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Distortionary taxes and public investment when government promises are not enforceable

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  • Azzimonti, Marina
  • Sarte, Pierre-Daniel
  • Soares, Jorge

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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Bibliographic 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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Web page: http://www.elsevier.com/locate/jedc

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

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References

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Citations

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Cited by:
  1. Dirk Niepelt & Martín Gonzalez-Eiras, 2011. "Ageing, Government Budgets, Retirement, and Growth," Working Papers 11.06, Swiss National Bank, Study Center Gerzensee.
  2. Lancia, Francesco & Russo, Alessia, 2010. "A Dynamic Politico-Economic Model of Intergenerational Contracts," MPRA Paper 24795, University Library of Munich, Germany.
  3. Meixing Dai & Moïse Sidiropoulos, 2010. "Monetary and fiscal policy interactions with central bank transparency and public investment," Working Papers of BETA 2010-21, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  4. Fernando M. Martin, 2010. "Government Policy in Monetary Economies," Discussion Papers dp10-01, Department of Economics, Simon Fraser University.
  5. marina, azzimonti, 2009. "Barriers to investment in polarized societies," MPRA Paper 25936, University Library of Munich, Germany.
  6. Fernando Martin, 2012. "Debt, Inflation and Central Bank Independence," 2012 Meeting Papers 1019, Society for Economic Dynamics.
  7. Fernando M. Martin, 2011. "Policy and welfare effects of within-period commitment," Working Papers 2011-031, Federal Reserve Bank of St. Louis.

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