Dynamics of Fiscal Financing in the United States

47 Pages Posted: 20 Aug 2009  

Eric M. Leeper

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

Michael Plante

Federal Reserve Bank of Dallas; Indiana University Bloomington - Center for Applied Economics and Policy Research

Nora Traum

North Carolina State University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: July 7, 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.

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

JEL Classification: C11, E32, E62

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: https://ssrn.com/abstract=1456361 or http://dx.doi.org/10.2139/ssrn.1456361

Eric Michael Leeper (Contact Author)

Indiana University at Bloomington - Department of Economics ( email )

304 Wylie Hall
Bloomington, IN 47405-6620
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National Bureau of Economic Research (NBER)

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Michael D. Plante

Federal Reserve Bank of Dallas ( email )

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Dallas, TX 75265-5906
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Indiana University Bloomington - Center for Applied Economics and Policy Research ( email )

100 South Woodlawn Avenue, Wylie Hall 250
Bloomington, IN 47405-1704
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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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