Simple, Implementable Fiscal Policy Rules

Author/Editor:

Michael Kumhof ; Douglas Laxton

Publication Date:

April 1, 2009

Electronic Access:

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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.

Series:

Working Paper No. 09/76

Subject:

English

Publication Date:

April 1, 2009

ISBN/ISSN:

9781451872231/1018-5941

Stock No:

WPIEA2009076

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

41

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