Is U.S. Fiscal Policy Optimal?
AbstractWe find and compare two simple fiscal rules. The first is a theoretical rule that approximates well Ramsey-optimal fiscal policy in a DSGE model calibrated to the U.S. economy over the period 1955:1 to 2007:3. The second is an empirical rule that approximates well actual U.S. fiscal policy over the same period. Our main findings are: First, Ramsey-optimal fiscal policy displays limited volatility even in the presence of sticky prices, while public debt absorbs most of the shocks. Second, actual U.S. fiscal policy is excessively counter-cyclical. Ramsey-optimal fiscal policy is negatively correlated with output over the business cycle, as expansions generate reduction in the level of public debt and the tax rate and vice versa. On the other hand, actual fiscal policy is positively correlated with output, with tax rate being raised during expansions and reduced during recessions. Third, actual fiscal policy is inconsistent with long-run debt sustainability over the period considered.
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Bibliographic InfoPaper provided by Center for Fiscal Policy, Swiss Federal Institute of Technology Lausanne in its series Working Papers with number 200802.
Length: 34 pages
Date of creation: Jan 2008
Date of revision:
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Find related papers by JEL classification:
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
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- Claeys Peter, 2008.
"Estimating the effects of fiscal policy under the budget constraint,"
0038, Department of Communication, University of Teramo.
- Peter Claeys, 2007. "Estimating the effects of fiscal policy under the budget constraint," IREA Working Papers 200715, University of Barcelona, Research Institute of Applied Economics, revised Jul 2007.
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