IMF Working Papers

Fiscal Rules and Countercyclical Policy: Frank Ramsey Meets Gramm-Rudman-Hollings

By Evan C Tanner

November 1, 2003

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Evan C Tanner. Fiscal Rules and Countercyclical Policy: Frank Ramsey Meets Gramm-Rudman-Hollings, (USA: International Monetary Fund, 2003) accessed September 20, 2024
Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Fiscal rules—legal restrictions on government borrowing, spending, or debt accumulation (like the Gramm-Rudman-Hollings Act in the United States)—have recently been adopted or considered in several countries, both industrial and developing. Previous literature stresses that such laws restrict countercyclical government borrowing, thus preventing intertemporal equalization of marginal deadweight losses of taxation—an idea associated with Frank Ramsey. However, such literature typically abstracts from persistent current deficits that are financed by future tax increases. Eliminating such deficits may substantially reduce tax rate variability—the very goal of countercyclical borrowing—even over a finite horizon. Thus, Gramm-Rudman-Hollings and Frank Ramsey are not necessarily enemies and they may even be good friends!

Subject: Expenditure, Fiscal policy, Fiscal rules, Public expenditure review, Public financial management (PFM), Tax expenditures

Keywords: Caribbean, Central America, Countercyclical policy, Debt accumulation, Debt target, Debt-GDP constant, Fiscal rules, GDP ratio, Government expenditure, Primary deficit, Public expenditure review, Ramsey approach, Tax expenditures, Tax smoothing, Variability rise, WP

Publication Details

  • Pages:

    29

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2003/220

  • Stock No:

    WPIEA2202003

  • ISBN:

    9781451875225

  • ISSN:

    1018-5941

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