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Fiscal rules and countercyclical policy: Frank Ramsey meets Gramm-Rudman-Hollings

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  • Tanner, Evan

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Fiscal rules—legal restrictions on government borrowing, spending, or debt accumulation (like the Gramm-Rudman-Hollings Act in the United States)—have recently been adopted or considered in several countries, both industrial and developing. Previous literature stresses that such laws restrict countercyclical government borrowing, thus preventing intertemporal equalization of marginal deadweight losses of taxation—an idea associated with Frank Ramsey. However, such literature typically abstracts from persistent current deficits that are financed by future tax increases. Eliminating such deficits may substantially reduce tax rate variability—the very goal of countercyclical borrowing—even over a finite horizon. Thus, Gramm-Rudman-Hollings and Frank Ramsey are not necessarily enemies and they may even be good friends!
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  • Tanner, Evan, 2003. "Fiscal rules and countercyclical policy: Frank Ramsey meets Gramm-Rudman-Hollings," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 34913, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    • Handle: RePEc:ecr:col093:34913
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    Cited by:

    1. Erdem Kılıç & Sıtkı Sönmezer & Orhan Özaydın, 2022. "Effects of Fiscal Rules and Political Framework: Evidence from COVID-19 Crisis," Journal of Research in Economics, Politics & Finance, Ersan ERSOY, vol. 7(4), pages 869-888.
    2. Maravalle, Alessandro & Claeys, Peter, 2012. "Boom–bust cycles and procyclical fiscal policy in a small open economy," Journal of Policy Modeling, Elsevier, vol. 34(5), pages 735-754.
    3. Garcia, Carlos J. & Restrepo, Jorge E. & Tanner, Evan, 2011. "Fiscal rules in a volatile world: A welfare-based approach," Journal of Policy Modeling, Elsevier, vol. 33(4), pages 649-676, July.
    4. Paolo Manasse, 2006. "Procyclical Fiscal Policy: Shocks, Rules, and Institutions: A View From Mars," IMF Working Papers 2006/027, International Monetary Fund.
    5. Mr. Alejandro D Guerson & Mr. Giovanni Melina, 2011. "Public Debt Targeting An Application to the Caribbean," IMF Working Papers 2011/203, International Monetary Fund.
    6. Manasse, Paolo & Panizza, Ugo & Dos Reis, Laura, 2007. "Targeting the Structural Balance," IDB Publications (Working Papers) 1595, Inter-American Development Bank.
    7. Mahdavi, Saeid & Westerlund, Joakim, 2011. "Fiscal stringency and fiscal sustainability: Panel evidence from the American state and local governments," Journal of Policy Modeling, Elsevier, vol. 33(6), pages 953-969.
    8. Lewis, Kenneth A. & Seidman, Laurence S., 2008. "Overcoming the zero interest-rate bound: A quantitative prescription," Journal of Policy Modeling, Elsevier, vol. 30(5), pages 751-760.
    9. Kilic, Erdem & Sonmezer, Sitki & Ozaydin, Orhan, 2023. "Effects of Fiscal Rules and Political Framework: Evidence from COVID-19 Crisis," MPRA Paper 116588, University Library of Munich, Germany.
    10. Koch, Daniel, 2011. "Wirksame Begrenzung von Staatsverschuldung auf europäischer Ebene," Discussion Paper Series 114, Julius Maximilian University of Würzburg, Chair of Economic Order and Social Policy.

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