A New-Open-Economy-Macro Model for Fiscal Policy Evaluation

46 Pages Posted: 23 Mar 2006

See all articles by Dennis P. J. Botman

Dennis P. J. Botman

International Monetary Fund (IMF) - Fiscal Affairs Department

Douglas Laxton

International Monetary Fund (IMF) - Research Department

Dirk Muir

Bank of Canada

Andrei Romanov

University of Wisconsin - Madison - Robert M. La Follette School of Public Affairs

Date Written: February 2006

Abstract

We develop a New-Open-Economy-Macro model in which Ricardian equivalence does not hold because of (i) distortionary labor and corporate income taxation; (ii) limited asset market participation; and (iii) because the overlapping-generations structure results in a disconnect between current and future generations. We consider a permanent increase in government debt following a cut in labor or corporate income taxes in a small and large open economy. We analyze the sensitivity of the results to the key structural parameters of the model and argue that under plausible assumptions there will be significant crowding-out effects associated with permanent increases in government debt.

Keywords: Finite lives, distortionary taxes, rule-of-thumb consumers, government debt

JEL Classification: E62, F41, F42, H30, H63

Suggested Citation

Botman, Dennis P. J. and Laxton, Douglas and Muir, Dirk and Romanov, Andrei, A New-Open-Economy-Macro Model for Fiscal Policy Evaluation (February 2006). IMF Working Paper No. 06/45, Available at SSRN: https://ssrn.com/abstract=892936

Dennis P. J. Botman (Contact Author)

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States

Douglas Laxton

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Dirk Muir

Bank of Canada ( email )

234 Wellington Street
Ontario, Ontario K1A 0G9
Canada

Andrei Romanov

University of Wisconsin - Madison - Robert M. La Follette School of Public Affairs ( email )

1180 Observatory Drive
Madison, WI 53706-1393
United States

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