Estimating the effects of fiscal policy under the budget constraint

Peter Claeys

No 200715, IREA Working Papers from University of Barcelona, Research Institute of Applied Economics

Abstract: I reconsider the short-term effects of fiscal policy when both government spending and taxes are allowed to respond to the level of public debt. I embed the long-term government budget constraint in a VAR, and apply this common trends model to US quarterly data. The results overturn some widely held beliefs on fiscal policy effects. The main finding is that expansionary fiscal policy has contractionary effects on output and inflation. Ricardian effects may dominate when fiscal expansions are expected to be adjusted by future tax rises or spending cuts. The evidence supports RBC models with distortionary taxation. We can discard some alternative interpretations that are based on monetary policy reactions or supply-side effects.

Keywords: fiscal policy; sustainability; spending; taxes; common trends; SVAR. (search for similar items in EconPapers)
JEL-codes: E42 E63 E65 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2007-07, Revised 2007-07
New Economics Papers: this item is included in nep-cba, nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: Estimating the effects of fiscal policy under the budget constraint (2008)
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