Dynamic Scoring in Open Economies

Giovanni Ganelli and Juha Tervala

FinanzArchiv: Public Finance Analysis, 2014, vol. 70, issue 1, 31-66

Abstract: This paper fills a gap in the literature by focusing on the degree of self-financing of tax cuts in a New Keynesian two-country model. We find that the degree of self-financing of income tax cuts is negative on impact, but it quickly becomes positive. The open-economy dimension does not matter much for the long-run degree of self-financing. This is because the main channel through which the open-economy dimension affects the results - an expenditure-switching effect stemming from exchange-rate appreciation - is not active in the new steady state, in which the economy reaches a new flexible-price equilibrium.

Keywords: tax cuts; dynamic Laffer effects; self-financing (search for similar items in EconPapers)
JEL-codes: E62 F41 H2 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (1)

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DOI: 10.1628/001522108X679147

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