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Intertemporal Budget Policies and Macroeconomic Adjustment in Indebted Open Economies


  • Presented at the workshop in honor of Stephen J. Turnovsky at the HIS (Institute for Advanced Study) Vienna and at the Dynamic Macroeconomics Workshop, Free University of Bozen-Bolzano. The authors thank the comments of Ben J. Heijdra, Stefan Shubert, Phil Brock, Stephen Turnovsky and the suggestions of an anonymous referee for this journal. The research assistance of Conor Carney is gratefully acknowledged. Any errors are their own.


This paper analyzes the role of government intertemporal budget policies in a growing open economy including nominal assets in the presence of an upward sloping supply of debt. This introduces transitional dynamics that influence the effects of government policy instruments on economic growth and the long term fiscal liability. It is shown that capital income taxes or a combination of tax-cum-expenditure or government expenditure alone can balance the long term intertemporal government budget constraint. However, those results are shown to depend critically upon the extent of distortion in capital flows brought about the upward sloping supply of debt.

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