The general equilibrium effects of fiscal policy

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7 Concluding remarksIn this paper we have presented new evidence regarding the macroeconomic effects offiscal policy. To this end, we have developed a general equilibrium model and estimatedits structural parameters through Bayesian techniques. As most of the euro area officialdata on government accounts are available only at an annual frequency and given theimportance for our purposes of including detailed information on government variables,we have also computed quarterly data for important fiscal policy series.Our results point to a significant share of non-Ricardian agents and to the prevalenceof mild Keynesian effects of fiscal policy. In particular, although innovations infiscal policy variables tend to be rather persistent, government purchases of goods andservices and compensations for public employees have small and short lived expansionaryeffects on private consumption, while innovations to transfers to households showa slightly more sizable and lasting effect. Among revenues, decreases in labor incomeand consumption tax rates have a sizable effect on consumption and output, while areduction in the capital income tax favors investment and output in the medium run.Finally, with the exception of transfers to households and labor income tax rates, mostfiscal policy variables contribute little to the cyclical variability of the main macrovariables.While our model is rather general, we have restricted our focus to a closed economysetup. Although we believe this is a good approximation for an economic area as theeuro area, as SW have shown, we might still be missing some effects coming from theexternal channel. This, however, is a topic for future research.30
References[1] Alesina A., S. Ardagna, R. Perotti and F. Schiantarelli (2002), Fiscal Policy, Profits,and Investment, American Economic Review, Vol. 92, No. 3, pp. 571-589.[2] Barbone L., G. Bodo and I. Visco (1981), Costi e profitti nell’industria in sensostretto: un’analisi su serie trimestrali, 1970-1980, Bank of Italy Economic Bulletin,No. 36.[3] Baxter M. and R.G. King (1993), Fiscal Policy in General Equilibrium, AmericanEconomic Review, Vol. 83 No. 3, pp. 315-334.[4] Bilbiie F. (2006), Limited Asset Market Participation, Monetary Policy and (Inverted)Keynesian Logic, mimeo.[5] Blanchard O. (1985), Debt, Deficits, and Finite Horizons, Journal of PoliticalEconomy, Vol. 93 No. 2.[6] Campbell J.Y. and G. Mankiw (1989), Consumption, Income and Interest Rate:Reinterpreting the Time Series Evidence, in O.J. Blanchard and S. Fisher eds.,NBER Macroeconomics Annual 1989, MIT Press.[7] Canova F. and E. Pappa (2005), Price Dispersions in Monetary Unions: The Roleof Fiscal Shocks, Economic Journal, forthcoming.[8] Carey D. and J. Rabesona (2002), Tax Ratios on Labour and Capital Income andConsumption, OECD Economic Studies, Vol. 35, No. 2, pp. 129-174.[9] Cavallo M. (2007), Government Consumption Expenditures and the Current Account,Public Finance and Management, Vol. 7, No. 1.[10] Chow G.C. and A.L. Lin (1971), Best Linear Unbiased Interpolation, Distribution,and Extrapolation of Time Series by Related Series, The Review of Economics andStatistics, Vol. 53.[11] Christiano L.J., M. Eichenbaum and L.E. Evans (2005), Nominal Rigidities andthe Dynamic Effect of a Shock to Monetary Policy, Journal of Political Economy,Vol. 113, No. 1.[12] Coenen G. and R. Straub (2005), Does Government Spending Crowd in PrivateConsumption? Theory and Empirical Evidence for the Euro Area, InternationalFinance, Vol. 8.31
Page 1 and 2: Temi di discussione(Working papers)
Page 3 and 4: THE GENERAL EQUILIBRIUM EFFECTS OF
Page 5 and 6: 1 Introduction∗∗ This paper rec
Page 7 and 8: In this paper we contribute to the
Page 9 and 10: The paper is organized as follows.
Page 11 and 12: the consumption-leisure intratempor
Page 14 and 15: The representative Ricardian househ
Page 16 and 17: positive (suggesting pro-cyclical c
Page 18 and 19: Equilibrium in the goods market req
Page 20 and 21: trend, we fit a linear spline until
Page 22 and 23: Overall, most parameters seem to be
Page 24 and 25: ill). 19 Impulse responses are for
Page 26 and 27: falls, and inflation do as well. Ov
Page 28 and 29: consumption and investment to each
Page 32 and 33: [13] Coenen G., P. McAdam and R. St
Page 34 and 35: [39] Schorfheide F. (2000), Loss Fu
Page 36 and 37: and of the capital accumulation equ
Page 38 and 39: and the aggregate resource constrai
Page 40 and 41: series using proxy indicators. In p
Page 42 and 43: T I 1 = general taxes on goods and
Page 44 and 45: Table 1: Selected prior and posteri
Page 46 and 47: Table 3: Variance decompositionafte
Page 48 and 49: Tax rate on labor income49443934291
Page 50 and 51: σ c1 2 3 4 5 6σ l0 0.5 12320γ1.5
Page 52 and 53: ρ z0.2 0.4 0.6 0.8 1ρ ε b0.2 0.4
Page 54 and 55: 0.8real interest rate0.4consumption
Page 56 and 57: 0.2real interest rate1consumption1i
Page 58 and 59: 1real interest rate−0.1consumptio
Page 60 and 61: 1.51output210.50−0.5consumptionin
Page 62 and 63: 210consumptionoutput10.50−1invest
Page 64 and 65: 1.510.5outputinvestment1.510.50cons
Page 66 and 67: RECENTLY PUBLISHED “TEMI” (*)N.
Page 68 and 69: 2005L. DEDOLA and F. LIPPI, The mon
Page 70 and 71: F. BUSETTI, S. FABIANI and A. HARVE

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