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Fiscal Volatility and Optimal Fiscal Rules: Based on Open Economy DSGE Model
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TitleFiscal Volatility and Optimal Fiscal Rules: Based on Open Economy DSGE Model  
AuthorWang Liyong and Ji Yao  
OrganizationCentral University of Finance and Economics, Beijing, China; 
Key WordsFiscal volatility; Fiscal rule; Monetary rule; Financial fraction; DSGE 
AbstractThis paper measures the volatility of fiscal policy in China quantitatively , and constructs a DSGE model to research the macro effect and micro mechanism of fiscal policy volatility. Next, this paper compares different fiscal rules from the view of fiscal policy volatility shock in a DSGE model involving fiscal policy volatility. This research reaches several conclusions. Firstly, volatility of China’s government expenditure is high, volatility of China’s consumption tax measured by average tax rate of consumption tax and China’s income tax rate measured by average tax rate of income tax are stable. Secondly, fiscal policy volatility causes the decrease of economic growth, consumption, investment, real wage and employment by expectation mechanism, and the increase of government debt. The negative impact of fiscal policy volatility on economy is hugely underestimated in a DSGE model without financial fraction. Thirdly, fiscal policy volatility shock imposes smaller negative effect on economy under leeper’s rule of government expenditure and tax policy than continuous spending rule, pegging debt rule and pegging output gap rule.  
Serial NumberWP1324 
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