Most of the recent literature analysing the adjustments of macroeconomic variables to fiscal policy shocks rely on the inclusion of non-Ricardian households to generate a positive response of consumption to an increase in government spending. This paper examines the dynamic effects of government financing behaviour in a foreign exchange constrained low income economy on key macroeconomic aggregates such as output, consumption, wages and labour supply.
A central tax policy parameter that has received much attention internationally, but about which there is substantial uncertainty, is the overall elasticity of taxable income. The size of this elasticity is of critical importance in the formulation of tax and transfer policy, as well as for the study of the welfare implications of tax decisions. This paper uses a panel of individual tax returns for the period 2009 - 2013 and the phenomenon of ’bracket creep’ as source of tax rate variation to construct instrumental variable estimates of the sensitivity of income to changes in tax rates.