Working Paper Series no. 296: Did Tax Policies mitigate US Business Cycles?

Abstract

I study whether US Tax Policies affected economic volatility during the post World War II period. I employ a Real Business Cycle model with distorting taxation on household income and tax rules, and assume that taxes respond to the cyclical conditions of the economy. I estimate the deep parameters of the model using Bayesian techniques. My findings are; (a) fiscal policies display a strong countercyclical behavior, (b) help to reduce the cyclical and raw volatility of GDP, consumption, investment when the government can issue debt, and (c) unexpected changes in tax policies do not affect the volatility of the macroeconomic variables.

Filippo Ferroni
October 2010

Classification JEL : E32, E62, C11, C22.

Keywords : Fiscal Policy and Business Cycles, Bayesian Methods