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The authors wish to thank Benjamin Hunt and staff of the Australian Treasury for discussions of issues and providing useful comments on an earlier version of this paper. The authors also wish to thank Susanna Mursula and Sarma Jayanthi for excellent research assistance.
In these simulations, the linear specification of the risk premium is used. In addition to the risk-premium channel, output costs arise from the negative effects of the fiscal adjustments on aggregate demand. Individual consumers have model-consistent expectations about their future after-tax income streams but have also finite lives.