Can Fiscal Budget-Neutral Reforms Stimulate Growth? Model-Based Results

35 Pages Posted: 19 Apr 2017

See all articles by Matthieu Bussière

Matthieu Bussière

Banque de France

Laurent Ferrara

Banque de France; Université Paris Ouest - Nanterre, La Défense - EconomiX

Michel Juillard

Banque de France - Economic Study and Research Division

Daniele Siena

Banque de France

Date Written: April 2017

Abstract

This paper focuses on growth enhancing budget-neutral fiscal reforms, i.e. changes in the composition of government revenues and spending that stimulate GDP growth while keeping the ratio of the fiscal budget to GDP constant. To this aim, we present simulation results using a multi-country DSGE model with three large economic regions, the US, the euro area and the rest of the world. The model features constrained and unconstrained non-Ricardian households and a detailed government sector; its multi-country nature allows investigating cross-country spillovers. The paper focuses on the most growth-friendly budget-neutral fiscal measures: (i) an incomplete fiscal devaluation (ii) a rise in government investment compensated by a fall in government consumption and (iii) a rise in government investment compensated by a rise in consumption and labor taxes. Dampening or amplifying effects due to coordination across policies (monetary and fiscal) and across economic regions are also considered. Three main results stand out. First, an increase in government investment financed by rising less distortionary taxes appears to be an effective growth-friendly budget-neutral reform in the sense that it generates both short- and long-run GDP growth and improves fiscal sustainability. Second, benefits and costs of budget-neutral reforms are not equally distributed across agents, giving rise to a policy trade-off between growth and distributional consequences. Third, budget-neutral reforms do not have large cross-border trade spillovers; however, reforms coordinated across all countries in periods of accommodative monetary policy do have amplified domestic effects.

Keywords: Fiscal composition, budget-neutral reforms, taxes, government spending, multi-country DSGE model, international spillovers

JEL Classification: E62, E63, F42

Suggested Citation

Bussiere, Matthieu and Ferrara, Laurent and Juillard, Michel and Siena, Daniele, Can Fiscal Budget-Neutral Reforms Stimulate Growth? Model-Based Results (April 2017). Available at SSRN: https://ssrn.com/abstract=2955120 or http://dx.doi.org/10.2139/ssrn.2955120

Matthieu Bussiere (Contact Author)

Banque de France ( email )

Paris
France

Laurent Ferrara

Banque de France ( email )

Paris
France

Université Paris Ouest - Nanterre, La Défense - EconomiX ( email )

200 Avenue de la République
92000

Michel Juillard

Banque de France - Economic Study and Research Division ( email )

31, rue Croix des Petits Champs
75049 Paris Cedex 01
FRANCE

Daniele Siena

Banque de France ( email )

Paris
France

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