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Optimal fiscal policy in a simple macroeconomic context

Listed author(s):
  • Luca Correani


    (Università degli studi della Tuscia, Viterbo)

  • Fabio Di Dio


    (Consip S.p.A., Macroeconomic Modelling Unit, Rome, Italy)

  • Stefano Patrì


    (Department of Methods and Models for Economics, Territory and Finance MEMOTEF, Sapienza University of Rome (Italy))

This article derives optimal fiscal rules within a stochastic model of Keynesian type in the context of Poole (1970) analysis. By using optimal control theory and applying the Hamilton-Jacoby Bellman equation, we extend the original Poole results concerning the output stabilization properties of monetary policy to the case of fiscal policy. In particular, we look for the optimal setting of government expenditure and lump-sum taxation in the case that the fiscal authority wishes to keep the product close to a reference value and that the economy is assumed to be affected by stochastic disturbances of real and/or monetary type. According to the findings an optimal government expenditure rule is on average preferable to a taxation rule whatever the source of disturbances.

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File Function: 2013
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Paper provided by Sapienza University of Rome, Metodi e modelli per l'economia, il territorio e la finanza MEMOTEF in its series Working Papers with number 111/13.

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Handle: RePEc:rsq:wpaper:18/13
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