Fiscal Policy, Macroeconomic Stability and Finite Horizons

Javier Andrés (), Rafael Domenech () and Campbell Leith ()

Working Papers from Department of Economics, University of Glasgow

Abstract: In this paper we analyse the stabilisation properties of distortionary taxes in a New Keynesian model with overlapping generations of finitely-lived consumers. In this framework, government debt is part of net wealth and this adds a number of interesting channels through which fiscal policy could affect output and inflation. Output volatility, in presence of technology shocks, is not substantially affected by the operation of automatic stabilisers but we find interesting composition effects. While the presence of finitely-lived households strengthens the stabilisation performance of distortionary taxes through the reduction of the volatility of consumption, it does so at the cost of more volatile investment and real balances. These conflicting responses add up to a very small overall welfare losses associated with distortionary taxation.

JEL-codes: E21 E32 E63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: Written
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Related works:
Journal Article: FISCAL POLICY, MACROECONOMIC STABILITY AND FINITE HORIZONS (2006)
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Persistent link: http://EconPapers.repec.org/RePEc:gla:glaewp:2003_18

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