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Optimal Simple Rules for Fiscal Policy in a Monetary Union

Title data

Herz, Bernhard ; Vogel, Lukas ; Röger, Werner:
Optimal Simple Rules for Fiscal Policy in a Monetary Union.
Bayreuth : Universität Bayreuth, Rechts- und Wirtschaftswissenschaftliche Fakultät , 2006 . - 36 S. - (Wirtschaftswissenschaftliche Diskussionspapiere der Universität Bayreuth, Rechts- und Wirtschaftswissenschaftliche Fakultät ; 07-06 )

Official URL: Volltext

Abstract in another language

The paper discusses the stabilizing potential of fiscal policy in a dynamic general-equilibrium model of monetary union. We consider a small open economy inside the currency area. We analyze the demand and supply effects of direct taxation, indirect taxation and government spending and derive optimal simple rules for fiscal stabilization of a technology shock. Fiscal policy achieves substantial macroeconomic stabilization.
Simple public-expenditure rules show the highest degree of both output and inflation stabilization. The implementation lag substantially weakens output stabilization, but hardly affects the stabilization of prices. Output-oriented rules imply less instrument inertia than inflation-dominated rules. The implementation lag leads to higher coefficients for inflation relative to output in the optimal rule. Compared to the single-instrument approach the simultaneous optimization of two instrument rules implies only little additional stabilization gains.The paper discusses the stabilizing potential of fiscal policy in a dynamic general-equilibrium model of monetary union. We consider a small open economy inside the currency area. We analyze the demand and supply effects of direct taxation, indirect taxation and government spending and derive optimal simple rules for fiscal stabilization of a technology shock. Fiscal policy achieves substantial macroeconomic stabilization. Simple public-expenditure rules show the highest degree of both output and inflation stabilization. The implementation lag substantially weakens output stabilization, but hardly affects the stabilization of prices. Output-oriented rules imply less instrument inertia than inflation-dominated rules. The implementation lag leads to higher coefficients for inflation relative to output in the optimal rule. Compared to the single-instrument approach the simultaneous optimization of two instrument rules implies only little additional stabilization gains.

Further data

Item Type: Working paper, discussion paper
Institutions of the University: Faculties > Faculty of Law, Business and Economics > Department of Economics > Chair Economics I > Chair Economics I - Univ.-Prof. Dr. Bernhard Herz
Faculties
Faculties > Faculty of Law, Business and Economics
Faculties > Faculty of Law, Business and Economics > Department of Economics
Faculties > Faculty of Law, Business and Economics > Department of Economics > Chair Economics I
Result of work at the UBT: Yes
DDC Subjects: 300 Social sciences > 330 Economics
Date Deposited: 18 May 2015 10:28
Last Modified: 04 Apr 2019 05:40
URI: https://eref.uni-bayreuth.de/id/eprint/13562