ABSTRACT
We derive an optimal fiscal policy rule that reflects the US government’s desire to reduce fluctuations in the output gap and the primary deficit in the post-World War II period. The results from Bayesian estimations show a lower weight on output gap stabilization under predominant democratic presidencies relative to republican ones. The opposite holds with respect to maintaining a zero primary deficit. Our time-consistent fiscal rule indicates a countercyclical government response to GDP fluctuations at all times.
Supplementary material
Supplemental data for this article can be accessed here.
Disclosure statement
No potential conflict of interest was reported by the author.
Notes
1 Note that it can be shown that the condition for saddle point stability is given by the inequality where the expression is known from Bullard and Mitra (Citation2002). It follows that the Taylor principle, i.e., , is not strictly required to hold for given values of in this version of the purely forward-looking New-Keynesian model.
2 All corresponding files used for data alignment and estimations via Dynare together with a technical appendix are downloadable via the journal’s web page.