The tale of the donkey and the elephant: an estimated optimal fiscal policy rule for the US

Stephen Sacht

Applied Economics Letters, 2022, vol. 29, issue 4, 351-354

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.

Date: 2022
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DOI: 10.1080/13504851.2020.1869150

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