Toward a Taylor rule for fiscal policy

Abstract

In DSGE models, fiscal policy is typically described by simple rules in which tax rates respond to the level of output. We show that there is only weak empirical evidence in favor of such specifications in US data. Instead, the cyclical movements of labor and capital income tax rates are better described by a contemporaneous response to hours worked and investment, respectively. We show that conditioning on these variables is also desirable from a normative perspective as it significantly improves welfare relative to output-based rules.

Citation

Kliem, Martin, and Alexander Kriwoluzky (2014). “Toward a Taylor rule for fiscal policy.” Review of Economic Dynamics 17(2): 294–302.

@article{KliemKriwoluzky2014_RED,
  title   = {Toward a Taylor rule for fiscal policy},
  author  = {Kliem, Martin and Kriwoluzky, Alexander},
  journal = {Review of Economic Dynamics},
  volume  = {17},
  number  = {2},
  pages   = {294--302},
  year    = {2014},
  issn    = {1094-2025},
  doi     = {10.1016/j.red.2013.04.001},
  keywords = {fiscal policy, Taylor rule, DSGE, tax rules, welfare}
}