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Identifying endogenous fiscal policy rules for macroeconomic models

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  • Pérez, Javier J.
  • Hiebert, Paul

Abstract

In this paper, we present a model-based method for identifying fiscal closure rules in stochastic macroeconomic models. The methodology is based on the stability analysis of the model at hand, with an endogenous derivation of a reaction on the part of the fiscal authority to state variables in the model. The rule achieves the dual aim of imposing solvency on the fiscal sector and generating a state-contingent dynamic adjustment in a framework consistent with the properties of the model. Up to now, fiscal rules in leading large-scale macroeconomic forecasting models have been imposed exogenously, and in this sense are not necessarily compatible with the formulation of other sectors of these models. An example of the derivation procedure, including some illustrative results, is provided using a small calibrated macro model. JEL Classification: C5, E6, C62

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0156.

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Date of creation: Jul 2002
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Handle: RePEc:ecb:ecbwps:20020156

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Keywords: C62; Closure rules; E6; Fiscal Policy; JEL classification C5; macroeconomic models; Stability analysis;

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References

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Citations

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Cited by:
  1. V. Anton Muscatelli & Tiziano Ropele & Patrizio Tirelli, 2004. "Fiscal and Monetary Policy Interactions in a New Keynesian Model with Liquidity Constraints," Working Papers 83, University of Milano-Bicocca, Department of Economics, revised Nov 2004.
  2. Philippe Michel & Leopold von Thadden & Jean-Piere Vidal, 2005. "Debt stabilizing fiscal rules," Computing in Economics and Finance 2005 349, Society for Computational Economics.
  3. Anton Muscatelli & Patrizio Tirelli & Carmine Trecroci, 2003. "Fiscal and Monetary Policy Interactions: Empirical Evidence and Optimal Policy Using a Structural New Keynesian Model," CESifo Working Paper Series 1060, CESifo Group Munich.
  4. Teresa Leal & Javier J. Pérez & Mika Tujula & Jean-Pierre Vidal, 2008. "Fiscal Forecasting: Lessons from the Literature and Challenges," Fiscal Studies, Institute for Fiscal Studies, vol. 29(3), pages 347-386, 09.
  5. Patrizio Tirelli & V. Anton Muscatelli & Carmine Trecroci, 2004. "The interaction of fiscal and monetary policies: some evidence using structural econometric models'," Money Macro and Finance (MMF) Research Group Conference 2003 103, Money Macro and Finance Research Group.
  6. Anton Muscatelli & Patrizio Tirelli & Carmine Trecroci, 2004. "Can Fiscal Policy Help Macroeconomic Stabilisation? Evidence from a New Keynesian Model with Liquidity Constraints," CESifo Working Paper Series 1171, CESifo Group Munich.
  7. Hiebert, Paul & Pérez, Javier J. & Rostagno, Massimo, 2009. "The trade-off between public debt reduction and automatic stabilisation," Economic Modelling, Elsevier, vol. 26(2), pages 464-472, March.
  8. Antonio Morales & Pablo Brañas Garza, 2003. "Computational Errors in Guessing Games1," Economic Working Papers at Centro de Estudios Andaluces E2003/11, Centro de Estudios Andaluces.
  9. Kenneth Lewis & Laurence Seidman, 2006. "Overcoming the Zero Interest-Rate Bound: A Quantitative Prescription," Working Papers 06-14, University of Delaware, Department of Economics.
  10. J. Stephen Ferris & Hossein Kavand, 2008. "The monetary effects arising from stochastic resource revenues and the subsidization of financial intermediation in resource rich developing economies," Carleton Economic Papers 08-05, Carleton University, Department of Economics.
  11. Burcin Kisacikoglu, 2010. "Agency Costs, Fiscal Policy, and Business Cycle Fluctuations," Departmental Working Papers 1001, Bilkent University, Department of Economics.
  12. Rafael Domenech & Javier Andres, 2005. "Fiscal Rules and Macroeconomic Stability," Working Papers 0501, International Economics Institute, University of Valencia, revised Nov 2005.
  13. El Anshasy, Amany A. & Bradley, Michael D., 2012. "Oil prices and the fiscal policy response in oil-exporting countries," Journal of Policy Modeling, Elsevier, vol. 34(5), pages 605-620.

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