equation system of a model -- can be strongly influenced by alternative specifications of a reaction function describing the intertemporal behavior of a government's fiscal authority. The classes of fiscal rule studied -- debt-stock targeting, incremental interest payments (IIP), and the analytical benchmark of a balanced budget -- are described and discussed in the first paper in the series. The analysis demonstrates that the consequences of shocks or policy actions can be strongly conditioned by the intertemporal fiscal reaction function imposed on a macroeconomic model. Significant variation can occur for different types of rule, for alternative assumptions about the timing of the rule's activation, and for alternative values of the rule's feedback coefficients.

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Bibliographic Info

Paper provided by Brookings Institution International Economics in its series Discussion Papers with number 124.

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Date of creation: 1996
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Handle: RePEc:wop:briedp:124

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Cited by:
  1. Tracy Foertsch, 2004. "Macroeconomic Impacts of Stylized Tax Cuts in an Intertemporal Computable General Equilibrium Model: Technical Paper 2004-11," Working Papers 15914, Congressional Budget Office.
  2. Moldovan, Ioana R., 2010. "Countercyclical taxes in a monopolistically competitive environment," European Economic Review, Elsevier, vol. 54(5), pages 692-717, July.
  3. Eric M. Leeper, 2010. "Monetary Science, Fiscal Alchemy," NBER Working Papers 16510, National Bureau of Economic Research, Inc.
  4. Javier J. Pérez & Paul Hiebert, 2002. "Identifying endogenous fiscal policy rules for macroeconomic models," Economic Working Papers at Centro de Estudios Andaluces E2002/06, Centro de Estudios Andaluces.
  5. Leal, Teresa & Pérez, Javier J. & Tujula, Mika & Vidal, Jean-Pierre, 2007. "Fiscal forecasting: lessons from the literature and challenges," Working Paper Series 0843, European Central Bank.

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