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Fiscal policy in an open economy

Author

Listed:
  • Friedman Amit

    (Market Operations Division, Bank of Israel, Mailbox 780, Jerusalem)

  • Hercowitz Zvi

    (Tiomkin School of Economics, IDC Herzliya, P.O. Box 176, Herzliya 4610101, Israel Berglas School of Economics, Tel Aviv University)

  • Sidi Jonathan

    (Department of Statistics, The Hebrew University of Jerusalem, Mount Scopus, Jerusalem 91905, Israel Research Department, Bank of Israel, Jerusalem, Israel)

Abstract

This paper analyzes the quantitative macroeconomic implications of a fiscal policy regime based on exogenous tax rates paths and public debt/GDP target in an open economy. In this setup, government spending accommodates tax revenues and target deficits. In particular, we concentrate on pre-announced tax cuts, as well as on the adoption of a lower debt target – following policies conducted in Israel during the 2000s. We construct a model where domestic production requires imported inputs, and simulate the effects of these policies. The analysis focuses on the dynamics generated by the announcements of these policy steps, followed by their implementation. The model has the implication that a credible announcement of a future tax cut has an expansionary effect on impact, similar in nature to the effects of productivity shocks. Also, the model implies that the announcement of a lower public debt/GDP target has a contractionary effect, while it’s implementation leads to higher output in the long-run.

Suggested Citation

  • Friedman Amit & Hercowitz Zvi & Sidi Jonathan, 2016. "Fiscal policy in an open economy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 16(1), pages 25-46, January.
    • Handle: RePEc:bpj:bejmac:v:16:y:2016:i:1:p:25-46:n:10
    DOI: 10.1515/bejm-2015-0064
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    References listed on IDEAS

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