Mr Ricardo's Great Adventure: Estimating Fiscal Multipliers in a Truly Intertemporal Model

40 Pages Posted: 16 Nov 2006

See all articles by Tamim Bayoumi

Tamim Bayoumi

International Monetary Fund (IMF); Centre for Economic Policy Research (CEPR)

Silvia Sgherri

International Monetary Fund (IMF)

Multiple version iconThere are 2 versions of this paper

Date Written: September 2006

Abstract

We estimate tax multipliers in a Blanchard-Yaari consumption model where Ricardian equivalence is broken because the private sector discounts the future at a faster rate than the real rate of interest. The model fits U.S. data since 1955 extremely well - entailing a discount wedge of around 20 percent a year and fiscal multipliers of 0.15-0.4 - depending on the permanence of the change in taxes/transfers, and is much superior to one that assumes some consumers are fully Ricardian and others follow simple rules of thumb. The implied high private sector rate of discount has wide implications for policymakers.

Keywords: Fiscal policy, fiscal multipliers, Ricardian equivalence, discount rates

JEL Classification: E21, E63

Suggested Citation

Bayoumi, Tamim and Sgherri, Silvia, Mr Ricardo's Great Adventure: Estimating Fiscal Multipliers in a Truly Intertemporal Model (September 2006). CEPR Discussion Paper No. 5839. Available at SSRN: https://ssrn.com/abstract=944909

Tamim Bayoumi (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-6333 (Phone)
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Centre for Economic Policy Research (CEPR)

London
United Kingdom

Silvia Sgherri

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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