Working Paper: NBER ID: w2389
Authors: Assaf Razin
Abstract: The dynamic effects of fiscal policies on the real equilibrium have been the subject of a large body of recent research, emphasizing the intertemporal dimensions of tax and spending policies both in closed and open-economy contexts. The analysis in this paper extends the intertemporal analysis which was conducted under full certainty to uncertain environments. Specifically the paper uses a two-country stochastic general- equilibrium model of the world economy to address issues concerning the effects of government tax and spending policies on private sector consumption asset portfolios and stock market valuations. The key result of the paper is that the consequences of expected future policies and the characteristics of their international transmission depend critically on the precise variability of these policies across states of nature. The effects of current policies on consumption savings and stock market prices are shown, however to conform closely to the predictions of the corresponding certainty intertemporal model.
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JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| current transitory rise in government spending (E62) | decrease in domestic security prices (F52) |
| current transitory rise in government spending (E62) | decrease in foreign security prices (F31) |
| expected rise in future government spending (H59) | decrease in future disposable income (D15) |
| expected rise in future government spending (H59) | increase in current savings (E21) |
| expected rise in future government spending (H59) | decrease in consumption (E21) |
| marginal propensity of the government to spend in a low productivity state exceeds that of the private sector (H70) | domestic equity price rises relative to foreign equity prices (F31) |