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Simple, Implementable Fiscal Policy Rules

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Author Info
Michael Kumhof
Douglas Laxton

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

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Length: 41 pages
Date of creation: 22 Apr 2009
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Handle: RePEc:imf:imfwpa:09/76

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Related research
Keywords: Fiscal policy ; Business cycles ; Revenues ; Monetary policy ; External shocks ; Commodity prices ; Copper ; Manufacturing ; Economic stabilization ; Economic models ;

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