Toward A Taylor Rule For Fiscal Policy
This paper presents a procedure to determine policy feedback rules in Dynamic Stochastic General Equilibrium (DSGE) models. The authors illustrate their approach with fiscal feedback rules for tax instruments in a standard medium-scale DSGE model. First, they approximate the optimal dynamic behavior of the economy using simple linear feedback rules. Then they calculate the elasticities of the model variables' moments with respect to the feedback coefficients. The feedback coefficients associated with the highest elasticities form the policy feedback rules to be estimated.