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Economic Growth and Endogenous Fiscal Policy: In Search of a Data Consistent General Equilibrium Model

  • Jim Malley
  • Apostolis Philippopoulos

This paper searches for a general equilibrium model of optimal growth and endogenous fiscal policy with the aim of explaining the interaction between private agents and fiscal authorities in the U.S., West Germany, Japan and the U.K. over the period 1960-1996. Our search is conducted in the context of popular models with closed-form analytical solutions since this is necessary to formally test the models' theoretical restrictions. In West Germany and Japan there is evidence that the fiscal authorities act as optimizing Stackelberg leaders who are concerned about the current welfare of private agents. In contrast, the fiscal authorities in the U.S. and U.K. do not appear to act as optimizing agents; instead, they follow simple rule-of-thumb policy rules. In all countries, the tax smoothing model, according to which policymakers find it optimal not to react to the state of the economy, is rejected.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2000/wp-cesifo-2000-01/WP235.PDF
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 235.

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Date of creation: 2000
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Handle: RePEc:ces:ceswps:_235
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  9. Benhabib, Jess & Velasco, Andres, 1996. "On the optimal and best sustainable taxes in an open economy," European Economic Review, Elsevier, vol. 40(1), pages 135-154, January.
  10. Persson, Torsten & Tabellini, Guido, 1999. "The size and scope of government:: Comparative politics with rational politicians," European Economic Review, Elsevier, vol. 43(4-6), pages 699-735, April.
  11. Lawrence J. Christiano & Martin Eichenbaum, 1990. "Current real business cycle theories and aggregate labor market fluctuations," Discussion Paper / Institute for Empirical Macroeconomics 24, Federal Reserve Bank of Minneapolis.
  12. Lockwood, Ben & Philippopoulos, Apostolis & Snell, Andy, 1996. "Fiscal Policy, Public Debt Stabilisation and Politics: Theory and UK Evidence," Economic Journal, Royal Economic Society, vol. 106(437), pages 894-911, July.
  13. Steve Ambler & Alain Paquet, 1994. "Fiscal spending shocks, endogenous government spending, and real business cycles," Discussion Paper / Institute for Empirical Macroeconomics 94, Federal Reserve Bank of Minneapolis.
  14. Harald Uhlig & Martin Lettau, 1999. "Rules of Thumb versus Dynamic Programming," American Economic Review, American Economic Association, vol. 89(1), pages 148-174, March.
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  16. McGrattan, Ellen R., 1994. "The macroeconomic effects of distortionary taxation," Journal of Monetary Economics, Elsevier, vol. 33(3), pages 573-601, June.
  17. King, R.G. & Baxter, M., 1990. "Fiscal Policy In General Equilibrium," RCER Working Papers 244, University of Rochester - Center for Economic Research (RCER).
  18. Hsiao, Cheng, 1983. "Identification," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 1, chapter 4, pages 223-283 Elsevier.
  19. Dunne, John Paul & Pashardes, Panos & Smith, Ronald P, 1984. "Needs, Costs and Bureaucracy: The Allocation of Public Consumption in the UK," Economic Journal, Royal Economic Society, vol. 94(373), pages 1-15, March.
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  22. Kollintzas, T. & Philippopoulos, A. & Vasillatos, V., 1999. "Is Tax Policy Coordination Necessary?," DEOS Working Papers 110, Athens University of Economics and Business.
  23. Richmond, J, 1974. "Identifiability in Linear Models," Econometrica, Econometric Society, vol. 42(4), pages 731-36, July.
  24. Jim Malley & Apostolis Philippopoulos & George Economides, 1999. "Testing For Tax Smoothing In A General Equilibrium Model Of Growth," Working Papers 1999_22, Business School - Economics, University of Glasgow.
  25. Serletis, Apostolos & Schorn, Richard G, 1999. "International Evidence on the Tax- and Revenue-Smoothing Hypotheses," Oxford Economic Papers, Oxford University Press, vol. 51(2), pages 387-96, April.
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