STOCHASTIC FISCAL-POLICY AND THE SWEDISH BUSINESS-CYCLE

In this paper we show that fluctuations in distortive taxes can accoun t for some of the key features of the Swedish post-war business cycle. The empirical fit of a simple stochastic growth model is significantl y improved when it is amended to include imperfectly predictable fluct uations in payroll taxes, consumption taxes, and government consumptio n. Indeed, using the simulated method of moments, SMM, we find that, f or large sets of conventional moments, models with stochastic fiscal p olicy cannot be statistically rejected, whereas a model without it is always rejected.