Dynamics of Fiscal Financing in the United States

Abstract

Dynamic stochastic general equilibrium models that include policy rules for government spending, lump-sum transfers, and distortionary taxation on labor and capital income and on consumption expenditures are fit to U.S. data under a variety of specifications of fiscal policy rules. We obtain several results. First, the best fitting model allows a rich set of fiscal instruments to respond to stabilize debt. Second, responses of aggregate variables to fiscal policy shocks under rich fiscal rules can vary considerably from responses that allow only non-distortionary fiscal instruments to finance debt. Third, based on estimated policy rules, transfers, capital tax rates, and government spending have historically responded strongly to government debt, while labor taxes have responded more weakly. Fourth, all components of the intertemporal condition linking debt to expected discounted surpluses---transfers, spending, tax revenues, and discount factors---display instances where their expected movements are important in establishing equilibrium. Fifth, debt-financed fiscal shocks trigger long lasting dynamics so that short-run multipliers can differ markedly from long-run multipliers, even in their signs.Ȩ

Smaller Public Sectors in the Euro Area: Aggregate and Distributional Implications

“…Leeper et al, 2010, andLeeper, 2010). Here we assume that, along the transition path, fiscal reforms are accommodated by adjustments in tax rates, namely, the tax rates on capital income, labour income and 9 As said above, in the case of immediate and permanent spending cuts, 0 = x ρ in (11).…”

Fiscal Calculus and the Labor Market

“…Our paper is generally related to the recent literature on fiscal multipliers which includes, among others, Romer and Bernstein (2009), Cogan, Cwik, Taylor, and Wieland (2010), Christiano, Eichenbaum, and Rebelo (2009). Within this literature Uhlig (2010) and Leeper, Plante, and Traum (2010) show that distortionary taxation dampens the multipliers. 5 In our model the dampening effect also works through depressing vacancy creation and job finding rates.…”

Toward a Taylor rule for fiscal policy

“…Leeper et al, 2010a;Forni et al, 2009). Both studies include at least debt in the fiscal feedback rules.…”

“…So far, there is no agreement how these rules should be specified. For this reason, the rules are often modeled as simple ad-hoc processes (Leeper, Plante, and Traum, 2010a;Forni, Monteforte, and Sessa, 2009). These ad-hoc processes typically include output next to government debt as feedback variables.…”

“…Subsequently, the recent DSGE literature aims at characterizing automatic stabilizers in policy rules. For example, Jones (2002) assumes that fiscal policy responds to current and lagged output as well as hours worked and Leeper et al (2010a) include output as an additional variable in the policy rules and consider potential correlations in the tax rates. In this paper, we rely on a normative approach instead an ad-hoc approach to derive simple fiscal feedback rules that characterize the fiscal policy authority operating in the model economy.…”