Recent developments in the Dynamic Fiscal Policy literature

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  • 35 years later: what have we learned from Dynamic Fiscal Policy?

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In this article, Gorry and Hassett review the major contributions of the Auerbach- Kotlikoff model of dynamic fiscal policy and explore highlights of subsequent research based on dynamic general equilibrium models of fiscal policy.

A. Introduction
With the publication of Dynamic Fiscal Policy in 1987, Alan J. Auerbach and Laurence J. Kotlikoff opened up a new, major area of research into the long-run effects of fiscal policy on the economy. Their work was one of the first efforts to fully explore researchers’ ability to analyze highly complex dynamic economic models through the use of modern computers. They developed a framework that could estimate the impact of fiscal policy on capital formation and economic growth. Further, in a strikingly original contribution at the time, they examined intergenerational transfers associated with policies that often had different effects on each of the 55 overlapping generations of individuals in their model. Their dynamic framework also allowed the evaluation of the welfare gains and losses of a wide variety of proposed policy changes to the economy.

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About the Author

 

Kevin A.
Hassett

 

Aspen
Gorry

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