Fiscal policy rules in macroeconomic models: principles and practice

Fiscal closure rules that enforce the government's intertemporal budget constraint are important elements of macroeconomic models. This article presents a systematic study of the different rules employed on different models, considering both their theoretical properties and their comparative behaviour in model simulations. For tax-difference rules targeting debt/GDP or deficit/GDP ratios and tax-level rules which include the MSG2 'incremental interest payments' rule as a special case we show how both the steady-state implications and, to some extent, the short-run dynamics can be made comparable. Many of the theoretical equivalences are then observed in simulations of the MSG2 MULTIMOD and NIGEM models. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classifications: C5; E6.