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Working Paper
The effects of fiscal policy in a neoclassical growth model
This paper studies the effects of fiscal policies--depicted as stochastic changes in government spending and distortionary tax rates--when the government is constrained from using lump sum taxes for achieving intertemporal budget balance. The ratio of debt to gnp, therefore, has consequences for the future choices of government spending and distortionary taxation and hence affects real economic activity. Further modeling fiscal policy in this way generates results that differ substantially from those in standard stochastic models where lump sum taxes are used for budget balance. The modeling ...
Working Paper
The effects of fiscal policy in a neoclassical growth model
This paper studies the effects of fiscal policies--depicted as stochastic changes in government spending and distortionary tax rates--when the government cannot use lump sum taxes to achieve intertemporal budget balance. This framework contrasts the more standard analysis in which spending and taxes follow exogenous Markov process and where lump sum taxation is used to balance the government's budget. Although we also model tax rates and spending as following Markov processes, the transition probabilities of these processes depend on the ration of government debt to gnp. The ratio of debt to ...