Intertemporal Budget Policies and Macroeconomic Adjustment in Indebted Open Economies

Abstract

We analyze the role of government intertemporal budget policies in a growing open economy including nominal assets in the presence of an upward sloping supply of debt. This introduces transitional dynamics that influence the effects of government policy instruments on the long term fiscal liability. In particular, shifts in capital income taxes can lead to dynamic scoring effects through the evolution of foreign debt. We show that a combination of tax-cumexpenditure, or government expenditure alone can balance the long term government budget constraint. However, for certain combinations of parameter values, the capital income tax alone cannot balance the intertemporal budget. KeywordsGovernment budget constraint, nominal assets, capital income tax JEL ClassificationE5, E6, F4

Budget Deficit and External Debt in Jordan: Causality and Co-Integration Analysis

“…6, No. 8;2014 government policies in the effect of aid on growth, Ram (2004), Bianconi and Fisher (2014) for indebted open economies, Brautigam and Knack (2004) for Sub-Saharan Africa and Clements et al (2003) for low-income countries. More recently, Hansen and Headey (2010) investigated the short-run macroeconomic impact of aid in small developing countries by using a vector auto regression (VAR) model to study the impact of aid on net import (absorption) and domestic demand (spending).…”