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Fiscal Reform, Growth and Current Account Dynamics

  • Creina Day


  • Garth Day


This paper examines the dynamic and long run effects of a shift from income taxes to consumption taxes in a growing small open economy. We extend the small open economy Solow-Swan model by introducing a government sector that maintains both a balanced budget and expenditure at a constant proportion of domestic income. Switching to lower income taxes promotes economic growth and improves the current account balance, despite an instantaneous drop.

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Paper provided by Australian National University, College of Business and Economics, School of Economics in its series ANU Working Papers in Economics and Econometrics with number 2007-485.

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Length: 19 pages
Date of creation: Sep 2007
Date of revision:
Handle: RePEc:acb:cbeeco:2007-485
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  1. Turnovsky, Stephen J., 1996. "Fiscal policy, growth, and macroeconomic performance in a small open economy," Journal of International Economics, Elsevier, vol. 40(1-2), pages 41-66, February.
  2. Partha Sen & Stephen J. Turnovsky, 1990. "Investment Tax Credit in an Open Economy," NBER Working Papers 3298, National Bureau of Economic Research, Inc.
  3. Andrew B. Abel & N. Gregory Mankiw & Lawrence H. Summers & Richard J. Zeckhauser, 1989. "Assessing Dynamic Efficiency: Theory and Evidence," Review of Economic Studies, Oxford University Press, vol. 56(1), pages 1-19.
  4. Roberto Perotti, 2002. "Estimating the effects of fiscal policy in OECD countries," Economics Working Papers 015, European Network of Economic Policy Research Institutes.
  5. Zeng, Jinli & Zhang, Jie, 2002. "Long-run growth effects of taxation in a non-scale growth model with innovation," Economics Letters, Elsevier, vol. 75(3), pages 391-403, May.
  6. Jones, Larry E & Manuelli, Rodolfo E & Rossi, Peter E, 1993. "Optimal Taxation in Models of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 485-517, June.
  7. Schubert, Stefan F & Turnovsky, Stephen J, 2002. "The Dynamics of Temporary Policies in a Small Open Economy," Review of International Economics, Wiley Blackwell, vol. 10(4), pages 604-22, November.
  8. Matt Benge & Graeme Wells, 2002. "Growth and the Current Account in a Small Open Economy," The Journal of Economic Education, Taylor & Francis Journals, vol. 33(2), pages 152-165, June.
  9. Robert G. King & Sergio Rebelo, 1990. "Public Policy and Economic Growth: Developing Neoclassical Implications," NBER Working Papers 3338, National Bureau of Economic Research, Inc.
  10. Perotti, Roberto, 2002. "Estimating the effects of fiscal policy in OECD countries," Working Paper Series 0168, European Central Bank.
  11. Nancy L. Stokey & Sergio Rebelo, 1993. "Growth Effects of Flat-Rate Taxes," NBER Working Papers 4426, National Bureau of Economic Research, Inc.
  12. Manuel Gomez, 2003. "Effects of Flat-Rate Taxes: to What Extent Does the Leisure Specification Matter?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(2), pages 404-430, April.
  13. Leung, Charles Ka Yui, 1999. "Income Tax, Property Tax, and Tariff in a Small Open Economy," Review of International Economics, Wiley Blackwell, vol. 7(3), pages 541-54, August.
  14. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1329-1368.
  15. Kookshin Ahn, 2003. "Are East Asian Economies Dynamically Efficient?," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 28(1), pages 101-110, June.
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