SLIDE 8 - GOVERNMENT AND FISCAL POLICY IN THE...

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1 G OVERNMENT AND F ISCAL P OLICY IN THE C ONSUMPTION- S AVINGS M ODEL F EBRUARY 16, 2011 February 16, 2011 2 AD YNAMIC M ODEL OF THE G OVERNMENT A Government in the Two-Period Model ± So far only consumers in our two-period framework ± Introduce government in very simple form ± Exists for both periods ± Has spending in each period it needs to finance – can be financed via ± Taxes ± Issuing government debt/assets
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2 February 16, 2011 3 AD YNAMIC M ODEL OF THE G OVERNMENT A Government in the Two-Period Model ± So far only consumers in our two-period framework ± Introduce government in very simple form ± Exists for both periods ± Has spending in each period it needs to finance – can be financed via ± Taxes ± Issuing government debt/assets ± Notation ± g 1 :r e a l g o v e r n m e n t s p e n d i n g i n p e r i o d 1 ± g 2 e a l g o v e r n m e n t s p e n d i n g i n p e r i o d 2 ± b 0 :g o v e r n m e n t a s s e t p o s i t i o n a t b e g i nning of period 1/end of period 0 ± b 1 o v e r n m e n t a s s e t p o s i t i o n a t b e g i nning of period 2/end of period 1 ± b 2 o v e r n m e n t a s s e t p o s i t i o n a t b e g i nning of period 3/end of period 2 ± r e a l i n t e r e s t r a t e b e t w e e n p e r i o d s February 16, 2011 4 YNAMIC M ODEL OF THE G OVERNMENT Model Structure ± Economic activities/actions described by period budget constraints ± Period-1 government budget constraint ± Period-2 government budget constraint 11 01 (1 ) g br b t ± ± ± 22 12 ) g b t Total expenditure in period 1: period-1 spending + wealth to carry into period 2 Total income in period 1: period-1 tax collections + income from wealth carried into period 1 (inclusive of interest) Total expenditure in period 2: period-2 spending + wealth to carry into period 3 Total income in period 2: period-2 tax collections + income from wealth carried into period 2 (inclusive of interest)
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3 February 16, 2011 5 AD YNAMIC M ODEL OF THE G OVERNMENT Model Structure ± Economic activities/actions described by period budget constraints ± Period-1 government budget constraint ± Period-2 government budget constraint ± Definition: A government’s savings during a given period is the change in its wealth during that period ± “Fiscal surplus” if government savings is positive ± “Fiscal deficit” if government savings is negative 11 01 (1 ) g br b t ± ± ± 22 12 ) g b t Total expenditure in period 1: period-1 spending + wealth to carry into period 2 Total income in period 1: period-1 tax collections + income from wealth carried into period 1 (inclusive of interest) Total expenditure in period 2: period-2 spending + wealth to carry into period 3 Total income in period 2: period-2 tax collections + income from wealth carried into period
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SLIDE 8 - GOVERNMENT AND FISCAL POLICY IN THE...

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