We analyze the effect of the fiscal structure upon the trade-off between inflation and output stabilization in presence of technological shocks and deficit or debt objectives in a DGE model with nominal inertia. The model is calibrated to reproduce the main long-run and business cycle features of European economies, and it integrates a rich menu of fiscal variables, including fiscal rules. Thes...

In federal countries, such as the United States, state and local governments play an important role. They provide many different types of local public goods and services and are able to tailor the amount and quality of these goods to the preferences of their constituencies. To provide these services, state and local governments must raise tax revenues from their residents using a menu of differ...

Search models of monetary exchange commonly assume that terms of trade in decentralized markets are determined via Nash bargaining. Bargaining frictions add to the classical intertemporal distortion present in most monetary models, whereby agents work today to obtain cash that can be used only in future transactions. More important, bargaining frictions may cause underproduction in decentralize...

Financial instability has increased for many economies in the face of greater capital mobility. Eliminating capital flows, especially portfolio investment flows, may reduce volatility, but it could also result in domestic capital constraints. To overcome this dilemma, policymakers may consider alternatives, such as progressive income taxation, that could raise domestic funds. In this paper, we ...

The mainstream literature on normative framework on fiscal federalism has been largely developed keeping in view the advanced market economies. It is necessary to modify these before they are applied to developing transitional economies to take account of the characteristics of these economies, legacies of past policies, and the nature of their institutions. The paper analyses the effect of lac...

The integration of European financial markets of the 1980s created an environment of nearperfect capital mobility across countries that had harmonized indirect taxes but maintained large differences in factor taxes. The years that followed witnessed several rounds of competition in capital taxes with puzzling results. Instead of the dreaded “race to the bottom” in capital taxes, the U.K. lowere...

This article explores the effect of sub-national tax autonomy and sub-national control over shared taxes on primary deficits with panel data for 23 OECD countries over the 1975-2000 period. The results suggest that sub-national tax autonomy has a U-shaped effect on primary deficits. We find that the “average” country in the sample could increase the fiscal stability of its public sector by redu...

What is the impact of fiscal policy on the economy? How large are the “multipliers” of government spending and tax cuts? This old question has recently received considerable attention, in particular in the context of the American Recovery and Reinvestment Act (ARRA) of 2009. I contribute to answering that question by calculating fiscal multipliers in a baseline neoclassical growth model with en...

This paper presents a political economy model of inflation as a result of social conflict. Agents are heterogeneous in terms of income. Agents’ income levels determine their ability to hedge against the effects of inflation. The interaction of heterogeneous cash holdings and preferences over fiscal policy leads to conflict over how to finance government expenditure. The model makes a number of ...

This paper considers optimal fiscal policy in a deterministic Lucas and Stokey (1983) economy in the absence of government commitment. In every period, the government chooses a labor income tax and issues any unconstrained maturity structure of debt as a function of its outstanding debt portfolio. We find that the solution under commitment cannot always be sustained through the appropriate choi...