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Distortionary taxes and public investment when government promises are not enforceable

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Author Info
Azzimonti, Marina
Sarte, Pierre-Daniel
Soares, Jorge

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Abstract

We characterize the optimal financing of productive public capital and compute the welfare loss from being unable to commit to the Ramsey policy. Because this calculation ultimately relies on numerical approximations, we contrast alternative approaches. While perturbation and linear quadratic methods deliver accurate steady states, the latter can yield misleading policy implications during transitions. We find that moving from a regime with commitment to one with discretion implies only a small welfare loss. Although Markov-perfect consumption falls noticeably short of its Ramsey counterpart in steady-state, consumption under discretion is higher in the short-run which largely offsets this long-run loss.

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Publisher Info
Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 33 (2009)
Issue (Month): 9 (September)
Pages: 1662-1681
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Handle: RePEc:eee:dyncon:v:33:y:2009:i:9:p:1662-1681

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Related research
Keywords: Public investment Commitment Time consistency Discretion Ramsey Markov-perfect;

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