Fiscal Reaction Rules in Numerical Macro Models

To avoid exploding government debt, numerical macro models require "fiscal reaction rules". Present rules impose arbitrary, backward-looking reaction of taxes to deviations of the debt ratio from a target. Arbitrary models may be poor guides to monetary policy. A constant future tax rate is optimal in a perfect-market model for some preferences. I implement the constant-future-tax rule in the IMF's MULTIMOD model. Simulations show model outcomes' sensitivity to the choice of fiscal rule. A constant tax rate induces smoother and hence preferable consumption paths to MULTIMOD's existing rule