Economic Growth and Endogenous Fiscal Policy: In Search of a Data Consistent General Equilibrium Model

29 Pages Posted: 7 Apr 2001

See all articles by Jim Malley

Jim Malley

University of Glasgow - Department of Economics

Apostolis Philippopoulos

Athens University of Economics and Business - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); University of Essex

Date Written: January 2000

Abstract

This paper searches for a general equilibrium model of optimal growth and endogenous fiscal policy with the aim of explaining the interaction between private agents and fiscal authorities in the U.S., West Germany, Japan and the U.K. over the period 1960-1996. Our search is conducted in the context of popular models with closed-form analytical solutions since this is necessary to formally test the models' theoretical restrictions. In West Germany and Japan there is evidence that the fiscal authorities act as optimizing Stackelberg leaders who are concerned about the current welfare of private agents. In contrast, the fiscal authorities in the U.S. and U.K. do not appear to act as optimizing agents; instead, they follow simple rule-of-thumb policy rules. In all countries, the tax smoothing model, according to which policymakers find it optimal not to react to the state of the economy, is rejected.

JEL Classification: H3, D9

Suggested Citation

Malley, Jim and Philippopoulos, Apostolis, Economic Growth and Endogenous Fiscal Policy: In Search of a Data Consistent General Equilibrium Model (January 2000). Available at SSRN: https://ssrn.com/abstract=263972 or http://dx.doi.org/10.2139/ssrn.263972

Jim Malley (Contact Author)

University of Glasgow - Department of Economics ( email )

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Apostolis Philippopoulos

Athens University of Economics and Business - Department of Economics ( email )

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GR-10434 Athens
Greece
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CESifo (Center for Economic Studies and Ifo Institute for Economic Research) ( email )

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Munich, DE-81679
Germany

University of Essex ( email )

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United Kingdom

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