Model uncertainty and intertemporal tax smoothing

Yulei Luo (), Jun Nie and Eric Young

No RWP 12-01, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: In this paper we examine how model uncertainty due to the preference for robustness (RB) affects optimal taxation and debt structure 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 can improve the model?s predictions by generating (i) the observed relative volatility of the changes in tax rates to government spending and (ii) the observed comovement between government deficits and spending, and (iii) more consistent behavior of government budget deficits.

Date: 2012
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Related works:
Journal Article: Model uncertainty and intertemporal tax smoothing (2014)
Working Paper: Model Uncertainty and Intertemporal Tax Smoothing (2014)
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