Model Uncertainty and Intertemporal Tax Smoothing

Luo, Yulei and Nie, Jun and Young, Eric (2014): Model Uncertainty and Intertemporal Tax Smoothing.

Abstract

In this paper we examine how model uncertainty due to the preference for robustness (RB) affects optimal taxation and the evolution of debt in the Barro tax-smoothing model (1979). We first study how the government spending shocks are absorbed in the short run by varying taxes or through debt under RB. Furthermore, we show that introducing RB improves the model's predictions by generating (i) the observed relative volatility of the changes in tax rates to government spending, (ii) the observed comovement between government deficits and spending, and (iii) more consistent behavior of government budget deficits in the US economy.

• Item Type: MPRA Paper
• Language: English
• Keywords: Robustness, Model Uncertainty, Taxation Smoothing
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty; H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents; H - Public Economics > H5 - National Government Expenditures and Related Policies

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