Dirk_Dynamic_Fiscal_Policy

Dirk_Dynamic_Fiscal_Policy - Dynamic Fiscal Policy Dirk...

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Unformatted text preview: Dynamic Fiscal Policy Dirk Krueger 1 Department of Economics University of Pennsylvania April 2007 1 I would like to thank Victor Rios Rull and Jesus Ferandez Villaverde for many helpful discussions. c & by Dirk Krueger ii Contents Preface ix I Introduction 1 1 Empirical Facts of Government Economic Activity 5 1.1 Data on Government Activity in the U.S. . . . . . . . . . . . . . 5 1.2 The Structure of Government Budgets . . . . . . . . . . . . . . . 10 1.3 Fiscal Variables and the Business Cycle . . . . . . . . . . . . . . 13 1.4 Government De&cits and Government Debt . . . . . . . . . . . . 17 2 A Two Period Benchmark Model 23 2.1 The Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 2.2 Solution of the Model . . . . . . . . . . . . . . . . . . . . . . . . 25 2.3 Comparative Statics . . . . . . . . . . . . . . . . . . . . . . . . . 30 2.3.1 Income Changes . . . . . . . . . . . . . . . . . . . . . . . 30 2.3.2 Interest Rate Changes . . . . . . . . . . . . . . . . . . . . 31 2.4 Borrowing Constraints . . . . . . . . . . . . . . . . . . . . . . . . 35 3 The Life Cycle Model 39 3.1 Solution of the General Problem . . . . . . . . . . . . . . . . . . 41 3.2 Important Special Cases . . . . . . . . . . . . . . . . . . . . . . . 43 3.2.1 Equality of & = 1 1+ r . . . . . . . . . . . . . . . . . . . . . 43 3.2.2 Two Periods and log-Utility . . . . . . . . . . . . . . . . . 46 3.2.3 The Relation between & and 1 1+ r and Consumption Growth 47 3.3 Empirical Evidence . . . . . . . . . . . . . . . . . . . . . . . . . . 49 3.4 Potential Explanations . . . . . . . . . . . . . . . . . . . . . . . . 50 II Positive Theory of Government Activity 55 4 Dynamic Theory of Taxation 57 4.1 The Government Budget Constraint . . . . . . . . . . . . . . . . 58 4.2 The Timing of Taxes: Ricardian Equivalence . . . . . . . . . . . 60 4.2.1 Historical Origin . . . . . . . . . . . . . . . . . . . . . . . 60 iii iv CONTENTS 4.2.2 Derivation of Ricardian Equivalence . . . . . . . . . . . . 61 4.2.3 Discussion of the Crucial Assumptions . . . . . . . . . . . 64 4.3 An Excursion into the Fiscal Situation of the US . . . . . . . . . 70 4.3.1 Two Measures of the Fiscal Situation . . . . . . . . . . . 70 4.3.2 Main Assumptions . . . . . . . . . . . . . . . . . . . . . . 71 4.3.3 Main Results . . . . . . . . . . . . . . . . . . . . . . . . . 72 4.3.4 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . 72 4.4 Consumption, Labor and Capital Income Taxation . . . . . . . . 75 4.4.1 The U.S. Federal Personal Income Tax . . . . . . . . . . . 75 4.4.2 Theoretical Analysis of Consumption Taxes, Labor In- come Taxes and Capital Income Taxes . . . . . . . . . . . 87 5 Unfunded Social Security Systems 99 5.1 History of the German Social Security System . . . . . . . . . . . 99 5.2 History of the US Social Security System . . . . . . . . . . . . . 101 5.3 The Current US System . . . . . . . . . . . . . . . . . . . . . . . 102 5.4 Theoretical Analysis . . . . . . . . . . . . . . . . . . . . . . . . . 106Theoretical Analysis ....
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