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Optimal Fiscal Policy in a Multisector Model: The Price Consequences of Government Spending

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Author Info
STEVEN P. CASSOU
ARANTZA GOROSTIAGA

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Abstract

This paper investigates optimal fiscal policy in a static multisector model. A Ramsey type planner chooses tax rates on each good type as well as spending levels on each good type subject to an exogenous total expenditure constraint. It is shown that, like taxes, government spending policy has price effects and that these price effects have significant implications for optimal policy. These price effects imply a U shape to the government's objective function and this U shape results in boundary values for the choice of the spending allocation. In particular, it is shown that the optimal allocation of government spending tends to be concentrated on one good rather than spread among many goods. Copyright © 2009 Wiley Periodicals, Inc..

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-9779.2009.01406.x
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Publisher Info
Article provided by Association for Public Economic Theory in its journal Journal of Public Economic Theory.

Volume (Year): 11 (2009)
Issue (Month): 2 (04)
Pages: 177-201
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Handle: RePEc:bla:jpbect:v:11:y:2009:i:2:p:177-201

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=1097-3923

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This page was last updated on 2009-11-22.

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