FISCAL POLICY AND OPTIMAL TAX IN A SMALL-OPEN ECONOMY

Abstract

The thesis studies the effect of fiscal policy on a small-open economy by estimating the DSGE Model calibrated for Thailand. The considered fiscal policies are composed of an increase in government spending and a decrease in tax rates, namely, a sales tax, a payroll tax, and a capital income tax. The model foundation is adopted from The Bank of Thailand Structural Model which is introduced by Tanboon (2008). This thesis extends the model and introduces a rich fiscal block for analysis of the effect of fiscal policy. The important findings are that the impact of fiscal policy on a small-open economy is smaller than the one on a closed economy. An increase in government expenditures has a positive impact on the domestic firms' output, whereas exporting firms respond by lowering their production. The impact multiplier of government spending on the national output is 0.25 and the impact multipliers of sales tax, payroll tax, and capital tax are 0.08, 0.37 and 0.09, respectively.

The second paper studies the optimal capital income tax and optimal labour income tax in a small-open economy with an imperfectly competitive market and habit formation preferences. This paper uses numerical estimates and analytical investigation. The numerical approach solves the Ramsey problem, by parameterizing to Thailand data. The numerical finding indicates that the optimal capital income tax appeared to be negative. The analytical investigation simplifies the models in order to explain factors that influence the numerical results. The analytical results highlight that i) the optimal capital income tax in a small-open economy with a perfectly competitive market is not different with optimal capital income tax in a closed economy and equals to zero, ii) the optimal capital income tax in small open-economy with an imperfectly competitive market is negative and negatively related to price markup, iii) the deep habit preferences create a volatile and countercyclical markup, hence, the capital income tax is not smooth over the horizon. It should be increased during an economic boom period and lower in recessions.

The third paper examines the impact of the government spending on health on the economic growth by analyzing the improvement in national health condition. The research questions are i) what is the effect of the government spending on health on the improvement in national health indicators, such as life expectancy, infant mortality, and under-five mortality, ii) does an improvement in human capital on health leads to an economic growth. Three panel estimations are implemented: fixed-effect model, random-effect model, and the mean group estimator. The main findings show that the government spending on health has a significantly positive effect on the health status. An increase in life expectancy has a positive effect on output in developing countries but does not have a significant effect on output in developed countries. In addition, non-medical determinants of health, such as tobacco consumption and alcohol consumption have a significant effect on economic growth of OECD countries.