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Toward a Taylor Rule for Fiscal Policy

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Author Info

  • Martin Kliem

    (Deutsche Bundesbank)

  • Alexander Kriwoluzky

    (University of Bonn)

Abstract

In DSGE models, fiscal policy is typically described by simple rules in which tax rates respond to the level of output. We show that there is only weak empirical evidence in favor of such specifications in U.S. data. Instead, the cyclical movements of labor and capital income tax rates are better described by a contemporaneous response to hours worked and investment, respectively. We show that conditioning on these variables is also desirable from a normative perspective as it significantly improves welfare relative to output-based rules. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2013.08.003
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 17 (2014)
Issue (Month): 2 (April)
Pages: 294-302

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Handle: RePEc:red:issued:12-15

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Related research

Keywords: Fiscal policy; Bayesian model estimation; Identification; Variable selection.;

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Cited by:
  1. Alexander Kriwoluzky, 2009. "Pre-announcement and Timing - The Effects of a Government Expenditure Shock," Economics Working Papers ECO2009/40, European University Institute.
  2. Serbanoiu, Georgian Valentin, 2012. "Transmission of fiscal policy shocks into Romania's economy," MPRA Paper 40947, University Library of Munich, Germany.

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