{
  "title": "Fiscal Rules and Countercyclical Policy: Frank Ramsey Meets Gramm-Rudman-Hollings",
  "publication": "IMF Working Papers, November 1, 2003",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/30/fiscal-rules-and-countercyclical-policy-frank-ramsey-meets-gramm-rudman-hollings-16963",
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  "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.",
  "sections": [
    {
      "heading": "Summary",
      "content": "- 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.\n- 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.\n- The literature typically abstracts from persistent current deficits that are financed by future tax increases.\n- Eliminating such deficits may substantially reduce tax rate variability—the very goal of countercyclical borrowing—even over a finite horizon.\n- Conclusion emphasized in the paper: Gramm-Rudman-Hollings and Frank Ramsey are not necessarily enemies and they may even be good friends!"
    },
    {
      "heading": "Key findings and analysis",
      "content": "- Fiscal rules can constrain countercyclical borrowing, which, under standard Ramsey logic, can impede intertemporal tax-smoothing (equalization of marginal deadweight losses of taxation).\n- When analysis incorporates persistent current deficits financed by future tax increases, eliminating those deficits through fiscal rules can reduce the variability of tax rates.\n- 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."
    },
    {
      "heading": "Policy implications and recommendations",
      "content": "- Policymakers considering fiscal rules should account for the presence of persistent current deficits that require future tax financing.\n- Fiscal rules targeting elimination of persistent deficits can complement Ramsey-style objectives by lowering tax rate variability.\n- 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."
    },
    {
      "heading": "Subjects and keywords",
      "content": "- Subject: Expenditure, Fiscal policy, Fiscal rules, Public expenditure review, Public financial management (PFM), Tax expenditures\n- 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\n\nIMF 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\n\n---\n\n Content in this bundle\n\n- wp03220\n  - wp03220 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp03220 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/30/fiscal-rules-and-countercyclical-policy-frank-ramsey-meets-gramm-rudman-hollings-16963"
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    "Authors: Evan C Tanner",
    "Published: November 1, 2003",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781451875225.001",
    "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!",
    "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.",
    "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.",
    "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",
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