We determine and estimate the feedback variables for tax rates which capture the automatic stabilizing behavior of fiscal policy within a DSGE model. To that end we employ the working hypothesis that the fiscal feedback rules share similar characteristics with the Taylor-rule in monetary economics: the empirically observed rule itself is not optimal but its feedback variables are the choice of a welfare-maximizing policymaker. We determine investment for the tax rate on capital income and hours worked for the tax rate on labor income as most important from a normative point of view. What is more, we find strong empirical support for those feedback rules in comparison to common feedback rules in the literature.JEL classification: E62, H30, C51.

Membership in a currency union is not irreversible. Exit expectations may emerge during sovereign debt crises, because exit allows countries to reduce their liabilities through a currency redenomination. As market participants anticipate this possibility, sovereign debt crises intensify. We establish this formally within a small open economy model of changing policy regimes. The model permits explosive dynamics of debt and sovereign yields inside currency unions and allows us to distinguish between exit expectations and those of an outright default. By estimating the model on Greek data, we quantify the contribution of exit expectations to the crisis dynamics during 2009-2012.

Summary We estimate the low‐frequency relationship between fiscal deficits and inflation and pay special attention to its potential time variation by estimating a time‐varying vector autoregression model for US data from 1900 to 2011. We find the strongest relationship neither in times of crisis nor in times of high public deficits, but from the mid 1960s up to 1980. Employing a structural decomposition of the low‐frequency relationship and further narrative evidence, we interpret our results such that the low‐frequency relationship between fiscal deficits and inflation is strongly related to the conduct of monetary policy and its interaction with fiscal policy after World War II.Copyright © 2015 John Wiley & Sons, Ltd.

This paper investigates the effect of a government expenditure shock on consumption and real wages. I identify the shock by exploiting its pre-announced nature, i.e. different signs of the responses in investment, hours worked and output during the announcement and after the realization of the shock. Since pre-announcement leads to a non-stationary moving average representation, I estimate and identify a VMA model. The identifying restrictions are derived from a DSGE model, which is estimated by matching the impulse response functions of the VMA model. Private consumption is found to respond negatively during the announcement period and positively after the realization. The reaction of real wages is significantly positive on impact, decreases during the announcement horizon, and is again significantly positive for two quarters after the realization.