Toward a Taylor Rule for Fiscal Policy

Posted: 17 Nov 2015

See all articles by Martin Kliem

Martin Kliem

Deutsche Bundesbank - Research Centre

Alexander Kriwoluzky

Martin Luther University of Halle-Wittenberg

Date Written: June 28, 2013

Abstract

In DSGE models, fiscal policy is typically described by simple rules in which tax rates respond to the level of output. We show that there is only weak empirical evidence in favor of such specifications in US data. Instead, the cyclical movements of labor and capital income tax rates are better described by a contemporaneous response to hours worked and investment, respectively. We show that conditioning on these variables is also desirable from a normative perspective as it significantly improves welfare relative to output-based rules.

Keywords: Fiscal policy, Bayesian model estimation, Identification, Variable selection

JEL Classification: E62, H30, C51

Suggested Citation

Kliem, Martin and Kriwoluzky, Alexander, Toward a Taylor Rule for Fiscal Policy (June 28, 2013). Review of Economic Dynamics, Vol. 17, 2014, Available at SSRN: https://ssrn.com/abstract=2690180

Martin Kliem (Contact Author)

Deutsche Bundesbank - Research Centre ( email )

Wilhelm-Epstein-Str. 14
D-60431 Frankfurt/Main
Germany

Alexander Kriwoluzky

Martin Luther University of Halle-Wittenberg ( email )

Emil-Abderhalden-Str. 7
Halle an der Saale
06099 Halle (Saale), DE Sachsen-Anhalt 06099
Germany

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