Evaluating Fiscal Policy with a Dynamic Simulation Model
Abstract
Those schooled in the shifting curves of static and steady-state macro models may not fully appreciate the dynamic nature of fiscal policy. Simple blackboard models can convey neither the timing nor the magnitude of responses to shortand intermediate-term fiscal policies, nor can they isolate the impact of fiscal policies on transitional generations. There is also a range of issues, such as deficit finance and the relative efficiency of alternative tax structures, that cannot be properly addressed without solving for the economy's transition path. Recent experience has provided several experiments in dynamic fiscal policy, including the accumulation of large amounts of official government debt, expected future changes in the level of social security benefits, shifts in the tax structure, and increases and then reductions in investment incentives. Each of these policies has important transitional as well as long-term effects. The analysis of these effects is possible using a dynamic general equilibrium numerical simulation model.
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