Advanced Search
MyIDEAS: Login to save this paper or follow this series

Stability consequences of fiscal policy rules

Contents:

Author Info

  • Jukka Railavo

    (Bank of Finland)

Registered author(s):

    Abstract

    Using an optimisation-based model with endogenous labour supply and a proportional tax rate, we compare the stabilising properties of different fiscal policy rules. The economy is affected by shocks from both government spending and technology. The fiscal policy rule can be based on government liabilities or the government budget deficit. As both are given as measures of fiscal policy performance in the Stability and Growth Pact (SGP), we also use a fiscal policy rule based on the combination of the two. We compare the accounting definition of deficit with the economic definition which takes inflation into account. The fiscal policy rule based on debt, with monetary policy consistent with the Taylor principle, results in an unstable solution. However, a fiscal policy rule based on deficit produces stable solutions with a wide range of fiscal policy parameters. Moreover, we find that putting more weight on the deficit than the debt in the fiscal policy rule creates less cyclical responses to shocks. Finally we find out that the SGP definition of deficit performs as well as the real deficit based on the government budget constraint.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://128.118.178.162/eps/mac/papers/0404/0404020.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by EconWPA in its series Macroeconomics with number 0404020.

    as in new window
    Length: 38 pages
    Date of creation: 26 Apr 2004
    Date of revision:
    Handle: RePEc:wpa:wuwpma:0404020

    Note: Type of Document - pdf; pages: 38
    Contact details of provider:
    Web page: http://128.118.178.162

    Related research

    Keywords: inflation; fiscal and monetary policy; stabilisation;

    Find related papers by JEL classification:

    This paper has been announced in the following NEP Reports:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer, vol. 4(3), pages 345-80.
    2. Chari, V V & Christiano, Lawrence J & Kehoe, Patrick J, 1991. "Optimal Fiscal and Monetary Policy: Some Recent Results," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 519-39, August.
    3. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October.
    4. Leith, Campbell & Wren-Lewis, Simon, 2008. "Interactions between monetary and fiscal policy under flexible exchange rates," Journal of Economic Dynamics and Control, Elsevier, vol. 32(9), pages 2854-2882, September.
    5. Rochelle M. Edge & Jeremy B. Rudd, 2002. "Taxation and the Taylor principle," Finance and Economics Discussion Series 2002-51, Board of Governors of the Federal Reserve System (U.S.).
    6. Erkki Koskela & Mikko Puhakka, 2003. "Stabilizing Competitive Cycles with Distortionary Taxation," CESifo Working Paper Series 947, CESifo Group Munich.
    7. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "Monetary policy rules and macroeconomic stability: Evidence and some theory," Economics Working Papers 350, Department of Economics and Business, Universitat Pompeu Fabra, revised May 1999.
    8. Harald Uhlig, 1998. "A Toolkit for Analysing Nonlinear Dynamic Stochastic Models Easily," QM&RBC Codes 123, Quantitative Macroeconomics & Real Business Cycles.
    9. Jess Benhabib & Stephanie Schmitt-Grohe & Martin Uribe, 1998. "Monetary policy and multiple equilibria," Finance and Economics Discussion Series 1998-29, Board of Governors of the Federal Reserve System (U.S.).
    10. Sims, Christopher A, 1994. "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory, Springer, vol. 4(3), pages 381-99.
    11. Schmitt-Grohé, Stephanie & Uribe, Martín, 2001. "Optimal Fiscal and Monetary Policy Under Sticky Prices," CEPR Discussion Papers 2942, C.E.P.R. Discussion Papers.
    12. George W. Evans & Seppo Honkapohja, 2002. "Adaptive Learning and Monetary Policy Design," University of Oregon Economics Department Working Papers 2002-18, University of Oregon Economics Department, revised 04 Mar 2004.
    13. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
    14. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
    15. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
    16. Kaushik Mitra & James Bullard, . "Learning About Monetary Policy Rules," Discussion Papers 00/41, Department of Economics, University of York.
    17. Woodford, Michael, 2001. "Fiscal Requirements for Price Stability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 669-728, August.
    18. Dirk Niepelt, 2004. "Tax Smoothing versus Tax Shifting," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(1), pages 27-51, January.
    19. Woodford, Michael, 1999. "Optimal Monetary Policy Inertia," Manchester School, University of Manchester, vol. 67(0), pages 1-35, Supplemen.
    20. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    21. Thomas J. Sargent, 1982. "Beyond demand and supply curves in macroeconomics," Staff Report 77, Federal Reserve Bank of Minneapolis.
    22. V.V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1993. "Optimal fiscal policy in a business cycle model," Staff Report 160, Federal Reserve Bank of Minneapolis.
    23. Julio J. Rotemberg & Michael Woodford, 1998. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy: Expanded Version," NBER Technical Working Papers 0233, National Bureau of Economic Research, Inc.
    24. Michael Woodford, 1995. "Price Level Determinacy Without Control of a Monetary Aggregate," NBER Working Papers 5204, National Bureau of Economic Research, Inc.
    25. Leong , Kenneth, 2002. "Reconciling the New Keynesian model with observed persistence," Research Discussion Papers 19/2002, Bank of Finland.
    26. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1329-1368, November.
    27. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
    28. Leith, Campbell & Wren-Lewis, Simon, 2000. "Interactions between Monetary and Fiscal Policy Rules," Economic Journal, Royal Economic Society, vol. 110(462), pages C93-108, March.
    29. Bernheim, B Douglas, 1991. "Optimal Fiscal and Monetary Policy: Some Recent Results," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 540-42, August.
    30. Michael Woodford, 1996. "Control of the Public Debt: A Requirement for Price Stability?," NBER Working Papers 5684, National Bureau of Economic Research, Inc.
    31. Woodford, Michael, 1999. "Optimal monetary policy inertia," CFS Working Paper Series 1999/09, Center for Financial Studies (CFS).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Kilponen , Juha & Kinnunen , Helvi & Ripatti , Antti, 2006. "Population ageing in a small open economy – some policy experiments with a tractable general equilibrium model," Research Discussion Papers 28/2006, Bank of Finland.
    2. Rafael Domenech & Javier Andres, 2005. "Fiscal Rules and Macroeconomic Stability," Working Papers 0501, International Economics Institute, University of Valencia, revised Nov 2005.
    3. Jukka Railavo, 2005. "Monetary Concequences of Alternative Fiscal Policy Rules," Computing in Economics and Finance 2005 145, Society for Computational Economics.
    4. Railavo, Jukka, 2004. "Monetary consequences of alternative fiscal policy rules," Research Discussion Papers 20/2004, Bank of Finland.
    5. Marattin, Luigi & Marzo, Massimiliano & Zagaglia, Paolo, 2011. "A welfare perspective on the fiscal–monetary policy mix: The role of alternative fiscal instruments," Journal of Policy Modeling, Elsevier, vol. 33(6), pages 920-952.
    6. Kremer, Jana, 2004. "Fiscal rules and monetary policy in a dynamic stochastic general equilibrium model," Discussion Paper Series 1: Economic Studies 2004,35, Deutsche Bundesbank, Research Centre.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpma:0404020. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.