A Model-Based Fiscal Taylor Rule and a Toolkit to Assess the Fiscal Stance
37 Pages Posted: 18 Mar 2020
Date Written: February 2020
This paper presents a model-based fiscal Taylor rule and a toolkit to assess the fiscal stance, defined as the change in the structural primary balance. This is 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.
Keywords: Economic stabilization, Interest rate increases, Business cycles, Financial crises, Economic forecasting, Fiscal Taylor Rule, Model, Toolkit, WP, output gap, Taylor rule, primary balance, debt level, hysteresis
JEL Classification: E32, E62, H62, H63, E01, E2, E52, G21
Suggested Citation: Suggested Citation