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Fiscal stabilization rule

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  • Shahnazarian, Hovick

Abstract

The optimal fiscal stabilization rule presented in this paper is derived from a loss function where the government is assumed to keep the structural balance close to its target level and simultaneously stabilize the GDP and inflation gaps. The rule yields the size of the discretionary stabilization measures needed, in addition to automatic stabilizers, to be able to stabilize the business cycle, without compromising the sustainability of public finances. Using this policy rule and a first-order Taylor expansion of the fiscal balance, we decompose the automatic stabilizers and the discretionary fiscal policy conditional on business cycle conditions.

Suggested Citation

  • Shahnazarian, Hovick, 2023. "Fiscal stabilization rule," Journal of Macroeconomics, Elsevier, vol. 77(C).
    • Handle: RePEc:eee:jmacro:v:77:y:2023:i:c:s0164070423000289
    DOI: 10.1016/j.jmacro.2023.103528
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    More about this item

    Keywords

    Fiscal stabilization policy; Fiscal stabilization rule; Automatic stabilizers; Cyclical balance; Discretionary fiscal policy; Structural balance;
    All these keywords.

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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