Is U.S. Fiscal Policy Optimal?
31 Pages Posted: 7 Aug 2009 Last revised: 15 Jan 2010
Date Written: January 1, 2008
Abstract
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.
Keywords: fiscal policy
JEL Classification: E62
Suggested Citation: Suggested Citation
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