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Identifying endogenous fiscal policy rules for macroeconomic models

In this paper, we present a model-based method for identifying fiscal closure rules in stochastic macroeconomic models. The methodology is based on the stability analysis of the model at hand, with an endogenous derivation of a reaction on the part of the fiscal authority to state variables in the model. The rule achieves the dual aim of imposing solvency on the fiscal sector and generating a state-contingent dynamic adjustment in a framework consistent with the properties of the model. Up to now, fiscal rules in leading large-scale macroeconomic forecasting models have been imposed exogenously, and in this sense are not necessarily compatible with the formulation of other sectors of these models. An example of the derivation procedure, including some illustrative results, is provided using a small calibrated macro model.

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Paper provided by Centro de Estudios Andaluces in its series Economic Working Papers at Centro de Estudios Andaluces with number E2002/06.

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Length: 22 pages
Date of creation: Jul 2002
Date of revision:
Handle: RePEc:cea:doctra:e2002_06
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  1. 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.
  2. K.B. Church & P.R. Mitchell & P.N. Smith & K.F. Wallis, 1993. "Comparative Properties of Models of the UK Economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 145(1), pages 87-107, August.
  3. Eric M. Leeper, 1993. "The policy tango: toward a holistic view of monetary and fiscal effects," Economic Review, Federal Reserve Bank of Atlanta, issue Jul, pages 1-27.
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  7. Woodford, M., 1999. "Optimal Monetary Policy Inertia.," Papers 666, Stockholm - International Economic Studies.
  8. V. V. Chari & Patrick J. Kehoe, 1998. "Optimal fiscal and monetary policy," Staff Report 251, Federal Reserve Bank of Minneapolis.
  9. Ralph C. Bryant & Long Zhang, 1996. "Alternative Specifications of Intertemporal Fiscal Policy in a Small Theoretical Model," Discussion Papers 124, Brookings Institution International Economics.
  10. McAdam, Peter & Hughes Hallett, A J, 1999. " Nonlinearity, Computational Complexity and Macroeconomic Modelling," Journal of Economic Surveys, Wiley Blackwell, vol. 13(5), pages 577-618, December.
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  12. Wren-Lewis, Simon, 2000. "The Limits to Discretionary Fiscal Stabilization Policy," Oxford Review of Economic Policy, Oxford University Press, vol. 16(4), pages 92-105, Winter.
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  16. Jess Gaspar & Kenneth L. Judd, 1997. "Solving Large Scale Rational Expectations Models," NBER Technical Working Papers 0207, National Bureau of Economic Research, Inc.
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  18. Johnson, Richard, 2003. "A comparison of the constant-tax rule and a standard fiscal reaction rule in the IMF's MULTIMOD model," Journal of Policy Modeling, Elsevier, vol. 25(6-7), pages 639-653, September.
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  23. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 0042, European Central Bank.
  24. 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.
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  28. repec:cup:macdyn:v:1:y:1997:i:1:p:45-75 is not listed on IDEAS
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