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Model Uncertainty and Intertemporal Tax Smoothing

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  • Luo, Yulei
  • Nie, Jun
  • Young, Eric

Abstract

In this paper we examine how model uncertainty due to the preference for robustness (RB) affects optimal taxation and the evolution of debt in the Barro tax-smoothing model (1979). We first study how the government spending shocks are absorbed in the short run by varying taxes or through debt under RB. Furthermore, we show that introducing RB improves the model's predictions by generating (i) the observed relative volatility of the changes in tax rates to government spending, (ii) the observed comovement between government deficits and spending, and (iii) more consistent behavior of government budget deficits in the US economy.

Suggested Citation

  • Luo, Yulei & Nie, Jun & Young, Eric, 2014. "Model Uncertainty and Intertemporal Tax Smoothing," MPRA Paper 54268, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:54268
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    Cited by:

    1. Yulei Luo & Jun Nie & Eric R. Young, 2012. "Model uncertainty, state uncertainty, and state-space models," Research Working Paper RWP 12-02, Federal Reserve Bank of Kansas City.
    2. Young, Eric R., 2012. "Robust policymaking in the face of sudden stops," Journal of Monetary Economics, Elsevier, vol. 59(5), pages 512-527.

    More about this item

    Keywords

    Robustness; Model Uncertainty; Taxation Smoothing;

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • H5 - Public Economics - - National Government Expenditures and Related Policies

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