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Model Framework for Issues in Evaluation of Different types of Fiscal Consolidations

Model Framework for Issues in Evaluation of Different types of Fiscal Consolidations. Jaromír Beneš Jaromír Hurník. Purpose of the Model. Both trend (flexible-price) and cyclical (sticky-price) analysis of FP effects Effect of a given fiscal programme onto

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Model Framework for Issues in Evaluation of Different types of Fiscal Consolidations

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  1. Model Framework for Issues inEvaluation of Different types of Fiscal Consolidations Jaromír Beneš Jaromír Hurník

  2. Purpose of the Model • Both trend (flexible-price) and cyclical (sticky-price) analysis of FP effects • Effect of a given fiscal programme onto • long-run properties of economic development • cyclical properties of economic development

  3. Presented • Basic model framework -- perpetual-youth OLG, Yaari (1965) and Blanchard (1985) • Small open economy • One good, no money

  4. Distinct Properties of the Model • Strong non-ricardian devices • overlapping generations • age-earnings profiles • Active rules in both FP and MP (fiscal determination of price level ruled out)

  5. Agents and Markets • Domestic agents: households, producers, fiscal authority, monetary authority • Foreign counterparts when needed • International markets: real goods (consumption, physical capital), riskless bonds, labor

  6. Households (Individual Behavior) • Constant probability of death, p • Life expectance 1/p • Size of each generation born at s • Competitive life insurance market -- redistribution of wealth

  7. Households (Individual Behavior) • Consume goods, supply labor (inelastically), hold bonds, own firms • Maximize expected utility from consumption

  8. Households (Individual Behavior) • Constraint • Age-earnings profile

  9. Households (Individual Behavior) • Age-earnings profile

  10. Households (Aggregate Behavior) • Difference between individual and aggregate rate of wealth accumulation • Strengthened by non-flat age-earnings profile

  11. Firms (Individual Behavior) • Own physical capital, make investment (financed by issuing debt), hire labor, produce/sell goods • Installation cost of capital • Maximize present value of net cash flows

  12. Fiscal Authority • Consumes goods, levies taxes, issues or holds bonds • Utility from private consumption not affected by level of public consumption • Fiscal policy rule in terms of direct (income) taxes

  13. Fiscal Authority

  14. Economy constraint

  15. Simple Simulation • Fiscal consolidation • Bringing public debt down (30 % of GDP to 10 % of GDP) • Public consumption unchanged (20 % of GDP)

  16. Income Tax Rate

  17. Consumption-to-GDP Ratio

  18. Foreign Debt-to-GDP Ratio

  19. Public Debt-to-GDP Ratio

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