Stochastic Fiscal Policy and the Swedish Business Cycle
1995 (English)Report (Other academic)
In this paper we show that fluctuations in distortive taxes account for some of the key features of the Swedish post-war business cycle. The empirical fit of a simple stochastic growth model is dramatically improved when it is amended to include imperfectly predictable fluctuations in payroll taxes, consumption taxes and the degree of progressivity of income taxes. Indeed, using the simulated method of moments, SMM, we find that for large sets of conventional moments the tax-model cannot be statistically rejected, whereas a no-tax-model is always strongly rejected. In particular, allowing for stochastic fiscal policy brings the model's predicted correlation between labor input and the real wage, as well as the standard deviation of labor input and consumption relative to that of output, much more in line with the empirical evidence.
Place, publisher, year, edition, pages
Stockholm: IIES , 1995. , 38 p.
Seminar Paper / Institute for International Economic Studies, Stockholm University, ISSN 0347-8769 ; 592
business cycles, stochastic growth model, fiscal policy, simulated method of moments
IdentifiersURN: urn:nbn:se:su:diva-41923OAI: oai:DiVA.org:su-41923DiVA: diva2:343062