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Is U.S. Fiscal Policy Optimal?

Listed author(s):
  • Nicola Giammarioli
  • Luisa Lambertini


    (Chair of International Finance, Ecole Polytechnique Federale de Lausanne (EPFL), Switzerland)

  • Luca Onorante

We find and compare two simple fiscal rules. The first is a theoretical rule that approximates well Ramsey-optimal fiscal policy in a DSGE model calibrated to the U.S. economy over the period 1955:1 to 2007:3. The second is an empirical rule that approximates well actual U.S. fiscal policy over the same period. Our main findings are: First, Ramsey-optimal fiscal policy displays limited volatility even in the presence of sticky prices, while public debt absorbs most of the shocks. Second, actual U.S. fiscal policy is excessively counter-cyclical. Ramsey-optimal fiscal policy is negatively correlated with output over the business cycle, as expansions generate reduction in the level of public debt and the tax rate and vice versa. On the other hand, actual fiscal policy is positively correlated with output, with tax rate being raised during expansions and reduced during recessions. Third, actual fiscal policy is inconsistent with long-run debt sustainability over the period considered.

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Paper provided by Center for Fiscal Policy, Swiss Federal Institute of Technology Lausanne in its series Working Papers with number 200802.

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Length: 34 pages
Date of creation: Jan 2008
Handle: RePEc:cif:wpaper:200802
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