Government and the Rest of the World
Government and the Rest of the World
This chapter describes the determination of government expenditures, revenues and deficits, and the determination of imports and exports. Taxes are imposed on labor income, capital income, property, sales and imports. Tax rates are projected based on revenue projections of the CBO, and average and marginal rates on labor income are distinguished. Deficits are set to CBO projections in the near term and assumed to converge gradually to steady state balance. Deficits cumulate in government debt which determines an exogenous path of interest payments. Imports are regarded as imperfect substitutes (the Armington assumption) and modeled using the Kalman filter in the same way as inputs into the production function. The share of domestic output going to exports is also derived from a translog function of domestic and world prices. The current account balance is exogenous where the constraint is met by an endogenous terms of trade.
Keywords: Government, revenue, deficits, government debt, interest, imports, exports, current account, Armington
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