Fiscal Policy and the Slowdown in Trend Growth in an Open Economy

Alexander Beames, Mariano Kulish and Nadine Yamout
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Alexander Beames: Macroeconomic Group, The Treasury
Nadine Yamout: School of Economics, University of Sydney

No 143, Working Papers from Red Nacional de Investigadores en Economía (RedNIE)

Abstract: We study the impact that a permanent slowdown in trend growth has on fiscal policy with an estimated small open economy model. The magnitude and timing of the change in trend growth are estimated alongside the structural and fiscal policy rule parameters. Around 2003:Q3, trend growth in per capita output is estimated to have fallen from just over 2 per cent to 0.6 per cent annually. The slowdown sets off an endogenous response of the private sector which increases capital accumulation acting as an automatic stabilizer. The slowdown also brings about a lasting transition which in the short-run decreases consumption tax revenues but increases them in the long-run changing permanently the composition of tax revenues and temporarily increasing the government debt to output ratio.

Keywords: Open economy; trend growth; fiscal policy; real business cycles; estimation; structural breaks. (search for similar items in EconPapers)
JEL-codes: E30 F43 H30 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2022-05
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:aoz:wpaper:143

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