Intertemporal Budget Policies and Macroeconomic Adjustment in Indebted Open Economies
Review of International Economics, 22(1), 116-130, February 2014
35 Pages Posted: 8 Jun 2011 Last revised: 30 Apr 2015
Date Written: June 5, 2011
Abstract
We analyze the role of government intertemporal budget policies in a growing open economy including nominal assets in the presence of an upward sloping supply of debt. This introduces transitional dynamics that influence the effects of government policy instruments on the long term fiscal liability. In particular, shifts in capital income taxes can lead to dynamic scoring effects through the evolution of foreign debt. We show that a combination of tax-cumexpenditure, or government expenditure alone can balance the long term government budget constraint. However, for certain combinations of parameter values, the capital income tax alone cannot balance the intertemporal budget.
Keywords: government budget constraint, nominal assets, capital income tax
JEL Classification: E5, E6, F4
Suggested Citation: Suggested Citation
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