Fundamental Determinants of the Effects of Fiscal Policy

Abstract

We explore the underlying determinants of the macroeconomic effects of fiscal policy and tax and social security reform using the Global Fiscal Model (GFM). We show that the planning horizon of consumers, access to financial markets, and the elasticity of labor supply, as well as the characteristics of utility and production functions, and the degree of competition are all critical for determining the impact of fiscal policy. Four topical fiscal policy issues, for a representative large and small economy, are examined: the effects of changes in government debt; higher government spending; tax reform; and privatization of retirement savings.Public debt;Government expenditures;Tax reforms;Privatization;Economic models;government spending, taxation, labor income, fiscal policy, private consumption, real interest rate, tax reform, fiscal consolidation, capital accumulation, tax policy, disposable income, consumption over time, government spending shocks, tax cut, fiscal adjustment, national saving, aggregate demand, fiscal model, fiscal policies, tax rates, capital income, increase in consumption, government revenue, fiscal expansion, tax burden, tax base, general equilibrium, fiscal stimulus, consumption increases, consumption goods, fiscal deficits, consumption declines, fiscal loosening, temporary tax, temporary tax cut, expansionary fiscal, consumption decline, tax system, fiscal contraction, consumer behavior, fiscal policy on consumption, tax reduction, national income, national savings, consumption tax, fiscal affairs department, tax bases, government deficit, fiscal structure, tax revenue, fiscal affairs, consumption growth, expansionary fiscal policy, fiscal reform, aggregate consumption, fiscal shocks, consumption needs, fiscal models, tax increase, permanent income, fiscal discipline