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Toward a Taylor Rule for Fiscal Policy

Author

Listed:
  • Martin Kliem

    (Deutsche Bundesbank)

  • Alexander Kriwoluzky

    (University of Bonn)

Abstract

In DSGE models, fiscal policy is typically described by simple rules in which tax rates respond to the level of output. We show that there is only weak empirical evidence in favor of such specifications in U.S. data. Instead, the cyclical movements of labor and capital income tax rates are better described by a contemporaneous response to hours worked and investment, respectively. We show that conditioning on these variables is also desirable from a normative perspective as it significantly improves welfare relative to output-based rules. (Copyright: Elsevier)

Suggested Citation

  • Martin Kliem & Alexander Kriwoluzky, 2014. "Toward a Taylor Rule for Fiscal Policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(2), pages 294-302, April.
  • Handle: RePEc:red:issued:12-15
    DOI: 10.1016/j.red.2013.08.003
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    Cited by:

    1. Born, Benjamin & Peter, Alexandra & Pfeifer, Johannes, 2013. "Fiscal news and macroeconomic volatility," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2582-2601.
    2. Evers, Michael P., 2015. "Fiscal federalism and monetary unions: A quantitative assessment," Journal of International Economics, Elsevier, vol. 97(1), pages 59-75.
    3. Hollmayr, Josef & Matthes, Christian, 2015. "Learning about fiscal policy and the effects of policy uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 59(C), pages 142-162.
    4. repec:eee:jpolmo:v:39:y:2017:i:2:p:206-231 is not listed on IDEAS
    5. Crowley, Patrick M. & Hudgins, David, 2015. "Fiscal policy tracking design in the time–frequency domain using wavelet analysis," Economic Modelling, Elsevier, vol. 51(C), pages 502-514.
    6. repec:ijc:ijcjou:y:2017:q:4:a:8 is not listed on IDEAS
    7. repec:eee:macchp:v2-2305 is not listed on IDEAS
    8. Daniel Baksa & Mihnea Constantinescu & Zsuzsa Munkacsi, 2016. "Aging, Informality and Public Policies in a Small Open Economy," Bank of Lithuania Discussion Paper Series 2, Bank of Lithuania.
    9. Gadatsch, Niklas & Hauzenberger, Klemens & Stähler, Nikolai, 2016. "Fiscal policy during the crisis: A look on Germany and the Euro area with GEAR," Economic Modelling, Elsevier, vol. 52(PB), pages 997-1016.
    10. Kriwoluzky, Alexander, 2012. "Pre-announcement and timing: The effects of a government expenditure shock," European Economic Review, Elsevier, vol. 56(3), pages 373-388.
    11. Serbanoiu, Georgian Valentin, 2012. "Transmission of fiscal policy shocks into Romania's economy," MPRA Paper 40947, University Library of Munich, Germany.
    12. Campbell Leith & Eric Leeper, 2016. "Understanding Inflation as a Joint Monetary-Fiscal Phenomenon," Working Papers 2016_01, Business School - Economics, University of Glasgow.
    13. Apostolis Philippopoulos & Petros Varthalitis & Vanghelis Vassilatos, 2017. "Fiscal Consolidation in an Open Economy with Sovereign Premia and without Monetary Policy Independence," International Journal of Central Banking, International Journal of Central Banking, vol. 13(4), pages 259-306, December.
    14. repec:eee:ecmode:v:64:y:2017:i:c:p:473-486 is not listed on IDEAS
    15. Ferdinandusse, Marien & Checherita-Westphal, Cristina & Attinasi, Maria Grazia & Bańkowski, Krzysztof & Palaiodimos, Georgios & Trindade Campos, Maria Manuel, 2017. "Euro area fiscal stance," Occasional Paper Series 182, European Central Bank.

    More about this item

    Keywords

    Fiscal policy; Bayesian model estimation; Identification; Variable selection.;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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