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A New-Open-Economy Macro Model for Fiscal Policy Evaluation

  • Dirk Muir
  • Douglas Laxton
  • Dennis P. J. Botman
  • Andrei Romanov

We develop a New-Open-Economy-Macro model in which Ricardian equivalence does not hold because of (i) distortionary labor and corporate income taxation; (ii) limited asset market participation; and (iii) because the overlapping-generations structure results in a disconnect between current and future generations. We consider a permanent increase in government debt following a cut in labor or corporate income taxes in a small and large open economy. We analyze the sensitivity of the results to the key structural parameters of the model and argue that under plausible assumptions there will be significant crowding-out effects associated with permanent increases in government debt.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/45.

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Length: 46
Date of creation: 01 Feb 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/45
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  8. Christopher J. Erceg & Luca Guerrieri & Christopher Gust, 2005. "Expansionary Fiscal Shocks and the US Trade Deficit," International Finance, Wiley Blackwell, vol. 8(3), pages 363-397, December.
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  13. Willem H. Buiter, 1979. "Time Preference and International Lending and Borrowing in an Overlapping-Generations Model," NBER Working Papers 0352, National Bureau of Economic Research, Inc.
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