Fiscal policy with banks and financial frictions

Abstract

We assess the role of banks to the transmission of optimal and exogenous changes in …scal policy to the economy. We built-up a dynamic stochastic general equilibrium model with patient and impatient agents, banks and a government to …nd that banks and their associated capital-adequacy constraint mitigate the negative spill-over e¤ects to the economy from higher taxes. Speci…cally, we con…rm that labour income tax is the most distortionary …scal instrument. The optimal choice of a housing tax is the most favorable funding source to a temporary increase in public spending. The combination of housing and labour taxes is the most preferred tax bundle to be optimally chosen under negative output shocks. Moreover, a permanent increase in housing tax is bene…cial if it is welfare enhancing and the existence of banks bene…ts mainly impatient households under permanently higher consumption taxes. Finally, these results remain robust to various robustness checks.

Budgetary policy of the emerging countries in conditions of institutional transformations

“…At the same time, in the emerging countries, compared with the countries with developed economies, interest rates are more variable, which reduces the government's ability to smooth tax rates. Default risk also limits the accumulation of public debt and the ability to use monetary policy instruments (Roettger, 2019; P. Asimakopoulos & S. Asimakopoulos, 2019).…”