Working Paper
Model uncertainty and intertemporal tax smoothing
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.
Access Documents
File(s): File format is application/pdf https://www.kansascityfed.org/documents/7697/rwp12-01.pdf
Authors
Bibliographic Information
Provider: Federal Reserve Bank of Kansas City
Part of Series: Research Working Paper
Publication Date: 2012
Number: RWP 12-01