Fiscal policy in an open economy

Friedman Amit, Zvi Hercowitz () and Sidi Jonathan
Additional contact information
Friedman Amit: Market Operations Division, Bank of Israel, Mailbox 780, Jerusalem
Sidi Jonathan: Department of Statistics, The Hebrew University of Jerusalem, Mount Scopus, Jerusalem 91905, Israel Research Department, Bank of Israel, Jerusalem, Israel

The B.E. Journal of Macroeconomics, 2016, vol. 16, issue 1, 25-46

Abstract: This paper analyzes the quantitative macroeconomic implications of a fiscal policy regime based on exogenous tax rates paths and public debt/GDP target in an open economy. In this setup, government spending accommodates tax revenues and target deficits. In particular, we concentrate on pre-announced tax cuts, as well as on the adoption of a lower debt target – following policies conducted in Israel during the 2000s. We construct a model where domestic production requires imported inputs, and simulate the effects of these policies. The analysis focuses on the dynamics generated by the announcements of these policy steps, followed by their implementation. The model has the implication that a credible announcement of a future tax cut has an expansionary effect on impact, similar in nature to the effects of productivity shocks. Also, the model implies that the announcement of a lower public debt/GDP target has a contractionary effect, while it’s implementation leads to higher output in the long-run.

Keywords: fiscal policy; open economy; preannounced tax cuts (search for similar items in EconPapers)
Date: 2016
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Related works:
Working Paper: Fiscal Policy in an Open Economy (2012)
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DOI: 10.1515/bejm-2015-0064

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