Supply-Side Economics in an Integrated World Economy

62 Pages Posted: 15 Feb 2006

See all articles by Enrique G. Mendoza

Enrique G. Mendoza

University of Pennsylvania; National Bureau of Economic Research (NBER)

Linda L. Tesar

University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: November 1993

Abstract

The macroeconomic effects of changes in tax and expenditure policies are examined in the context of the competitive equilibrium of a two-country, two-sector model of an integrated world economy. Governments finance purchases and net transfers of tradable and nontradable goods by imposing distortionary taxes on factor incomes and consumption. The model is parameterized and calibrated using data from large industrial economies, including estimates of effective tax rates. Numerical simulations provide estimates of the welfare costs associated with existing distortionary taxes and of the potential gains linked to a more efficient use of these taxes. Welfare gains from tax reforms favoring indirect taxation are substantial. The effects of permanent changes in expenditures depend on their sectoral allocation across tradables and nontradables and on whether they are debtor tax-financed. Trade in goods and assets is very sensitive to fiscal policy changes, but aggregate consumption patterns and welfare implications are not.

JEL Classification: E62, H87, H21

Suggested Citation

Mendoza, Enrique G. and Tesar, Linda L., Supply-Side Economics in an Integrated World Economy (November 1993). IMF Working Paper, Vol. , pp. 1-62, 1993. Available at SSRN: https://ssrn.com/abstract=883806

Enrique G. Mendoza (Contact Author)

University of Pennsylvania ( email )

Philadelphia, PA 19104
United States

HOME PAGE: http://www.sas.upenn.edu/~egme/index.html

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Linda L. Tesar

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States
734-763-2254 (Phone)
734-764-2769 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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