Macroeconomic Effects of Tax Policy Measures in an Econometric Model for Germany

Abstract

Even abstracting from the fact that governments try to influence economic developments in desired directions, it is obvious that the government sector has a considerable impact on the economy simply because of its sheer size. However, there is a continuing controversy among economists about the aggregate or allocative effects of fiscal policy on the economy. The answer to the question about the effects of fiscal policy depends crucially on the underlying theoretical model. The general equilibrium models of the new classical economists—with completely flexible prices, continuing market clearance and rational expectations—produce results contrary to those derived from short-run disequilibrium models of the neo-keynesian type—with price rigidities, market imbalances and adaptive expectations.¹ Therefore, empirical models are needed in order to analyse the effects of fiscal policy.

The simulations have been carried out with the Deutsche Bundesbank’s macroeconometric model of the German economy in June 1994. The findings and conclusions represent the author’s personal views and do not necessarily correspond to those of the Deutsche Bundesbank.