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Model Uncertainty and Intertemporal Tax Smoothing
Journal of Economic Dynamics and Control (2014)
  • Yulei Luo, The University of Hong Kong
  • Jun Nie
  • Eric R Young
In this paper we examine how model uncertainty due to the preference for robustness (RB) aff ects optimal taxation and the evolution of debt 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 improves the model's predictions by generating (i) the observed relative volatility of the changes in tax rates to government spending, (ii) the observed comovement between government deficits and spending, and (iii) more consistent behavior of government budget deficits in the US economy. Finally, we show that RB can also improve the model's predictions in the presence of multiple shocks.
  • Robustness,
  • Model Uncertainty,
  • Taxation Smoothing
Publication Date
Citation Information
Yulei Luo, Jun Nie and Eric R Young. "Model Uncertainty and Intertemporal Tax Smoothing" Journal of Economic Dynamics and Control (2014)
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