Journal Article

The limits to discretionary fiscal stabilization policy

S Wren-Lewis

in Oxford Review of Economic Policy

Published on behalf of The Oxford Review of Economic Policy Ltd

Volume 16, issue 4, pages 92-105
Published in print December 2000 | ISSN: 0266-903X
Published online December 2000 | e-ISSN: 1460-2121 | DOI: http://dx.doi.org/10.1093/oxrep/16.4.92
The limits to discretionary fiscal stabilization policy

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  • Economic Development and Growth
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The use of discretionary fiscal policy as a counter-cyclical tool has declined in popularity over the last 30 years. This paper examines the extent to which this decline is justified in terms of developments in macroeconomic theory over this period. Both a small calibrated model and a larger econometric model suggest that the intertemporal consumer will smooth away most of the impact of temporary tax changes, even when additional discounting and credit constraints are allowed for. However, this analysis suggests a more powerful role for other forms of fiscal policy, such as government objections to the use of discretionary fiscal stabilization policy, and makes a tentative suggestion as to how these might be overcome.

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Subjects: Economic Development and Growth ; Public Economics ; Political Economy ; Public Policy

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