Fiscal stabilisation rule

Shahnazarian, Hovick (2022): Fiscal stabilisation rule.

Abstract

This paper decomposes the fiscal balance into a cyclical and a structural component using an optimal fiscal stabilisation rule derived from a loss function where the government is assumed to keep structural balance close to the targeted surplus for fiscal balance while at the same time stabilising the GDP- and the inflation gap. A first-order Taylor expansion of fiscal balance is then used to further disaggregate the different components of fiscal balance. These practical policy rules can be used to calculate the magnitude of automatic stabilisers and the appropriate discretionary fiscal policies conditional on the state of the economy.

• Item Type: MPRA Paper
• Language: English
• Keywords: stabilisation policy; fiscal stabilisation rules; automatic stabilisers; discretionary fiscal policy
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E61 - Policy Objectives ; Policy Designs and Consistency ; Policy Coordination; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H20 - General; H - Public Economics > H5 - National Government Expenditures and Related Policies > H50 - General; H - Public Economics > H6 - National Budget, Deficit, and Debt > H60 - General

References

Almenberg, J. and M. Sigonius (2021), ”Automatic fiscal stabilisers in Sweden 1998–2019”, Working Paper No. 155, The National Institute of Economic Research.

Almerud, J. och T. Laun (2021), ”Finanspolitiska multiplikatorer i Sverige – ett allmänjämviktsperspektiv”, KI-kommentar 2021:29, Konjunkturinstitutet.

Ankargren, S. and H. Shahnazarian (2019), ”The Interaction Between Fiscal and Monetary Policies: Evidence from Sweden”, Sveriges Riksbank Working Paper Series No. 365.

Aranki, T., K. Friberg, and M. Sjödin et al. (2010), “The Relationship Between the Business Cycle and the Labour Market in Sweden”, Economic Commentaries, No. 2, Sveriges Riksbank.

Boije, R. (2004), “The General Government Structural Budget Balance”, Economic Review, Sveriges Riksbank, 2004/1.

Boije, R. (2005), ”On the need to focus more on the asymmetry problem within the EU Fiscal Policy Framework”, Economic Review, Sveriges Riksbank, 2005/1.

Caldara, D. and Kamps, C. (2017). “The analytics of svars: A unified framework to measure fiscal multipliers”, The Review of Economic Studies, 84(3):1015–1040.

Calmfors L., J. Hassler, and A. Seim (2022), Samspel för stabilitet – en ESO-rapport om rollfördelningen mellan finans- och penningpolitik, Rapport till Expertgruppen för studier i offentlig ekonomi 2022:3.

Chadha, J.S. and C. Nolan (2007), “Optimal Simple Rules for the Conduct of Monetary and Fiscal Policy”, Journal of Macroeconomics, 29, 665-689.

Dixit, A. and L. Lambertini (2003), ”Interactions of Commitment and Discretion in Monetary and Fiscal Policies”, American Economic Review, 93(5), 1522–1542.

Erceg, C. and Lindé, J. (2014), “Is there a fiscal free lunch in a liquidity trap?”, Journal of the European Economic Association, 12(1):73–107.

Farhi, E., Correia, I., Nicolini, J. P., and Teles, P. (2013). Unconventional fiscal policy at the zero bound. American Economic Review, 103(4):1172–1211.

Flodén, M. (2009), ”Automatic Fiscal Stabilizers in Sweden 1998– 2009”, Studier i Finanspolitik 2009/2, Underlagsrapport till Finanspolitiska rådet.

Girouard, N. and C. André (2005), “Measuring cyclically-adjusted budget balances for OECD countries”, Economics Department Working Paper No. 434, OECD.

Hall, R. (2009), “By How Much Does GDP Rise If the Government Buys More?”, Brookings Papers on Economic Activity, Project Muse, pp. 183-249.

Hjelm, G. and P. Stockhammar (2016), “Short-run Effects of Fiscal Policy on GDP and Employment: Swedish Evidence”, Working Paper No. 147, National Institute of Economic Research.

Jonsson, M. and Moran K. (2014), “The linkages between monetary and macroprudential policies”, Sveriges Riksbank Economic Review 2014:1.

Karlsson, S. and Österholm P. (2020), ”Sambandet mellan arbetslöshet och inflation i Sverige. Ekonomisk debatt nr 1 årgång 48, 48-1-skpo.pdf (nationalekonomi.se).

Lambertini, L. and R. Rovelli (2003), ”Monetary and Fiscal Policy Coordination and Macroeconomic Stabilization. A Theoretical Analysis”, University of Bologna.

Leeper, E. M. (2016). Why central banks should care about fiscal rules. Economic Review 2016:3, Sveriges Riksbank.

Molteni, F. and Pappa, E. (2017). The Combination of Monetary and Fiscal Policy Shocks: A TVP-FAVAR Approach. Max Weber Programme Working Papers 2017/13, European University Institute.

Miyamoto, W., T. Nguyen, and D. Sergeyev (2018), “Government Spending Multipliers under the Zero Lower Bound: Evidence from Japan”, American Economic Journal: Macroeconomics, 10, 247–77.

National Institute of Economic Research (2022), Hållbarhetsrapport 2022 för de offentliga finanserna, Hållbarhetsrapporten 2021 (konj.se).

Owyang, M. T., V. A. Ramey, and S. Zubairy (2013), “Are Government Spending Multipliers Greater during Periods of Slack? Evidence from Twentieth-Century Historical Data" American Economic Review, 103(3): 129-134.

Price, R. W. R., Dang, T.-T., and Botev, J. (2015). Adjusting fiscal balances for the business cycle: New tax and expenditure elasticity estimates for oecd countries. Economics Department Working Papers 1275, OECD.

Ramey, V. (2019), ”Ten Years after the Financial Crisis: What Have We Learned from the Renaissance in Fiscal Research?”, Journal of Economic Perspectives, 33(2), 89–114.

Sørensen, P. B. (2010), “Swedish Tax Policy: Recent Trends and Future Challenges”, Report to the Expert Group on Public Economics 2010:4, Government Offices of Sweden, Ministry of Finance.

Yoshino N., T. Mizoguchi, and F. Taghizadeh-Hesary (2015), “Optimal Fiscal Policy Rule for Achieving Fiscal Sustainability: A Japanese Case Study”, ADBI Working Paper series 531, Asian Development Bank Institute.

Woodford, M. (2001), “The Taylor rule and optimal monetary policy”, American Economic Review, 91(2), 232–37. Woodford, M. (2011), “Simple analytics of the government expenditure multiplier”, American Economic Journal: Macroeconomics, 3(1):1–35.