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The Effects of Fiscal Instruments on the Economy of Lithuania

Author

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  • Sigitas Karpavicius

    () (University of New South Wales)

Abstract

The goal of this paper is to examine the dynamic effects of fiscal instruments in Lithuania on the economy and welfare. In the analysis, a calibrated dynamic stochastic general equilibrium model for Lithuania is employed. The calculation implies that 9-16 percent of tax cuts are self-financing in the long run. It suggests that the slope of Laffer curve in Lithuanian economy is rather flat. The analysis of effects of different tax cuts shows that the impact of 1 percentage point permanent decrease in statutory tax rate on gross domestic product is very small (within the range of –0.15 through 0.15 percent in all cases). The estimated government expenditure multiplier has a different sign in the long run when various financing sources are used to balance the government budget.

Suggested Citation

  • Sigitas Karpavicius, 2009. "The Effects of Fiscal Instruments on the Economy of Lithuania," Bank of Lithuania Working Paper Series 4, Bank of Lithuania.
  • Handle: RePEc:lie:wpaper:4
    as

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    File URL: http://www.lb.lt/en/publications/no-4-the-effects-of-fiscal-instruments-on-the-economy-of-lithuania
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    References listed on IDEAS

    as
    1. Mathias Trabandt & Harald Uhlig, 2006. "How Far Are We From The Slippery Slope? The Laffer Curve Revisited," SFB 649 Discussion Papers SFB649DP2006-023, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    2. Cardia, Emanuela & Kozhaya, Norma & Ruge-Murcia, Francisco J, 2003. " Distortionary Taxation and Labor Supply," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(3), pages 350-373, June.
    3. Sigitas Karpavicius & Igor Vetlov, 2008. "Personal Income Tax Reform in Lithuania: Macroeconomic and Welfare Implications," Bank of Lithuania Working Paper Series 2, Bank of Lithuania.
    4. Devereux, Michael B & Love, David R F, 1995. "The Dynamic Effects of Government Spending Policies in a Two-Sector Endogenous Growth Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 232-256, February.
    5. Kollmann, Robert, 2002. "Monetary policy rules in the open economy: effects on welfare and business cycles," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 989-1015, July.
    6. Christophe Chamley, 1985. "Efficient Tax Reform in a Dynamic Model of General Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 100(2), pages 335-356.
    7. Niels Arne Dam & Jesper Gregers Linaa, 2005. "What Drives Business Cycles in a Small Open Economy with a Fixed Exchange Rate?," EPRU Working Paper Series 05-02, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    8. Trabandt, Mathias & Uhlig, Harald, 2011. "The Laffer curve revisited," Journal of Monetary Economics, Elsevier, vol. 58(4), pages 305-327.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    fiscal policy; degree of self-financing of tax cuts; impact of tax cuts; government expenditure multiplier;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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