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

By Dirk V Muir, Douglas Laxton, Dennis P Botman, Andrei Romanov

February 1, 2006

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Dirk V Muir, Douglas Laxton, Dennis P Botman, and Andrei Romanov. A New-Open-Economy Macro Model for Fiscal Policy Evaluation, (USA: International Monetary Fund, 2006) accessed October 15, 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 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.

Subject: Consumption, Financial services, Labor, Labor taxes, National accounts, Public debt, Real interest rates, Taxes

Keywords: Consumption, Consumption function, Crowding-out effect, Debt ratio, Distortionary taxes, Finite lives, Fiscal policy, Global, Government debt, Home economy, Labor taxes, Open economy, Real interest rates, Rule-of-thumb consumer, Rule-of-thumb consumers, WP

Publication Details

Pages:

46
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2006/045
Stock No:

WPIEA2006045
ISBN:

9781451863055
ISSN:

1018-5941

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