Fiscal Rules and Countercyclical Policy: Frank Ramsey Meets Gramm-Rudman-Hollings
IMF Working Papers, November 1, 2003
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- Fiscal Rules and Countercyclical Policy: Frank Ramsey Meets Gramm-Rudman-Hollings
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Bibliographic details
- Authors: Evan C Tanner
- Published: November 1, 2003
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451875225.001
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 emphasizes that such laws restrict countercyclical government borrowing, thus preventing intertemporal equalization of marginal deadweight losses of taxation—an idea associated with Frank Ramsey.
- The 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.
- Conclusion emphasized in the paper: Gramm-Rudman-Hollings and Frank Ramsey are not necessarily enemies and they may even be good friends!
Key findings and analysis
- Fiscal rules can constrain countercyclical borrowing, which, under standard Ramsey logic, can impede intertemporal tax-smoothing (equalization of marginal deadweight losses of taxation).
- When analysis incorporates persistent current deficits financed by future tax increases, eliminating those deficits through fiscal rules can reduce the variability of tax rates.
- The reduction in tax rate variability is attainable even over a finite horizon, altering the conventional trade-off between fiscal rules and Ramsey-style tax smoothing.
Policy implications and recommendations
- Policymakers considering fiscal rules should account for the presence of persistent current deficits that require future tax financing.
- Fiscal rules targeting elimination of persistent deficits can complement Ramsey-style objectives by lowering tax rate variability.
- Gramm-Rudman-Hollings–style constraints can be compatible with—and possibly supportive of—intertemporal tax-smoothing goals, under realistic assumptions about deficit persistence and finite horizons.
Subjects and keywords
- 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
IMF Working Papers — Evan C Tanner; citation preview: Evan C Tanner. "Fiscal Rules and Countercyclical Policy: Frank Ramsey Meets Gramm-Rudman-Hollings", IMF Working Papers 2003, 220 (2003), accessed 9/17/2026, https://doi.org/10.5089/9781451875225.001