Identifying endogenous fiscal policy rules for macroeconomic models

Abstract

Non-technical summary 1 Introduction 2 The government budget constraint and the need of fiscal rules 2.1 Standard practice to obtain fiscal closure in large-scale macroeconomic models 2.1.1 The adjusting budgetary item 2.1.2 The functional form and the calibration 3 Identifying endogenous fiscal rules 3.1 Developing intuition via a basic macro model 3.1.1 The model 3.1.2 Characterising the stable manifold of the model 3.1.3 Computing an explicit model-based rule 3.2 Generalisation of the discussion in linear models 3.2.1 Standard stability analysis theory 3.2.2 The identification procedure 4 Application of the identification scheme 4.1 Calibration of the model 4.2 Computation of the explicit model-based rule 5 Conclusions References Figures European Central Bank working paper series

Debt Stabilizing Fiscal Rules

“…First, the results relate to the literature on fiscal closure rules, as typically used in large scale macroeconomic models. In this literature it is widely understood that different instruments, when residually used to enforce the intertemporal budget constraint of the government, lead to different dynamic outcomes which preclude simple comparisons across simulations, as discussed in Bryant and Zhang (1996), Mitchell et al (2000), and Pérez and Hiebert (2002). Yet, by construction, this literature offers few explicit analytical findings and we are not aware of a systematic discussion of the role of government debt in this context.…”

“…After linearizing (30) and substituting out the relevant terms in the three systems, it is clear that a switch from a representation in π b −π k −space to a representation in h b − h k −space amounts to another affine transformation, leaving, again, the results of Propositions 1 − 4 unaffected.…”

Characterising Alternative Fiscal Policy Rules for Sri Lanka

“…It is found that Sri Lankan data does not support the simple tax difference rules proposed by Mitchell et al (2000) and Perez and Hiebert (2004). This implies that in Sri Lanka the tax rate does not respond significantly to either debt or deficit alone.…”

“…In light of the publicly available versions of the IMF's MULTIMOD model, Mitchell et al (2000) and Perez and Hiebert (2004) specify a general form of tax difference rule that targets debt as a percent of GDP, as follows:…”

“…22 These are approximated by the corresponding data series treated with the Hodrick-Prescott (HP) filter. 23 The literature such as Mitchell et al (2000), Perez and Hiebert (2004), Brzozowski and Siwinska Gorzelak (2010) and Wyplosz (2012) discuss backward-looking and contemporaneous fiscal policy rules, avoiding forward-looking specifications. Country studies for instance Kopits (2001), De Mello (2008 and Burger et al (2011) also use backward-looking and contemporaneous rules.…”