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Balanced budget vs. Tax smoothing in a small open economy: A welfare comparison

  • Angyridis, Constantine
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    The objective of this paper is to investigate the effect of lending and borrowing constraints on the dynamics of public debt and optimal taxation policy in the context of a general equilibrium model with tax smoothing. The results from the numerical simulation of the model show significant welfare gains, provided that the policymaker is allowed to borrow and lend in order to smooth taxes across time instead of maintaining a balanced budget at all times. Moreover, for a specific process for asset prices, it is also shown that if the government can issue state-contingent debt then overall welfare can be further improved substantially.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0164-0704(08)00056-6
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    Article provided by Elsevier in its journal Journal of Macroeconomics.

    Volume (Year): 31 (2009)
    Issue (Month): 3 (September)
    Pages: 438-463

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    Handle: RePEc:eee:jmacro:v:31:y:2009:i:3:p:438-463
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622617

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    2. Cashin, P. & Olekalns, N. & Sahay, R., 1998. "Tax Smoothing in a Financially Repessed Economy: Evidence from India," Department of Economics - Working Papers Series 656, The University of Melbourne.
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    5. International Monetary Fund, 1999. "Spend Now, Pay Later? Tax Smoothing and Fiscal Sustainability in South Asia," IMF Working Papers 99/63, International Monetary Fund.
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    7. Albert Marcet & Andrew Scott, 2007. "Debt and Deficit Fluctuations and the Structure of Bond Markets," UFAE and IAE Working Papers 728.08, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
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    15. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Optimal Fiscal and Monetary Policy Under Sticky Prices," Departmental Working Papers 200105, Rutgers University, Department of Economics.
    16. S. Rao Aiyagari, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, Oxford University Press, vol. 109(3), pages 659-684.
    17. Sleet, Christopher & Yeltekin, Sevin, 2006. "Optimal taxation with endogenously incomplete debt markets," Journal of Economic Theory, Elsevier, vol. 127(1), pages 36-73, March.
    18. David R. Stockman, 2001. "Balanced-Budget Rules: Welfare Loss and Optimal Policies," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(2), pages 438-459, July.
    19. den Haan, Wouter J & Marcet, Albert, 1990. "Solving the Stochastic Growth Model by Parameterizing Expectations," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(1), pages 31-34, January.
    20. Strazicich, Mark C., 1997. "Does Tax Smoothing Differ by the Level of Government? Time Series Evidence from Canada and the United States," Journal of Macroeconomics, Elsevier, vol. 19(2), pages 305-326, April.
    21. Correia, Isabel H., 1996. "Dynamic optimal taxation in small open economies," Journal of Economic Dynamics and Control, Elsevier, vol. 20(4), pages 691-708, April.
    22. Mark Strazicich, 2002. "International evidence of tax smoothing in a panel of industrial countries," Applied Economics, Taylor & Francis Journals, vol. 34(18), pages 2325-2331.
    23. Stephanie Schmitt-Grohe & Martin Uribe, 1995. "Balanced-budget rules, distortionary taxes, and aggregate instability," Finance and Economics Discussion Series 95-44, Board of Governors of the Federal Reserve System (U.S.).
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