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Fiscal Rules and Countercyclical Policy: Frank Ramsey Meets Gramm-Rudman-Hollings
Author:
Mr. Evan C Tanner
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Series:
IMF Working Papers
Volume/Issue:
Volume 2003: Issue 220
Language:
English
Publication Date:
01 Nov 2003
DOI:
https://doi.org/10.5089/9781451875225.001
ISBN:
9781451875225
ISSN:
1018-5941
Pages:
29
Keywords:
WP; government expenditure; Ramsey approach; tax smoothing; countercyclical policy; primary deficit; GDP ratio; debt accumulation; variability rise; debt-GDP constant; debt target; Fiscal rules; Tax expenditures; Public expenditure review; Central America; Caribbean
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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Fiscal rules—legal restrictions on government borrowing, spending, or debt accumulation (like the Gramm-Rudman-Hollings Act in the United States)—have recently been adopted or considered in several countries, both industrial and developing. Previous literature stresses that such laws restrict countercyclical government borrowing, thus preventing intertemporal equalization of marginal deadweight losses of taxation—an idea associated with Frank Ramsey. However, such literature typically abstracts from persistent current deficits that are financed by future tax increases. Eliminating such deficits may substantially reduce tax rate variability—the very goal of countercyclical borrowing—even over a finite horizon. Thus, Gramm-Rudman-Hollings and Frank Ramsey are not necessarily enemies and they may even be good friends!
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2003: Issue 220