Fiscal reaction rules in numerical macro models
AbstractTo avoid exploding government debt, numerical macro models require ‘fiscal reaction rules’. Present rules impose arbitrary, backward-looking reaction of taxes to deviations of the debt ratio from a target. Arbitrary models may be poor guides to monetary policy. An optimising fiscal policy-maker would look forward, and maximise an objective function. A simple optimising model implies the future tax rate should be constant. I implement the constant-future-tax rule in the IMF’s MULTIMOD model. Simulations show model outcomes’ sensitivity to the choice of fiscal rule. A constant tax rate induces smoother and hence preferable consumption paths to MULTIMOD’s existing rule.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 01-01.
Date of creation: 2001
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2001-06-08 (All new papers)
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