Mr. Ricardo’s Great Adventure: Estimating Fiscal Multipliers in a Truly Intertemporal Model

July 1, 2006

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Format: Chicago

Silvia Sgherri, and Tamim Bayoumi. Mr. Ricardo’s Great Adventure: Estimating Fiscal Multipliers in a Truly Intertemporal Model, (USA: International Monetary Fund, 2006) accessed December 22, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We estimate tax multipliers in a "Blanchard-Yaari" consumption model where Ricardian equivalence is broken because the private sector discounts the future at a faster rate than the real rate of interest. The model fits U.S. data since 1955 extremely well-entailing a discount wedge of around 20 percent a year and fiscal multipliers of 0.15-0.4-depending on the permanence of the change in taxes/transfers, and is much superior to one that assumes some consumers are fully Ricardian and others follow simple rules of thumb. The implied high private sector rate of discount has wide implications for policymakers.

Subject: Consumption, Disposable income, Estimation techniques, Income, Personal income

Keywords: Consumption function, WP

Publication Details

Pages:

30
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2006/168
Stock No:

WPIEA2006168
ISBN:

9781451864281
ISSN:

1018-5941

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