Aghevli, Bijan B., and Mohsin S. Khan, “Government Deficits and the Inflationary Process in Developing Countries” Staff Papers, International Monetary Fund (Washington), Vol. 25 (September 1978), pp. 383–416.
Bewley, R.A., “On the Functional Form of Engel Curves: The Australian Household Expenditure Survey, 1975-76,” Economic Record (Melbourne, Australia), Vol. 58 (January 1982), pp. 82–91.
Blinder, Alan S., and Robert M. Solow, “Does Fiscal Policy Matter?” Journal of Public Economics (Amsterdam), Vol. 2 (November 1973), pp. 319–37.
Blinder, Alan S., and Robert M. Solow, “Analytical Foundations of Fiscal Policy,” in The Economics of Public Finance: Essays by Alan S. Blinder and Robert M. Solow, George F. Break, Peter O. Steiner, Dick Netzer (Washington: The Brookings Institution, 1974), pp. 3–115.
- Search Google Scholar
- Export Citation
)| false “ Blinder, Alan S., and Robert M. Solow, Analytical Foundations of Fiscal Policy,” in The Economics of Public Finance: Essays by ( Alan S. Blinderand Robert M. Solow, George F. Break, Peter O. Steiner, Dick Netzer Washington: The Brookings Institution, 1974), pp. 3– 115.
Brock, William A., and Stephen J. Turnovsky, “The Analysis of Macroeconomic Policies in Perfect Foresight Equilibrium,” International Economic Review (Osaka), Vol. 22 (February 1981), pp. 179–209.
Brunner, Karl, and Allan H. Meltzer, “Money, Debt, and Economic Activity,” Journal of Political Economy (Chicago), Vol. 80 (September–October 1972), pp. 837–51.
Buiter, Willem H., “‘Crowding Out’ and the Effectiveness of Fiscal Policy,” Journal of Public Economics (Amsterdam), Vol. 7 (June 1977), pp. 309–28.
Christ, Carl F., “A Simple Macroeconomic Model with a Government Budget Restraint,” Journal of Political Economy (Chicago), Vol. 76 (January–February 1968), pp. 53–67.
Clements, Kenneth W., “A General Equilibrium Econometric Model of the Open Economy,” International Economic Review (Osaka), Vol. 21 (June 1980), pp. 69–88.
Cohen, Darrel, and J. Stuart McMenamin, “The Role of Fiscal Policy in a Financially Disaggregated Macroeconomic Model,” Journal of Money, Credit and Banking (Columbus, Ohio), Vol. 10 (August 1978), pp. 322–36.
Dervis, Kemal, Jaime De Melo, and Sherman Robinson, General Equilibrium Models for Development Policy (New York: Cambridge University Press, 1982).
Dixon, Peter B., B.R. Parmenter, J. Sutton, and D.P. Vincent, ORANI: A Multisectoral Model of the Australian Economy (Amsterdam: North-Holland, 1982).
Feltenstein, Andrew, “Market Equilibrium in a Model of a Planned Economy of the Soviet Type: A Proof of Existence and Results of Numerical Simulations,” Review of Economic Studies (Edinburgh, Scotland), Vol. 46 (October 1979), pp. 631–52.
Feltenstein, Andrew, “A General Equilibrium Approach to the Analysis of Trade Restrictions, with an Application to Argentina,” Staff Papers, International Monetary Fund (Washington), Vol. 27 (December 1980), pp. 749–84.
Feltenstein, Andrew, “A Computational General Equilibrium Approach to the Shadow-Pricing of Trade Restrictions §nd the Adjustment of the Exchange Rate,” Journal of Policy Modeling (New York), Vol. 5 (November 1983), pp. 333–61.
- Search Google Scholar
- Export Citation
)| false “ Feltenstein, Andrew, A Computational General Equilibrium Approach to the Shadow-Pricing of Trade Restrictions §nd the Adjustment of the Exchange Rate,” Journal of Policy Modeling( New York), Vol. 5( November 1983), pp. 333– 61. 10.1016/0161-8938(83)90002-9
Feltenstein, Andrew, “Money and Bonds in a Disaggregated Open Economy,” in Applied General Equilibrium Analysis, ed. by H.E. Scarf and J.B. Shoven (New York: Cambridge University Press, 1984), pp. 209–42.
Friedman, Benjamin M., “Crowding Out or Crowding In? The Economic Consequences of Financing Government Deficits,” Brookings Papers on Economic Activity: 3 (1978), pp. 593–641.
Fullerton, Don, “On the Possibility of an Inverse Relationship Between Tax Rates and Government Revenues,” Journal of Public Economics (Amsterdam), Vol. 19 (October 1982), pp. 3–22.
Fullerton, Don, “Transition Losses of Partially Mobile Industry-Specific Capital,” Quarterly Journal of Economics (Cambridge, Massachusetts), Vol. 98 (February 1983), pp. 107–25.
Fullerton, Don, and others, “Corporate Tax Integration in the United States: A General Equilibrium Approach,” American Economic Review (Nashville, Tennessee), Vol. 71 (September 1981), pp. 677–91.
Gramlich, Edward M., “The Usefulness of Monetary and Fiscal Policy as Discretionary Stabilization Tools,” Journal of Money, Credit and Banking (Columbus, Ohio), Vol. 3 (May 1971), pp. 506–32.
Grandmont, Jean-Michel, “Temporary General Equilibrium Theory,” Econo-metrica (Evanston, Illinois), Vol. 45 (April 1977), pp. 535–72.
Grandmont, Jean-Michel, and Guy Laroque, “On Money and Banking,” Review of Economic Studies (Edinburgh, Scotland), Vol. 42 (April 1975), pp. 207–36.
Harberger, Arnold C., “The Incidence of the Corporation Income Tax,” Journal of Political Economy (Chicago), Vol. 70 (June 1962), pp. 215–40.
Harberger, Arnold C., “Efficiency Effects of Taxes on Income from Capital,” in Effects of Corporation Income Tax, ed. by Marian Krzyzaniak (Detroit, Michigan: Wayne State University Press, 1966).
Infante, Ettore F., and Jerome L. Stein, “Does Fiscal Policy Matter?” Journal of Monetary Economics (Amsterdam), Vol. 2 (April 1976), pp. 473–500.
Jorgenson, Dale W., “Econometric Studies of Investment Behavior: A Survey,” Journal of Economic Literature (Nashville, Tennessee), Vol. 9 (December 1971), pp. 1111–47.
Jorgenson, Dale W., “Investment and Production: A Review,” in Frontiers of Quantitative Economics, Vol. 2, ed. by Michael D. Intriligator and David A. Kendrick (Amsterdam: North-Holland, 1974), pp. 341–75.
Jorgenson, Dale W., “Econometric Models for General Equilibrium Analysis,” in Applied General Equilibrium Analysis, ed. by H.E. Scarf and J.B. Shoven (New York: Cambridge University Press, 1983), pp. 139–202.
Jorgenson, Dale W., and James A. Stephenson, “Issues in the Development of the Neoclassical Theory of Investment Behavior,” Review of Economics and Statistics (Cambridge, Massachusetts), Vol. 51 (August 1969), pp. 346–53.
Merrill, Orin H., “Application and Extensions of an Algorithm That Computes Fixed Points of Certain Non-Empty Convex Upper Semi-Continuous Point to Set Mappings” (doctoral dissertation; Ann Arbor: University of Michigan, 1972).
Meyer, Lawrence H., “The Balance Sheet Identity, the Government Financing Constraint, and the Crowding-Out Effect,” Journal of Monetary Economics (Amsterdam), Vol. 1 (January 1975), pp. 65–78.
Miller, Marcus H., and John E. Spencer, “The Static Economic Effects of the U.K. Joining the EEC: A General Equilibrium Approach,” Review of Economic Studies (Edinburgh, Scotland), Vol. 44 (February 1977), pp. 71–93.
Modigliani, Franco, and Albert Ando, “Impacts of Fiscal Actions on Aggregate Income and the Monetarist Controversy: Theory and Evidence,” in Monetarism, ed. by Jerome L. Stein (Amsterdam: North-Holland, 1976), pp. 17–42.
Norton, W.E., P.M. Garmston, and Reserve Bank of Australia, Australian Economic Statistics, 1949–50 to 1982–83, Part I: Tables (Sydney: Reserve Bank of Australia, 1984).
Piggott, John, and John Whalley, Economic Effects of U.K. Tax-Subsidy Policies: A General Equilibrium Appraisal (London: Macmillan, 1983).
Shoven, John B., “A Proof of the Existence of a General Equilibrium with ad Valorem Commodity Taxes,” Journal of Economic Theory (New York), Vol. 8 (May 1974), pp. 1–25.
Shoven, John B., “The Incidence and Efficiency Effects of Taxes on Income from Capital,” Journal of Political Economy (Chicago), Vol. 84 (December 1976), pp. 1261–83.
Shoven, John B., “Applied General-Equilibrium Tax Modeling,” Staff Papers, International Monetary Fund (Washington), Vol. 30 (June 1983), pp. 394–420.
Shoven, John B., and John Whalley, “A General Equilibrium Calculation of the Effects of Differential Taxation of Income from Capital in the U.S.,” Journal of Public Economics (Amsterdam), Vol. 1 (November 1972), pp. 281–321.
- Search Google Scholar
- Export Citation
)| false “ Shoven, John B., and John Whalley, A General Equilibrium Calculation of the Effects of Differential Taxation of Income from Capital in the U.S.,” Journal of Public Economics( Amsterdam), Vol. 1( November 1972), pp. 281– 321. 10.1016/0047-2727(72)90009-6
Shoven, John B., and John Whalley, and John Whalley, “General Equilibrium with Taxes: A Computational Procedure and an Existence Proof,” Review of Economic Studies (Edinburgh, Scotland), Vol. 40 (October 1973), pp. 475–89.
Slemrod, J., A General Equilibrium Model of Taxation with Endogenous Financial Behavior, NBER Working Paper 799 (Cambridge, Massachusetts: National Bureau of Economic Research, November 1981).
Spencer, Roger W., and William P. Yohe, “The ‘Crowding Out’ of Private Expenditures by Fiscal Policy Actions,” Federal Reserve Bank of St. Louis Review, Vol. 52 (October 1970), pp. 12–24.
Tanzi, Vito, “Inflation, Real Tax Revenue, and the Case for Inflationary Finance: Theory with an Application to Argentina,” Staff Papers, International Monetary Fund (Washington), Vol. 25 (September 1978), pp. 417–51.
Tobin, James, and Willem H. Buiter, “Long-Run Effects of Fiscal and Monetary Policy on Aggregate Demand,” in Monetarism, ed. by Jerome L. Stein (Amsterdam: North-Holland, 1976), pp. 273–309.
Whalley, John, “A General Equilibrium Assessment of the 1973 United Kingdom Tax Reform,” Economica (London), Vol. 42 (May 1975), pp. 139–61.
Whalley, John, “The United Kingdom Tax System 1968-1970: Some Fixed Point Indications of Its Economic Impact,” Econometrica (Evanston, Illinois), Vol. 45 (November 1977), pp. 1837–58.
Whalley, John, “An Evaluation of the Recent Tokyo Round Trade Agreement Using General Equilibrium Computational Methods,” Journal of Policy Modeling (New York), Vol. 4 (November 1982), pp. 341–61.
Mr. Feltenstein, a Senior Economist in the Country Policy Department of The World Bank, was a member of the Fiscal Affairs Department of the Fund when this paper was written. Most of the research was carried out while the author was visiting the University of Melbourne, and a theoretical version of the paper was written while he was at the Stockholm School of Economics. He would like to thank Lars Bergman, Willem Buiter, Ken Clements, Allan Powell, John Shoven, and Nicholas Stern for many helpful suggestions. The views expressed here do not necessarily represent those of The World Bank or the Fund.
Among such models are those of Blinder and Solow (1973, 1974), Brunner and Meltzer (1972), Buiter (1977), Christ (1968), Cohen and McMenamin (1978), Friedman (1978), Gramlich (1971), Infante and Stein (1976), Meyer (1975), Modigliani and Ando (1976), Spencer and Yohe (1970), and Tobin and Buiter (1976).
The model may thus be interpreted as generating a rational expectations equilibrium. The minimum needed to introduce a dynamic framework is two periods, but there would be no difficulty in extending the models to several periods. For a study of perfect foresight equilibria, see Brock and Turnovsky (1981).
This “closure” rule is made for purely technical reasons. One must allow for some future after the final period in order to avoid the requirement that in that final period all debt be fully paid off, so that no customer would hold debt. Alternative approaches would be to have infinitely lived consumers, or to introduce an overlapping generations structure. The closure rule will, in particular, ensure that the model does not generate Ricardian debt equivalence.
The model does not, however, yield a mechanical one-to-one correspondence between public deficits and crowding out because the rising interest rate will not only have the above-mentioned effects but may also increase the overall level of private savings.
The investment function could also require intermediate and final goods as inputs, but for simplicity of exposition it will require only capital and labor.
It would also be possible to have investment activities distinguished by firms if firm-specific capital were available, as in specifications by Fullerton (1983) and Dervis, De Melo, and Robinson (1982).
Decreasing returns to scale will allow the derivation of a single-valued investment response. If desired, one could choose the parameters such that 1 - ai - b = εi, with εi arbitrarily small. Any investment function with decreasing returns to scale would be equally acceptable.
Rather than having the government operate its own production function, it would also be possible to have the government buy directly from the private sector. Introducing a government production function allows, however, the direct representation of changing public policy toward the relative importance of hiring capital or labor. If, for example, the government wished to increase employment, it could, in the model, change the weights given to capital and labor in its production function. A more sophisticated version of the model would have public goods enter consumers’ utility functions directly, or increase productivity.
A rational expectations equilibrium is being defined in which consumers’ expectations of period 2 are perfectly fulfilled. If the model contained more than two periods, it would be quite possible that information available for the time period after period 2 might be used to determine the consumers’ choices in periods 1 and 2.
There are K>0 consumers in the model; to avoid unreadable subscripts, however, the consumer demand parameters will not be indexed. It should be noted that these parameters, along with initial allocations, are not uniform across consumers. One might also wish to include public goods in the consumers’ utility function, although that has not been done here.
Proof of the existence of equilibrium does not depend on this form of the utility function; any continuous utility function would be valid. This particular form permits an analytic solution to the demand function.
Another approach—for example, in Grandmont (1977) and Grandmont and Laroque (1975)-—is to have consumers borrow from the central bank against future income but to have no borrowing by the central bank. Several technical problems are involved with allowing borrowing to go in both directions, which essentially is equivalent to the requirement of irreversibility of production.
It will be assumed that initial holdings of bonds,
The interpretation of the price of capital in capital i, pKi, is that it is a rental rather than a sales, or cost of production, price. There is no secondary market for capital, since the conditions on private investment are such that the rate of return on capital is always identically equal to the interest rate. Thus all savings decisions are made by purchases of bonds, and capital gains are realized by the sale of bonds.
These transfer payments are not identically equal to the sum of the transfer payments included in the consumer’s budget constraints, although at equilibrium they will be.
Here π2 (CPI2/pM2)/(CPI1/pM1), where CPIi is a weighted average of the period-i Leontief prices. It may be assumed that π1 is exogenous (in practice, taken to be the actual inflation rate in that year).
Thus, the interest obligations incurred by the government in period 1 are paid off in period 2 in units of money, rather than being rolled over in new bond sales. This form of payment is not essential to the model, but it does allow a simpler proof of the boundedness of the supply of bonds in period 2.
For i = 2, assume that pK3 = (1 + π2)Pk2.
The proof of this result is available from the author upon request.
This figure is taken from the ORANI general equilibrium model of Australia (see Dixon and others (1982)).
See Norton, Garmston, and Reserve Bank of Australia (1984, Table 2.22). Recall the assumption that there are no outstanding initial holdings of privately issued bonds.
Within a particular consumption category, the elasticities for the input-output sectors are derived from relative consumption shares. Budget shares for the rest of the world are taken to be the shares in total exports of goods of each input-output category.
That the simulated interest rate in 1981 is lower than the corresponding actual rate is primarily a result of the decision to take the initial allocation of bonds as comprising only outstanding government debt and not incorporating private debt. Inclusion of initial private debt (which, as a fixed cost, is technically not feasible) would tend to lower the 1981 price of bonds and raise the interest rate.