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Simple, Implementable Fiscal Policy Rules

Author/Editor: Kumhof, Michael | Laxton, Douglas
Authorized for Distribution: April 1, 2009
Electronic Access: Free Full Text (PDF file size is 873KB)
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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: This paper analyzes the scope for systematic rules-based fiscal activism in open economies. Relative to a balanced budget rule, automatic stabilizers significantly improve welfare. But they minimize fiscal instrument volatility rather than business cycle volatility. A more aggressively countercyclical tax revenue gap rule increases welfare gains by around 50 percent, with only modest increases in fiscal instrument volatility. For raw materials revenue gaps the government should let automatic stabilizers work. The best fiscal instruments are targeted transfers, consumption taxes and labor taxes, or, if it enters private utility, government spending. The welfare gains are significantly lower for more open economies.
 
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Series: Working Paper No. 09/76
Subject(s): Fiscal policy | Business cycles | Revenues | Monetary policy | External shocks | Commodity prices | Copper | Manufacturing | Economic stabilization | Economic models
Author's keyword(s): Fiscal policy rules; balanced budget rules; automatic stabilizers; countercyclical fiscal policy; welfare analysis.
 
English  
    Published:   April 1, 2009        
            Format:   Paper
    Stock No:   WPIEA2009076   Pages:   41
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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