Model uncertainty and intertemporal tax smoothing

Yulei Luo (), Jun Nie and Eric Young

Journal of Economic Dynamics and Control, 2014, vol. 45, issue C, 289-314

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 U.S. economy. Finally, we show that RB can also improve the model׳s predictions in the presence of multiple shocks.

Keywords: Robustness; Model uncertainty; Taxation smoothing (search for similar items in EconPapers)
JEL-codes: D83 E6 H3 H6 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (9)

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Related works:
Working Paper: 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:eee:dyncon:v:45:y:2014:i:c:p:289-314

DOI: 10.1016/j.jedc.2014.06.004

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