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Simple, Implementable Fiscal Policy Rules

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Author Info

  • 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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Related research

Keywords: Revenues; External shocks; Commodity prices; Copper; Manufacturing; Economic models;

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References

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Cited by:
  1. Stephen Snudden, 2013. "Cyclical Fiscal Rules for Oil-Exporting Countries," IMF Working Papers 13/229, International Monetary Fund.
  2. 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.
  3. 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.
  4. 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.

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