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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. Fernando Martin, 2012. "Debt, Inflation and Central Bank Independence," 2012 Meeting Papers 1019, Society for Economic Dynamics.
  2. Marina Azzimonti, 2009. "Barriers to investment in polarized societies," 2009 Meeting Papers 1233, Society for Economic Dynamics.
  3. Dai, Meixing & Sidiropoulos, Moïse, 2011. "Monetary and fiscal policy interactions with central bank transparency and public investment," Research in Economics, Elsevier, vol. 65(3), pages 195-208, September.
  4. Alfonso Novales & Rafaela Pérez & Jesús Rúiz, 2013. "Optimal time-consistent fiscal policy in an endogenous growth economy with public consumption and capital," Documentos de Trabajo del ICAE 2013-23, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
  5. Francesco Lancia & Alessia Russo, 2013. "A Dynamic Politico-Economic Model of Intergenerational contracts," Vienna Economics Papers 1304, University of Vienna, Department of Economics.
  6. Fernando M. Martin, 2010. "Government Policy in Monetary Economies," Discussion Papers dp10-01, Department of Economics, Simon Fraser University.
  7. Fernando M. Martin, 2011. "Policy and welfare effects of within-period commitment," Working Papers 2011-031, Federal Reserve Bank of St. Louis.
  8. Dirk Niepelt & Martin Gonzalez-Eiras, 2010. "Ageing, Government Budgets, Retirement, and Growth," 2010 Meeting Papers 69, Society for Economic Dynamics.
  9. Alfonso Novales & Rafaela Pérez & Jesús Rúiz, 2013. "Optimal time-consistent fiscal policy under endogenous growth with elastic labour supply," Documentos de Trabajo del ICAE 2013-24, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.

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