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Dynamic Scoring in Open Economies

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  • Giovanni Ganelli
  • Juha Tervala

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.

Suggested Citation

  • Giovanni Ganelli & Juha Tervala, 2014. "Dynamic Scoring in Open Economies," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 70(1), pages 31-66, March.
    • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(201403)70:1_31:dsioe_2.0.tx_2-q
    DOI: 10.1628/001522108X679147
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    References listed on IDEAS

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    2. Giancarlo Corsetti & Paolo Pesenti, 2001. "Welfare and Macroeconomic Interdependence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(2), pages 421-445.
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    4. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
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    9. Paul R. Bergin, 2017. "How Well Can the New Open Economy Macroeconomics Explain the Exchange Rate and Current Account?," World Scientific Book Chapters, in: International Macroeconomic Interdependence, chapter 5, pages 117-152, World Scientific Publishing Co. Pte. Ltd..
    10. Leonor Coutinho, 2005. "Fiscal Policy in the New Open Economy Macroeconomics and Prospects for Fiscal Policy Coordination," Journal of Economic Surveys, Wiley Blackwell, vol. 19(5), pages 789-822, December.
    11. K. Arin & Faik Koray, 2009. "Beggar thy Neighbor? The Transmission of Fiscal Shocks from the US to Canada," Open Economies Review, Springer, vol. 20(3), pages 425-434, July.
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    13. Betts, Caroline & Devereux, Michael B., 2000. "Exchange rate dynamics in a model of pricing-to-market," Journal of International Economics, Elsevier, vol. 50(1), pages 215-244, February.
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    Cited by:

    1. Ruud A. de Mooij & Ikuo Saito, 2014. "Japan’s Corporate Income Tax: Facts, Issues and Reform Options," IMF Working Papers 2014/138, International Monetary Fund.

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    More about this item

    Keywords

    tax cuts; dynamic Laffer effects; self-financing;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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