Identifying Endogenous Fiscal Policy Rules for Macroeconomic Models

30 Pages Posted: 28 May 2003

See all articles by Javier J. Pérez

Javier J. Pérez

Banco de España - Research Department

Paul Hiebert

European Central Bank (ECB)

Date Written: July 2002

Abstract

In this paper, we present a model-based method for identifying fiscal closure rules in stochastic macroeconomic models. The methodology is based on the stability analysis of the model at hand, with an endogenous derivation of a reaction on the part of the fiscal authority to state variables in the model. The rule achieves the dual aim of imposing solvency on the fiscal sector and generating a state-contingent dynamic adjustment in a framework consistent with the properties of the model. Up to now, fiscal rules in leading large-scale macroeconomic forecasting models have been imposed exogenously, and in this sense are necessarily compatible with the formulation of other sectors of these models. An example of the derivation procedure, including some illustrative results, is provided using a small calibrated macro model.

Keywords: Macroeconomic models, Closure rules, fiscal policy, stability analysis

JEL Classification: C5, E6, C62

Suggested Citation

Perez, Javier J. and Hiebert, Paul, Identifying Endogenous Fiscal Policy Rules for Macroeconomic Models (July 2002). Available at SSRN: https://ssrn.com/abstract=357961

Javier J. Perez

Banco de España - Research Department ( email )

Alcala 50
28014 Madrid
Spain

HOME PAGE: http://www.bde.es/investigador/staff/95.htm

Paul Hiebert (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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