TITLE:
Optimal Fiscal Policy Instrument under Different Shocks
AUTHORS:
Shuguang Xing
KEYWORDS:
Social Welfare, Tax, Government Spending
JOURNAL NAME:
Theoretical Economics Letters,
Vol.7 No.6,
October
16,
2017
ABSTRACT: This paper constructs a New Keynesian model to study
optimal tax and government spending rules and compares their welfare. The
output gap, inflation and the difference between the output gap and the
government spending gap all affect welfare. This paper finds that the optimal
fiscal policy instruments under technical shock and cost-push shock are
government spending and tax, respectively. If the policymaker is only concerned
with the output gap and inflation, the optimal fiscal policy rule and actual
social welfare loss will change. However, the optimal fiscal policy instruments
under technical shock and cost-push shock are still government spending and
tax. This paper also finds that an imperfect financial market affects social
welfare but does not change the optimal fiscal policy instrument under
different shocks.