Document Type

Dissertation

Degree

Doctor of Philosophy (PhD)

Department

Economics

First Advisor's Name

Cem Karayalcin

First Advisor's Title

Committee Chair

Second Advisor's Name

Peter Thompson

Third Advisor's Name

Sheng Guo

Fourth Advisor's Name

Mihaela Pintea

Fifth Advisor's Name

Sneh Gulati

Keywords

Fiscal Policy, Tax Shocks, Wealth Effect

Date of Defense

5-14-2012

Abstract

This dissertation raises a number of policy concerns from a macroeconomic policy point of view and provides additional insights and implications in terms of the effects of fiscal policy and its macroeconomic effects that have kept the open economy macroeconomics literature busy since the early 2000s.

The first essay develops a dynamic stochastic general equilibrium (DSGE) model for analyzing the impact of various capital income tax policies in a small open economy that is populated by households possessing endogenous time preferences. I contribute to the literature by studying the impacts of: i) anticipated tax shocks under stochastically growing output, ii) stochastic tax shocks under deterministic output, on a dynamic general equilibrium framework. With the model's specifications, this is the first attempt to integrate uncertainty in the study of taxation and welfare. The results suggest that under certain conditions welfare paradoxes may exist, in the sense that increases in tax instruments may improve welfare.

The second essay characterizes the dynamic effects of net tax and government spending shocks on prices, interest rate, GDP and its private components in four OECD countries using structural vector autoregressive regressions (SVAR) approach. For the first time in this literature, I propose a structural decomposition of total net taxes into four components: corporate income taxes, income taxes, indirect taxes and social insurance taxes. The paper provides estimates of the responses of macroeconomic aggregates to innovations in these net tax components. Decompositions of total net tax innovations show that net tax components have different impacts on economic variables. Moreover, the size and persistence of these effects vary across countries depending upon the strength of wealth, substitution, and income effects reflecting the structure of the economies.

The last essay estimates the wealth effects of housing and stock market wealth using time-series data for eight developed countries. In estimation I employ the SVAR, which articulate the dynamic interactions of shocks to housing prices, stock values, and disposable incomes. The results show that for these countries the initial consumption response to housing price shocks is greater than to stock market capitalization shocks, but the long-run consumption response to the latter is more persistent than to the former. My findings suggest balanced monetary policies for the developments of housing markets and equity markets.

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