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The effects of fiscal policy in a neoclassical growth model

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  • Michael Dotsey
  • Ching Sheng Mo

Abstract

This paper studies the effects of fiscal policies--depicted as stochastic changes in government spending and distortionary tax rates--when the government is constrained from using lump sum taxes for achieving intertemporal budget balance. The ratio of debt to gnp, therefore, has consequences for the future choices of government spending and distortionary taxation and hence affects real economic activity. Further modeling fiscal policy in this way generates results that differ substantially from those in standard stochastic models where lump sum taxes are used for budget balance. The modeling of fiscal policy presented here is also consistent with empirical evidence on U.S. fiscal policy.

Suggested Citation

  • Michael Dotsey & Ching Sheng Mo, 1994. "The effects of fiscal policy in a neoclassical growth model," Working Paper 94-03, Federal Reserve Bank of Richmond.
    • Handle: RePEc:fip:fedrwp:94-03
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    References listed on IDEAS

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    Cited by:

    1. Ludvigson, Sydney, 1996. "The macroeconomic effects of government debt in a stochastic growth model," Journal of Monetary Economics, Elsevier, vol. 38(1), pages 25-45, August.
    2. Kevin J. Lansing, 1994. "Optimal fiscal policy when public capital is productive: a business- cycle perspective," Working Papers (Old Series) 9406, Federal Reserve Bank of Cleveland.

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