The Perils of Tax Smoothing: Sustainable Fiscal Policy with Random Shocks to Permanent Output
November 1, 2005
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Summary
If permanent output is uncertain, tax smoothing can be perilous: both debt levels and tax rates are difficult to stabilize and may drift upwards. One practical remedy would be to target the debt. However, our simulations confirm that such a policy would require undesirably volatile fiscal adjustments and may inhibit countercyclical borrowing. An alternative would be to link the primary surplus not only to the debt ratio (like tax smoothing) but also to its volatility, thus preempting further adjustments while gradually reducing the debt.
Subject: Expenditure, Fiscal policy, Public debt, Tax arrears management, Vector autoregression
Keywords: debt ratio, objective function, standard deviation, WP
Pages:
32
Volume:
2005
DOI:
Issue:
207
Series:
Working Paper No. 2005/207
Stock No:
WPIEA2005207
ISBN:
9781451862263
ISSN:
1018-5941
