Blanchard, Olivier, and Roberto Perotti, 2002, “An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output,” Quarterly Journal of Economics 117 (3), pp. 1329-1367.
Betts, Caroline, and Michael B. Devereux, 2000, “Exchange Rate Dynamics in a Model of Pricing-to-Market,” Journal of International Economics 50, pp. 215–244.
Beetsma, Roel, Giuliodori, Massimo, and Franc Klaassen, 2006, “Trade Spill-overs of Fiscal Policy in the European Union: a Panel Analysis,” Economic Policy 48, pp. 641-687.
Bruce, Neil, and Stephen J. Turnovsky, 1999, “Budget Balance, Welfare, and the Growth Rate: “Dynamic Scoring” of the Long-Run Government Budget,” Journal of Money, Credit and Banking 31 (2), pp. 162-186.
Corsetti, Giancarlo, and Paolo Pesenti, 2001, “Welfare and Macroeconomic Interdependence,”Quarterly Journal of Economics 116, pp. 421–446.
Corsetti, Giancarlo, 2007, “New Open Economy Macroeconomics,”European University Institute Working Papers, Robert Schuman Center for Advanced Studies 2007/27.
Coutinho, Leonor, 2005, “Fiscal Policy in the New Open Economy Macroeconomics and Prospect for Fiscal Policy Coordination,”Journal of Economic Surveys 19, pp. 789–822.
Keen, Michael, Kim, Yitae, and Ricardo Varsano, 2006, “The “Flat Tax(es)”: Principles and Evidence,” IMF Working Paper 06/218 (Washington: International Monetary Fund).
Klein, Paul, 2000, “Using the Generalized Schur Form to Solve a Multivariate Linear Rational Expectations Model,” Journal of Economic Dynamics and Control 24, pp. 1405–1423.
Lane, Philip R., and Giovanni Ganelli, 2003, “Dynamic General Equilibrium Analysis: The Open Economy Dimension,” Published in Elements in Dynamic Macroeconomic Analysis (S. Altug, J. Chadha, C. Nolan, eds), Cambridge University Press.
Leeper, Eric M., and Shu-Chun Susan Yang, 2008, “Dynamic Scoring: Alternative Financing Schemes,” Journal of Public Economics 92, pp. 159-182.
Mankiw, N. Gregory, and Matthew Weinzierl, 2006, “Dynamic Scoring: a Back-of-the-Envelope Guide,” Journal of Public Economics 90, pp. 1415-1433.
Mendoza, Enrique G., Razin, Assaf, and Linda Tesar, 1994, “Effective Tax Rates in Macroeconomics. Cross-country Estimates of Tax Rates on Factor Incomes and Consumption,” Journal of Monetary Economics 34, pp. 297-323.
Mendoza, Enrique G., and L. Tesar, 1998, “The International Ramifications of Tax Reforms: Supply-Side Economics in a Global Economy,” The American Economic Review 88 (1), pp. 226-245.
McCallum, Bennett, 2001, Software for RE Analysis. Computer software available at http://wpweb2.tepper.cmu.edu/faculty/mccallum/research.html
Obstfeld, Maurice, and Kenneth Rogoff, 2000, “New Directions for Stochastic Open Economy Models,” Journal of International Economics, Vol. 50, pp. 117–153.
Obstfeld, Maurice, and Kenneth Rogoff, 2002, “Global Implications of Self-Oriented National Monetary Rules,” Quarterly Journal of Economics, Vol. 117, pp. 503–36.
Pecorino, Paul, 1995, “Tax Rates and Tax Revenues in a Model of Growth Through Human Capital Accumulation,” Journal of Monetary Economics, Vol. 36, pp. 527-539.
Rotemberg, Julio J., and Michael Woodford, 1997, “An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy,” in B.S. Bernanke and J.J. Rotemberg, eds, NBER Macroeconomics Annual 1997 (MIT Press, Massachusetts), pp. 297–346.
Sarno, Lucio, 2001, “Toward a New Paradigm in Open Economy Modeling: Where Do We Stand?,” Federal Reserve Bank of St. Louis Review 83, pp. 21–36.
Strauss-Kahn, Dominique, 2008, “Lessons from the Financial Market Crisis: Priorities for the World and for the IMF,” Speech delivered in New Delhi, India, February 13, 2008. Available at http://www.imf.org/external/np/speeches/2008/021308.htm
Trabandt, Mathias, and Harald Uhlig, 2006, “How Far Are We from the Slippery Slope? The Laffer Curve Revisited,” CEPR Discussion Paper No. 5657.
Mr. Ganelli is with European Division of the IMF Institute and Mr. Tervala is with the Department of Economics, University of Helsinki, Finland. We are grateful for comments to Enrica Detragiache, Lennart Erickson, Pertti Haaparanta, Juha Kilponen, Erkki Koskela, Tapio Palokangas, Panu Poutvaara, Antti Ripatti and seminar participants at the IMF Institute and at the University of Helsinki. Juha Tervala would like to thank the Yrjö Jahnsson Foundation for financial support.
If this minimum necessary condition is not satisfied, none of the various definitions of dynamic Laffer effects used in the literature (see, for example, Ireland (1994), p. 563; Novales and Ruiz (2002), p. 188) can be satisfied.
The partial equilibrium methodology used by the JCT is also referred to as static scoring, while the alternative general equilibrium methodology is also referred to as dynamic scoring.
While the term “flat tax” has been used loosely and the various versions which have been adopted (most notably by Russia and by other countries in Central and Eastern Europe) vary widely, common features have often been both a reduction of the number of income tax brackets and a substantial reduction in tax rates. See Keen, Kim and Varsano (2006) for an interesting analysis of recent “flat tax” experiences.
Following the seminal paper by Obstfeld and Rogoff (1995, 1996), important contributions to this literature include, but are not limited to, Betts and Devereux (2000, 2001), Corsetti and Pesenti (2001), and Obstfeld and Rogoff (2000, 2002). Surveys of this literature are provided by Lane (2001), Sarno (2001), Coutinho (2005), and Corsetti (2007).
Although we mostly focus on policy experiments in which governments adjust transfers to compensate changes in tax collection, in Section VI we also look at the implications of a revenue neutral exercise similar in spirit to the one carried out by Mendoza and Tesar (1998).
The fact that bonds are denominated in domestic currency does not introduce any asymmetry across countries, since we assume open capital markets so that nominal interest rates are equalized internationally. Furthermore, PPP holds under PCP.
In what follows we will keep money supply constant, therefore abstracting from seignorage in practice.
The estimate of effective tax rates on consumption made by Mendoza, Razin, and Tesar (1994) vary from about 5 percent for the US and Japan to about 21 percent for France.
The result of a negative degree of self-financing at t=1 is due to the dynamics of the nominal wage, which in the short run undershoots its new long-run steady-state level, thus implying that the “general equilibrium” revenue loss is temporarily higher than the “partial equilibrium” one in equations (26) and (27).