Fiscal policy in an open economy

Amit Friedman, Zvi Hercowitz*, Jonathan Sidi

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review


This paper analyzes the quantitative macroeconomic implications of a fiscal policy regime based on exogenous tax rates paths and public debt/GDP target in an open economy. In this setup, government spending accommodates tax revenues and target deficits. In particular, we concentrate on pre-announced tax cuts, as well as on the adoption of a lower debt target - following policies conducted in Israel during the 2000s. We construct a model where domestic production requires imported inputs, and simulate the effects of these policies. The analysis focuses on the dynamics generated by the announcements of these policy steps, followed by their implementation. The model has the implication that a credible announcement of a future tax cut has an expansionary effect on impact, similar in nature to the effects of productivity shocks. Also, the model implies that the announcement of a lower public debt/GDP target has a contractionary effect, while it's implementation leads to higher output in the long-run.

Original languageEnglish
Pages (from-to)25-46
Number of pages22
JournalB.E. Journal of Macroeconomics
Issue number1
StatePublished - 1 Jan 2016


  • Fiscal policy
  • Open economy
  • Preannounced tax cuts


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