The effects of fiscal policy in a neoclassical growth model

Michael Dotsey and Ching Sheng Mo

No 97-08, Working Paper from Federal Reserve Bank of Richmond

Abstract: This paper studies the effects of fiscal policies--depicted as stochastic changes in government spending and distortionary tax rates--when the government cannot use lump sum taxes to achieve intertemporal budget balance. This framework contrasts the more standard analysis in which spending and taxes follow exogenous Markov process and where lump sum taxation is used to balance the government's budget. Although we also model tax rates and spending as following Markov processes, the transition probabilities of these processes depend on the ration of government debt to gnp. The ratio of debt to gnp, will have consequences for the future choices of government spending and distortionary taxation and hence will affect real economic activity. The paper, therefore, is able to contribute to current public discussions over the economic effects of debt and deficits and to the effects of policies that attempt to reduce the deficit through cuts in government expenditures or increases in distortionary taxation.

Keywords: Fiscal; policy (search for similar items in EconPapers)
Date: 1997
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.richmondfed.org/publications/research/working_papers/1997/wp_97-8.cfm (text/html)
https://www.richmondfed.org/-/media/RichmondFedOrg ... /1997/pdf/wp97-8.pdf Full text (application/pdf)

Related works:
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:fip:fedrwp:97-08

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Paper from Federal Reserve Bank of Richmond Contact information at EDIRC.
Bibliographic data for series maintained by Christian Pascasio ().