A Model-Based Fiscal Taylor Rule and a Toolkit to Assess the Fiscal Stance

37 Pages Posted: 18 Mar 2020

See all articles by Jean-Marc Fournier

Jean-Marc Fournier

Organization for Economic Co-Operation and Development (OECD)

Philipp Lieberknecht

Deutsche Bundesbank; Goethe University Frankfurt; Goethe University Frankfurt - Institute for Monetary and Financial Stability (IMFS); Deutsche Bundesbank - Economics Department

Date Written: February 2020

Abstract

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

Fournier, Jean-Marc and Lieberknecht, Philipp, A Model-Based Fiscal Taylor Rule and a Toolkit to Assess the Fiscal Stance (February 2020). IMF Working Paper No. 20/33, Available at SSRN: https://ssrn.com/abstract=3555904

Jean-Marc Fournier (Contact Author)

Organization for Economic Co-Operation and Development (OECD) ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France

Philipp Lieberknecht

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Goethe University Frankfurt ( email )

Gr├╝neburgplatz 1
Frankfurt am Main, 60323
Germany

Goethe University Frankfurt - Institute for Monetary and Financial Stability (IMFS) ( email )

Gr├╝neburgplatz 1
Frankfurt am Main, 60323
Germany

Deutsche Bundesbank - Economics Department ( email )

Wilhelm-Epstein-Strasse 14
60431 Frankfurt am Main
Germany

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