Optimal time consistent fiscal policy with finite lifetimes, econometrica 56, 411492. The analysis identifies upper and lower bounds for the feasible range of. As we have stressed already, the optimal policies in the absence of full commitment are very different from those under full commitment. During childhood and old age, we consume more than we produce through our labor. A solution mats persson, torsten persson, and lars e. Optimal timeconsistent taxation with international mobility. Glass 2000 the progressivity of social security cremer helmuth, lozachmeur jeanmarie, pestieau pierre, social security, retirement age and optimal income taxation, 10. The implication for a steadystate fiscal policy is that any lending or spending requires a careful balance of recovery of money, not as a means of revenue, but as an economic imperative to meet monetary policy goals. Optimal taxation in theory and practice 060109 final. Analysis and extensions, in elhanan helpman, assaf razin, and efraim sadka, editors, economic effects of the government budget, mit press, 1988 with guillermo calvo. Calvo money demand, bank credit, and economic performance in former socialist economies. Optimal timeconsistent taxation with international mobility of capital paul klein, vincenzo quadrini and josevctor rosrull.
Part 1, general theory of public finance and fiscal policy, discusses ends and means in economic policy. V chari, timothy kehoe and ed ward prescott, my excolleagues at stanford, robert hall, beatrix paal and tom. This paper studies the longrun effects of government spending and taxation in an endogenous growth model with finite lived agents. Time consistency of optimal policy in a small open economy xuan liu on. Type i expenditures enter as inputs into the production function. Optimal timeconsistent fiscal policy with uncertain lifetimes. We focus primarily on issues relating to saving and capital accumulation. Gregory mankiw, matthew weinzierl, and danny yagan n. Using the model, i investigate the relationship between preference heterogeneity among the committee members and the optimal structure of the monetary policy committee.
This paper investigates the impact of the desire to keep up with the joneses kuj on economic growth and optimal tax policy in a continuoustime, overlappinggenerations model with ak technology and exogenous, gradual retirement. This thesis analyses fiscal policy in four models of economic growth. June, 2005 abstract the united states relies for its government revenues more on the taxation of capital relative to the taxation of labor than countries in continental europe do. The government must choose tax rates and borrowing to finance an exogenous stream of. The policy envisions a comprehensive longterm strategy that uses leading edge technology to produce an integrated energy, environmental and economic policy. The model employed encompasses the infinitelylived agent economy as a special case, thus helps understanding the differences in results between finite horizon overlappinggenerations and infinitelylived agents economies. We show that some plausible social welfare functions lead to timeinconsistent optimal plans, and we suggest restrictions on social preferences that avoid the problem. The optimal path has consumption growing at the rate.
First, capital income taxation equals zero in the long term. Timeconsistent optimal fiscal policy joint with paul klein. Celebrates the magnificent diversity of languages that advance research, teaching, and learning at the university of california, berkeley. We use and extend a well known calvo and obstfeld 1988, optimal timeconsistent fiscal policy with finite lifetimes, econometrica framework in order to distinguish individuals and social planners discount rates and show that hopf bifurcation occurs at two. Balance of payments crises in a cashinadvance economy. The new pension concept was born in the early 1990s, implemented from the mid1990s in italy, latvia, poland and sweden. A finite life privateinformation theory of unsecured consumer debt with satyajit chatterjee and dean corbae. The national energy policy was designed to promote dependable, affordable and environmentally sound energy for the future. On the timeconsistency of optimal capital taxes sciencedirect. Time consistency of optimal policy in a small open economy. Part 2, microeconomics, deals with the impact of fiscal measures.
Public investment and intergenerational distribution. We show that some plausible social welfare functions lead to time inconsistent. Intergenerational redistribution and risk sharing with. Finite lifetimes and government spending in an endogenous. Then the optimal policy problem is equivalent to the one in section ii. A negative consumption externality implies overconsumption, and growth is lower than optimal. Timeconsistent fiscal policy and heterogeneous agents. Debt can be repudiated subject to some default costs. A framework for empirical test ing, arnerican econornic reriew, september 1986. On the determinants of inequality electronic supplement to red, vol 3. For a particular utilitarian social welfare function, the problem faced by a central planner can be broken down into two subproblems.
The green book appraisal and evaluation in central government. The author studies agedependent optimal taxation in an environment that takes into consideration changes in consumption behavior over the life cycle due to changes in labor income paths and borrowing limits. In the first part, there is an olg model with individuals who have an individual discount factor the same individual discount rate for all individuals. Optimal timeconsistent fiscal policy with finite lifetimes, econometrica, econometric. Aug 16, 2006 the article reconsiders the implications of the choice of pure social time preference for intergenerational equity in the presence of a time consistent utilitarian social welfare criterion.
Optimal timeconsistent fiscal policy with finite lifetimes econometrica, 1988, 56, 2, 412 view citations 107 servicing the public debt. Optimal time consistent fiscal policy with finite lifetimes i am reading optimal time consistent fiscal policy with finite lifetimes by calvo and obstfeld. The article reconsiders the implications of the choice of pure social time preference for intergenerational equity in the presence of a timeconsistent utilitarian social welfare criterion. We also provide an alternative nu4romer and romer 2010 identify that there are 104 legislated tax changes between 1947 and 2006intheu. Optimal timeconsistent taxation with default anastasios g. The markovperfect policy implies a higher tax rateincome. The suppliers optimal guarantee policy in newsvendor finance. The results of this endsmeans analysis are applied to fiscal policy. There are few areas of economic policy making in which the returns to good decisions are so highand the punishment of bad decisions so cruelas in the management of natural resource wealth. Unless fiscal policy has no influence over factor prices, optimal fiscal policy can be timeinconsistent if the economys horizon is finite. We also find, however, that under commitment the regulators plans are time inconsistent, and hence focus on studying optimal, time consistent policy without commitment.
From economic effectts of the government budget, edited by. We study the full solution to the optimal policy choice problem, which includes the determination of debt ser vice as part of the optimal policy. We study optimal time consistent distortionary taxation when the repayment of government debt is not enforceable. Social time preference revisited, journal of population. We obtain the optimal investment proportions, which maximize the expected utility, by solving the following problem. Optimal timeconsistent fiscal policy with uncertain lifetimes with maurice obstfeld. We use and extend a well known calvo and obstfeld 1988, optimal timeconsistent fiscal policy with finite lifetimes, econometrica framework in order to distinguish individuals and social planners discount rates and show that hopf bifurcation occurs at two critical values for individual discount rate, only if the economy is exposed to catastrophic event risk. Determinants of job crafting among parttime and fulltime. Optimal timeconsistent fiscal policy with finite lifetimes. The result shows that it is optimal in general cases to appoint not only inflationminded hawkish persons but also outputminded dovish persons. The book explores whether fiscal policies can secure full employment without inflation, one of the key questions in economics after keynes. Timeconsistent optimal fiscal policy 1219 for this assumption is to avoid the rather trivial possibility of lumpsum taxation. Fiscal policy and debt management with incomplete markets. The government taxes labor income or issues noncontingent.
Optimal timeconsistent fiscal policy with finite lifetimes, econometrica 56, 411492. Guillermo a calvo this paper studies optimal fiscal policy in an economy where heterogeneous agents with uncertain lifetimes coexist. Aug 16, 2006 social time preference revisited willenbockel, dirk 20060816 00. In this context, we show that debt restructuring can make the optimal fiscal policy time consistent.
Calvo and obstfeld 1988 in fact, their model consists of two stages. A steadystate fiscal policy would prioritize targeted public goods investments, taxation of ecological bads and economic. Finite lifetimes and government spending in an endogenous growth model. Optimal timeconsistent fiscal policy with uncertain lifetimes nber. This article reconsiders the relationship between government debt and welfare in a twocountry overlappinggenerations model with lifetime uncertainty and inter. Calvo and maurice obstfeld this paper analyzes aspects of optimal fiscal policy for economies with capital accumulation and finitelylived, heterogeneous agents.
An international society for the advancement of economic theory in its relation to statistics and mathematics. Karantounias working paper 201712 november 2017 abstract. On the time consistency of optimal policy in a monetary. Solving the optimization problem given above for a vector x, the expected utility due to the optimal investment policy can be calculated.
We show that some plausible social welfare functions lead to time inconsistent optimal plans, and we suggest restrictions on social preferences that avoid the problem. Hence, our strategy is to compute exact solutions to finite horizon versions of an optimal taxation problem in a deterministic setting with endogenous growth. Monetary and fiscal policy in an optimizing model with capital accumulation and finite lives. Newest macroeconomics questions page 14 economics stack. For a particular utilitarian social welfare function, the problem faced by a central planner can. A finite life privateinformation theory of unsecured consumer debt.
Optimal taxation in models of endogenous growth larry e. Optimal timeconsistent fiscal policy with finite lifetimes this paper analyzes aspects of optimal fiscal policy for economies with capital ac cumulation and finitelylived, heterogeneous agents. This paper studies optimal fiscal policy in an economy where heterogeneous agents with uncertain lifetimes coexist. It shows that the presence of government private information could turn an optimal fullinformation countercyclical fiscal policy into a procyclical one that exacerbates the cycle. On the time consistency of optimal policy in a monetary economy. Only a few contributions have recently studied optimal taxation in simple generations models.
This paper analyzes aspects of optimal fiscal policy for economies with capital ac cumulation and finitelylived, heterogeneous agents. Macroeconomic theory dirk krueger1 department of economics university of pennsylvania january 26, 2012 1i am grateful to my teachers in minnesota, v. This paper aims to analyze the overlooked link between catastrophic events and sustainability through a limit cycle analysis. The lifetime utility w of the representative agent in both. For example, he investigates the sustainability of fiscal policy and government debt in dynamic models of optimal policy making. This paper analyzes aspects of optimal fiscal policy for economies with capital ac cumulation and finitelylived, heterogeneous. Svenssony october, 2004 abstract this paper demonstrates how time consistency of the ramsey policys the optimal scal and monetary policy under commitments can be achieved. From economic effectts of the government budget, edited by elhanan helpman, assaf razin, and efraim sadka, pp. Intergenerational redistribution and risk sharing with changing longevity intergenerational redistribution and risk sharing with changing longevity andersen, torben 20312 00. Kopeckyz february 15, 2015 abstract we study optimal time consistent distortionary taxation when the repayment of government debt is not enforceable.
Time consistent optimal fiscal policy over the business cycle. This paper studies the optimal timeconsistent distortionary taxation when the repayment of government debt is not enforceable. In a life cycle model the individuals optimal consumptionwork plan is almost never. International adjustment with habitforming consumption.
Rich endowments of oil, gas and minerals have set some countries on courses of sustained and robust prosperity. I show that these conditions depend on the way in which leisure is. We do not consider the broader question of whether the. Timeconsistent public policy 791 standard neoclassical growth framework, and we are not aware of any attempts to approach data on public expenditures using. Cnossen, sijbren 1988 mare tax competition in the european community, paper presented at 44th congress of the international institute of public finance, istanbul august.
Utility of consumption with mortality and finite termination. Since each economy is of measure zero, its domestic policy decisions do not have any impact on the rest of the world. Blanchard 1985, debt, deficits, and finite horizons9. Summers 1987, finite lifetimes and the effects of budget deficits on national saving10. It also has the added advantage of facilitating comparisons with their work. Nonfinancial defined contribution ndc schemes are now in their teens. Longer lives and fertility far below the replacement level of 2. Econ questions and problems at bentley university studyblue. Mathematics and economics ime educational workshop, actuarial mathematics, versicherungsmathematik, insurance mathematics, life insurance, nonlife insurance, reinsurance and risksharing arrangements, risk management, financial modeling, financial and actuarial mathematics at university of technology vienna, tu wien. Optimal time consistent taxation with default anastasios g.
Lecture notes for macroeconomics i, 2004 yale economic. Optimal taxation and income mobility with borrowing limits. The mirrlees approach to the theory of economic policy. What can catastrophic events tell us about sustainability. The main thrust of the paper is the presentation of three sets of conditions which are sufficient to prove that there exists an optimal policy with a certain intuitively pleasing and simple. International taxation in an integrated world munich. This may occur if the effect of aggregate shocks on the signaling properties of fiscal policy is not symmetric across states. Pdf optimal time consistent fiscal policy with overlapping. This paper investigates the optimal time consistent policies of an investmentreinsurance problem and an investmentonly problem under the meanvariance criterion for an insurer whose surplus process is approximated by a brownian motion with drift. Monetary and fiscal policy analysis we model the world economy as a continuum of small open economies represented by the unit interval.
Erosa and gervais 2002 use a model in which agents live a finite number of periods. Finally, assuming that lifetimes are finite rather than infinite also does. Public expenditures are classified according to their type. It argues that the mirrlees approach of viewing government as being constrained by imperfect information has changed profoundly how we look at the normative public policy. Optimal timeconsistent fiscal policy with finite lifetimes i am reading optimal timeconsistent fiscal policy with finite lifetimes by calvo and obstfeld. The analytic framework is a setting with overlapping generations, lifetime uncertainty, population growth and technical progress.
Boosting public investment stimulates private capital formation, output, and wages. The government taxes labor income or issues noncontingent debt in order to finance an exogenous stochastic stream of fiscal shocks. From economic effectts of the government budget, edited by elhanan. Income mobility is defined as an exogenous rate at which individuals change from a lowto a highincome path.
The government taxes labor income or issues noncontingent debt in order to. Optimal time consistent fiscal policy with finite lifetimes, econometrica, econometric society, vol. This paper examines a dynamic stochastic economy with a benevolent government that cannot commit to its future policies. A numerical example is used to illustrate the possible complexities. Fiscal deficits and relative prices in a growing world economy, journal of monetary economics, may 1989. The form of the optimal policy in the general case is found to be surprisingly complex. Nonfinancial defined contribution pension schemes in.
This paper summarizes james mirrlees key contribution to the theory of tax policy. We study optimal timeconsistent distortionary taxation when the repayment of government debt is not enforceable. In a seminal paper lucas and stokey 1983 show that the optimal management of the maturity structure of government debt can make the optimal policy time consistent in economies with no private capital. In this paper, we extend these methods to a stochastic setting. Optimal timeconsistent fiscal policy with uncertain. The paper analyzes optimal fiscal policy in an overlapping generations model with twoperiod lived households. Fiscal and monetary policy under imperfect commitment.
Public investment and intergenerational distribution public investment and intergenerational distribution heijdra, ben j meijdam, lex 20020501 00. We show that some plausible social welfare functions lead to timeinconsistent. Heilbroner march 24, 1919 january 4, 2005 was an american economist and historian of economic thought. Optimal time consistent fiscal policy with finite lifetimes, econornetrica, march 1988, 56, 412. Thus, if the government arbitrarily fixes its portfolio weights then, subject to that arbitrary choice, all section ii insights about optimal debt management and fiscal policy still apply. Optimal time consistent fiscal policy with finite lifetimes. Finite lifetimes and government spending in an endogenous growth model, journal of economics and business, elsevier. Optimal timeconsistent investment and reinsurance policies. Time consistent optimal fiscal policy 1219 for this assumption is to avoid the rather trivial possibility of lumpsum taxation. Woodford 2003, concerned with the formulation of credible policies, proposes a dynamic optimizationbased method for solving for optimal policy, which he has labelled a timeless perspective for optimal policy tp policy.
I am reading optimal timeconsistent fiscal policy with finite lifetimes by calvo and obstfeld. This paper steps back from the current political debate in the united states over the social security trust fund and examines the more general question of how serious a macroeconomic problem aging is and how policy should respond to it. Fiscal policy, time inconsistency, optimal capital accumulation, social welfare function, uncertain lifetimes, overlapping generations, government budget constraint. We develop a calibrated general equilibrium model of a small open economy to examine some macroeconomic and distributional effects of an aging population. In this book, i characterize conditions under which optimal monetary and fiscal policy is time consistent in a stylized small open economy with a flexible foreign exchange rate regime. In terms of fiscal policy, optimal labor tax rates are virtually constant and optimal capital income tax rates are close to zero on average. The author of some twenty books, heilbroner was best known for the worldly philosophers, a survey of the lives and contributions of famous economists, notably adam smith, karl marx, and john maynard keynes. This chapter investigates what the old owe the young, distinguishing this question from two.
Capital flight, external debt, and domestic policies fraser. Calvo columbia university school of international and public affairs. In particular, budget deficits will lead to trade deficits. It is the point of embarkation for an exciting sequential exhibit that will build on one post per week, showcasing an array of digitized works in the original language chosen by those who work with these languages on a daily basis librarians, professors. These involve growth and business cycle analysis, asset pricing, fiscal policy. Across households, income varies more than wealth, so highincome households should have a lower apc than lowincome households. David alan aschauer 1985, fiscal policy and aggregate demand7.
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