Fiscal policy, macroeconomic stability and finite horizons

Andrés, J., Doménech, R. and Leith, C. (2006) Fiscal policy, macroeconomic stability and finite horizons. Scottish Journal of Political Economy, 53(1), pp. 72-89. (doi: 10.1111/j.1467-9485.2005.00371.x)

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In this paper we analyse the stabilisation properties of distortionary taxes in a new-Keynesian model with overlapping generations of finitely lived consumers. In this framework, government debt is part of net wealth and this adds a number of interesting channels through which fiscal policy could affect output and inflation. Output volatility, in the presence of technology shocks, is not substantially affected by the operation of automatic stabilisers, but we find interesting composition effects. While the presence of finitely lived households strengthens the stabilisation performance of distortionary taxes through the reduction of the volatility of consumption, it does so at the cost of more volatile investment and real money balances.

Item Type:Articles
Glasgow Author(s) Enlighten ID:Leith, Professor Campbell
Authors: Andrés, J., Doménech, R., and Leith, C.
Subjects:H Social Sciences > HB Economic Theory
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Scottish Journal of Political Economy
ISSN (Online):1467-9485
Published Online:09 January 2006

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Project CodeAward NoProject NamePrincipal InvestigatorFunder's NameFunder RefLead Dept
388121Reinstating fiscal policy as a stabilisation deviceCampbell LeithEconomic & Social Research Council (ESRC)RES-156-25-0003Economics