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http://ssrn.com/abstract=1456361
 
 

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Dynamics of Fiscal Financing in the United States


Eric M. Leeper


Indiana University at Bloomington - Department of Economics; National Bureau of Economic Research (NBER); Monash University, Department of Economics

Michael Plante


Indiana University Economics Department

Nora Traum


North Carolina State University - Department of Economics

July 7, 2009

CAEPR Working Paper No. 012-2009

Abstract:     
Dynamic stochastic general equilibrium models that include policy rules for government spending, lump-sum transfers, and distortionary taxation on labor and capital income and on consumption expenditures are fit to U.S. data under a variety of specifications of fiscal policy rules. We obtain several results. First, the best fitting model allows a rich set of fiscal instruments to respond to stabilize debt. Second, responses of aggregate variables to fiscal policy shocks under rich fiscal rules can vary considerably from responses that allow only non-distortionary fiscal instruments to finance debt. Third, based on estimated policy rules, transfers, capital tax rates, and government spending have historically responded strongly to government debt, while labor taxes have responded more weakly. Fourth, all components of the intertemporal condition linking debt to expected discounted surpluses - transfers, spending, tax revenues, and discount factors - display instances where their expected movements are important in establishing equilibrium. Fifth, debt-financed fiscal shocks trigger long lasting dynamics so that short-run multipliers can differ markedly from long-run multipliers, even in their signs.

Number of Pages in PDF File: 47

Keywords: fiscal multipliers, government debt, taxes, government spending

JEL Classification: C11, E32, E62

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Date posted: August 20, 2009  

Suggested Citation

Leeper, Eric M. and Plante, Michael and Traum, Nora, Dynamics of Fiscal Financing in the United States (July 7, 2009). CAEPR Working Paper No. 012-2009. Available at SSRN: http://ssrn.com/abstract=1456361 or http://dx.doi.org/10.2139/ssrn.1456361

Contact Information

Eric Michael Leeper (Contact Author)
Indiana University at Bloomington - Department of Economics ( email )
304 Wylie Hall
Bloomington, IN 47405-6620
United States
812-855-9157 (Phone)
812-855-3736 (Fax)

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Monash University, Department of Economics ( email )
Wellington Road
Clayton, Victoria 3168
Australia
Michael Plante
Indiana University Economics Department ( email )
Wylie Hall
Bloomington, IN 47405-6620
United States
812-855-8580 (Phone)
812-855-3736 (Fax)
HOME PAGE: http://mypage.iu.edu/~mplante

Nora Traum
North Carolina State University - Department of Economics ( email )
Raleigh, NC 27695-8110
United States
HOME PAGE: http://www4.ncsu.edu/~njtraum/
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