A Model-based Fiscal Taylor Rule and a Toolkit to Assess the Fiscal Stance
IMF Working Papers, February 14, 2020
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- A Model-based Fiscal Taylor Rule and a Toolkit to Assess the Fiscal Stance
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Bibliographic details
- Authors: Jean-Marc Fournier, Philipp Lieberknecht
- Published: February 14, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513529240.001
Key summary
- Presents a model-based fiscal Taylor rule and a toolkit to assess the fiscal stance, defined as the change in the structural primary balance.
- Built on the normative buffer-stock model of the government (Fournier, 2019) which includes key channels like hysteresis, cycle-dependent multipliers and a risk premium.
- A simple fiscal Taylor rule prescribes the fiscal stance as a function of past government debt, past output gap and the past structural primary balance.
- Applications suggest several advanced economies could have better managed their fiscal stance over the last 20 years.
- Simulations provide fiscal stance recommendations over the medium-term.
Model features and mechanisms
- Normative buffer-stock model of the government (Fournier, 2019).
- Explicit inclusion of hysteresis.
- Cycle-dependent multipliers.
- A risk premium channel.
- Fiscal stance operationalized as the change in the structural primary balance.
Fiscal Taylor rule specification
- Rule prescribes the fiscal stance as a function of:
- past government debt,
- past output gap,
- past structural primary balance.
Applications and empirical findings
- Applications to several advanced economies over the last 20 years indicate scope for improved fiscal stance management.
- The toolkit enables assessment of historical fiscal stances and comparison with rule-implied recommendations.
Simulations and policy recommendations
- Simulations are used to provide fiscal stance recommendations over the medium-term.
- Toolkit designed to translate model outputs into actionable fiscal stance guidance defined in terms of changes to the structural primary balance.
Content in this bundle
- Working Paper