Structural and Stabilization Aspects of Fiscal and Financial Policy in the Dependent Economy

Willem Buiter

No 128, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The paper considers the response of a small, open dependent economy to a variety of fiscal and financial shocks. It also examines the influence of alternative budget-balancing rules on the response of the economy to external shocks, such as a change in the world interest rate. The approach allows for both uncertain individual lifetimes and population growth, using a slightly generalized version of the Yaari-Blanchard model of consumer behaviour. Debt neutrality does not prevail unless the sum of the population growth rate and the individual's probability of death equals zero. The government spends on traded and non-traded goods and raises tax revenue both through a lump sum tax and through a distortionary tax on the production of traded goods. Even though the tax on the production of traded goods is the only conventional distortion in the model, changes in this tax rate will have first-order real income effects even when the distortion is evaluated at a zero tax rate, as long as the individual's subjective pure rate of time preference differs from the interest rate. This can occur even in well-behaved steady states of the Yaari-Blanchard model, as long as the sum of population growth rate and the probability of death differs from zero. This "intrinsic" distortion effectively causes second-best arguments to apply even when there is only one conventional distortion. Even in the absence of government budget deficits, fiscal choices relating to the composition of public spending and the structure of taxation have important short- and long-term consequences for the real exchange rate, the sectoral allocation of production, and the level and composition of private consumption. They also affect the current account in the short run and the nation's stock of claims on the rest of the world in the long run.

Keywords: Balanced Budget; Financial Policy; Fiscal Policy; Population Growth; Public Expenditure; Tax Structure (search for similar items in EconPapers)
Date: 1986-09
References: Add references at CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=128 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Structural and Stabilization Aspects of Fiscal and Financial Policy in the Dependent Economy (1988)
Working Paper: Structural and Stabilization Aspects of Fiscal and Financial Policy in the Dependent Economy (1986)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:128

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... pers/dp.php?dpno=128

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().