Is U.S. Fiscal Policy Optimal?

31 Pages Posted: 7 Aug 2009 Last revised: 15 Jan 2010

See all articles by Luisa Lambertini

Luisa Lambertini

École Polytechnique Fédérale de Lausanne

Nicola Giammarioli

European Central Bank (ECB)

Luca Onorante

Joint Research Centre, Italy

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

Lambertini, Luisa and Giammarioli, Nicola and Onorante, Luca, Is U.S. Fiscal Policy Optimal? (January 1, 2008). Center for Fiscal Policy, EPFL, Chair of International Finance (CFI) Working Paper No. 2008-01, Available at SSRN: https://ssrn.com/abstract=1443815

Luisa Lambertini (Contact Author)

École Polytechnique Fédérale de Lausanne ( email )

Odyssea
Station 5
Lausanne, 1015
Switzerland

Nicola Giammarioli

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Luca Onorante

Joint Research Centre, Italy

Via E. Fermi 1
I-21020 Ispra (VA)
United States

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