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Ramsey Tax Cycles

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  • Marcus Hagedorn

Abstract

This paper asks whether tax cycles or tax smoothing represents the optimal policy in models without any extrinsic uncertainty. To answer this question, I develop a general framework for studying tax cycles in a large class of models that feature various types of frictions. This framework adds various wedges, resembling tax wedges, to the labour market, to the product market, and to money acquisition into an otherwise frictionless economy, so that it nests a large class of models used for policy analysis. I derive a criterion for this general framework that indicates when cycles are welfare-improving in a frictionless economy, and why frictions make cycles more likely to be optimal. I then calibrate two models with frictions, a labour search model and a monetary model, and show that cycles are welfare-improving under standard preferences. Copyright , Wiley-Blackwell.

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File URL: http://hdl.handle.net/10.1111/j.1467-937X.2009.00592.x
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Bibliographic Info

Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 77 (2010)
Issue (Month): 3 ()
Pages: 1042-1071

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Handle: RePEc:oup:restud:v:77:y:2010:i:3:p:1042-1071

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Cited by:
  1. Aleksandar Vasilev, 2013. "Fiscal policy in a Real-Business-Cycle model with labor-intensive government services and endogenous public sector wages and hours," Working Papers 2013_18, Business School - Economics, University of Glasgow.
  2. Angelopoulos, Konstantinos & Jiang, Wei & Malley, James R., 2013. "Tax reforms under market distortions in product and labour markets," European Economic Review, Elsevier, vol. 61(C), pages 28-42.
  3. Angelopoulos, Konstantinos & Economides, George & Philippopoulos, Apostolis, 2010. "First-and second-best allocations under economic and environmental uncertainty," SIRE Discussion Papers 2010-99, Scottish Institute for Research in Economics (SIRE).

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