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Tax Base and Crowding-in Effects of Balanced Budget Fiscal Policy

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  • Ludger Linnemann

Abstract

A dynamic general equilibrium business cycle model is constructed with staggered price adjustment, monopolistic wage setting and distortionary taxation. The government purchases goods, runs an unemployment benefit system and balances its budget through a proportional tax on labour income. A temporary tax-financed increase in government expenditures can lower the tax rate through a demand-induced widening of the tax base. It is shown analytically that this allows private consumption to rise, under realistic conditions, despite the negative wealth effect of increased fiscal spending. Copyright The editors of the "Scandinavian Journal of Economics", 2004 .

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  • Ludger Linnemann, 2004. "Tax Base and Crowding-in Effects of Balanced Budget Fiscal Policy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(2), pages 273-297, June.
  • Handle: RePEc:bla:scandj:v:106:y:2004:i:2:p:273-297
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    References listed on IDEAS

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    Cited by:

    1. IWATA Yasuharu, 2009. "Fiscal Policy in an Estimated DSGE Model of the Japanese Economy: Do Non-Ricardian Households Explain All?," ESRI Discussion paper series 216, Economic and Social Research Institute (ESRI).
    2. Heijdra, Ben J. & Ligthart, Jenny E., 2007. "Fiscal policy, monopolistic competition, and finite lives," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 325-359, January.

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