Model Uncertainty and Intertemporal Tax Smoothing

Yulei Luo (), Jun Nie and Eric Young

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper we examine how model uncertainty due to the preference for robustness (RB) affects optimal taxation and the evolution of debt in the Barro tax-smoothing model (1979). We first study how the government spending shocks are absorbed in the short run by varying taxes or through debt under RB. Furthermore, we show that introducing RB improves the model's predictions by generating (i) the observed relative volatility of the changes in tax rates to government spending, (ii) the observed comovement between government deficits and spending, and (iii) more consistent behavior of government budget deficits in the US economy.

Keywords: Robustness; Model Uncertainty; Taxation Smoothing (search for similar items in EconPapers)
JEL-codes: D8 H3 H5 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-mac and nep-pbe
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Citations: View citations in EconPapers (9)

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Related works:
Journal Article: Model uncertainty and intertemporal tax smoothing (2014)
Working Paper: Model uncertainty and intertemporal tax smoothing (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:54268

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