Theory, Evidence, and Policy
Chapter 8: Rampant Fiscal Policy, IMF Intervention and Policy Reforms
8.1 Introduction In this chapter we consider the conduct of ﬁscal policy in the context of the distributive cycle. We ﬁrst investigate a basic case where government expenditures are ﬁnanced through taxes and bonds (not yet consols, as in Ricardo’s times, but ﬁxed-price bonds with a given rate of interest that can be manipulated by the government). Government expenditures are completely unproductive, having no impact on the private sector of the economy whatsoever, that is, in principle the case where the government is acting like a king’s court by just extracting taxes from its tributaries and using bonds to ﬁnance excess goods demand of the court. We however here still consider a case where this is done in a somewhat disciplined manner, since this government has a debt to capital target towards which it is adjusting its expenditure over time. We therefore start from a distributive cycle model (of LotkaVolterra prey-predator type) where ﬁscal policy is just ‘harvesting’ from this predator-prey (wage share employment rate) interaction. We therefore start from an extension of the Goodwin growth cycle where government behaves in a way such that Say’s Law still holds true, where only wages are taxed and where government bonds are a perfect substitute for asset holders in comparison to their real investment into the capital stock they own. Deﬁcit spending of the government is therefore matched by a reduction of capital stock growth, while wage taxation provides the tax base for government spending. The model provides in a very...
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