Tax Smoothing with Stochastic Interest Rates: A Re-assessment of Clinton's Fiscal Legacy
AbstractThe return to sound fiscal policy after the high budget deficits of the 1980s and early 1990s has been hailed by many as the Clinton administration's most important achievement. In this article, we evaluate post-war, US fiscal policy using an extension of Barro's (1979) tax-smoothing model, generalized to allow for stochastic variation in interest rates and growth rates. We show that the evolution of the US debt-GDP ratio has been remarkably consistent with the tax-smoothing paradigm, even during the 1980s. The only major departure occurred during the late 1990s, when the debt-GDP ratio fell more rapidly than predicted by optimal tax smoothing. Le retour vers une politique fiscale raisonnable après les déficits budgétaires élevés des années 1980 et du début des années 1990 a été acclamé par beaucoup comme la réalisation la plus importante de l'administration Clinton. Dans cet article, nous évaluons la politique fiscale des États-Unis d'après-guerre en utilisant une extension du modèle de lissage des impôts de Barro (1979), modèle généralisé pour permettre des variations stochastiques des taux d'intérêt et des taux de croissance. Nous montrons que l'évolution de ratio dette/PIB américain a été remarquablement conséquent avec le paradigme de lissage des impôts, même durant les années 1980. Le seul écart important a eu lieu durant la fin des années 1990, lorsque le ratio dette/PIB est tombé plus rapidement que ce qu'aurait prédit un lissage optimal des impôts.
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Bibliographic InfoPaper provided by CREFE, Université du Québec à Montréal in its series Cahiers de recherche CREFE / CREFE Working Papers with number 125.
Length: 30 pages
Date of creation: Feb 2001
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public debt; tax smoothing; stochastic discouting;
Other versions of this item:
- Lloyd-Ellis, Huw & Zhan, Shiqiang & Zhu, Xiaodong, 2005. "Tax Smoothing with Stochastic Interest Rates: A Reassessment of Clinton's Fiscal Legacy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(4), pages 699-724, August.
- E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
- F3 - International Economics - - International Finance
- H6 - Public Economics - - National Budget, Deficit, and Debt
This paper has been announced in the following NEP Reports:
- NEP-ALL-2001-02-14 (All new papers)
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