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Simple, Implementable Fiscal Policy Rules

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  • Michael Kumhof
  • Douglas Laxton

Abstract

This paper analyzes the scope for systematic rules-based fiscal activism in open economies. Relative to a balanced budget rule, automatic stabilizers significantly improve welfare. But they minimize fiscal instrument volatility rather than business cycle volatility. A more aggressively countercyclical tax revenue gap rule increases welfare gains by around 50 percent, with only modest increases in fiscal instrument volatility. For raw materials revenue gaps the government should let automatic stabilizers work. The best fiscal instruments are targeted transfers, consumption taxes and labor taxes, or, if it enters private utility, government spending. The welfare gains are significantly lower for more open economies.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/76.

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Length: 41
Date of creation: 01 Apr 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/76

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Keywords: Revenues; External shocks; Commodity prices; Copper; Manufacturing; Economic models; fiscal policy; tax revenue; monetary policy; fiscal instruments; inflation; fiscal instrument; government spending; fiscal rules; fiscal rule; tax rates; fiscal policy rules; taxation; monetary economics; inflation targeting; tax bases; budget constraint; tax base; fiscal policies; discretionary fiscal policy; nominal interest rates; nominal interest rate; tax system; aggregate demand; real interest rate; budget surplus; taxes on labor; tax revenues; real money; tax changes; rate of inflation; fiscal responsibility; budget balance; fiscal issues; government budget; inflation rates; increase in consumption; fiscal policy on consumption; inflation target; real wages; public finance; public debt; macroeconomic stability; tax rebates; rational expectations; tax income; fiscal stimulus; government budget constraint; relative prices; fiscal sustainability; fiscal accounts; government deficit; tax reductions; reduction in transfers; fiscal stance; fiscal multipliers; fiscal responsibility law; macroeconomic analysis; tax labor; fiscal policy rule; fiscal impact; fiscal revenue; fiscal measures;

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References

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Citations

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Cited by:
  1. Lukas Vogel & Werner Roeger & Bernhard Herz, 2013. "The Performance of Simple Fiscal Policy Rules in Monetary Union," Open Economies Review, Springer, vol. 24(1), pages 165-196, February.
  2. Michael Kumhof; Douglas Laxton, 2010. "Chile’s Structural Fiscal Surplus Rule: a Model – Based Evaluation," Working Papers Central Bank of Chile 602, Central Bank of Chile.
  3. Freedman, Charles & Kumhof, Michael & Laxton, Douglas & Muir, Dirk & Mursula, Susanna, 2010. "Global effects of fiscal stimulus during the crisis," Journal of Monetary Economics, Elsevier, vol. 57(5), pages 506-526, July.
  4. Stephen Snudden, 2013. "Cyclical Fiscal Rules for Oil-Exporting Countries," IMF Working Papers 13/229, International Monetary Fund.
  5. Bi, Huixin & Kumhof, Michael, 2011. "Jointly optimal monetary and fiscal policy rules under liquidity constraints," Journal of Macroeconomics, Elsevier, vol. 33(3), pages 373-389, September.
  6. Reicher, Claire, 2014. "Systematic fiscal policy and macroeconomic performance: A critical overview of the literature," Economics Discussion Papers 2014-29, Kiel Institute for the World Economy.

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