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Optimal Government Policies in Models with Heterogeneous Agents

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  • Radim Bohacek
  • Michal Kejak

Abstract

In this paper we develop a new methodology for finding optimal government policies in economies with heterogeneous agents. The methodology is solely based on three classes of equilibrium conditions from the government’s and individual agent’s optimization problems: 1) the first order conditions; 2) the stationarity condition on the distribution function; and, 3) the aggregate market clearing conditions. These conditions form a system of functional equations which we solve numerically. The solution takes into account simultaneously the effect of government policy on individual allocations and (from the government’s point of view) optimal distribution of agents in the steady state. This general methodology is applicable to a wide range of optimal government policies in models with heterogeneous agents. We illustrate it on a steady state Ramsey problem with heterogeneous agents, finding the optimal tax schedule. JEL Keywords: Optimal macroeconomic policy, optimal taxation, computational techniques, heterogeneous agents, distribution of wealth and income

Suggested Citation

  • Radim Bohacek & Michal Kejak, 2005. "Optimal Government Policies in Models with Heterogeneous Agents," CERGE-EI Working Papers wp272, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    • Handle: RePEc:cer:papers:wp272
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    Cited by:

    1. Juan Carlos Conesa & Sagiri Kitao & Dirk Krueger, 2009. "Taxing Capital? Not a Bad Idea after All!," American Economic Review, American Economic Association, vol. 99(1), pages 25-48, March.
    2. Xiaoliang Yang & Patrick Minford & David Meenagh, 2021. "Inequality and Economic Growth in the UK," Open Economies Review, Springer, vol. 32(1), pages 37-69, February.
    3. Robin Boadway & Kevin Spiritus, 2021. "Optimal Taxation of Normal and Excess Returns to Risky Assets," Tinbergen Institute Discussion Papers 21-025/VI, Tinbergen Institute.
    4. Kitao, Sagiri, 2010. "Labor-dependent capital income taxation," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 959-974, November.
    5. Tomoyuki Nakajima & Shuhei Takahashi, 2020. "On the Non-Existence of a Zero-Tax Steady State with Incomplete Asset Markets," KIER Working Papers 1025, Kyoto University, Institute of Economic Research.
    6. Sagiri Kitao, 2010. "Labor-dependent Capital Income Taxation That Encourages Work and Saving," 2010 Meeting Papers 271, Society for Economic Dynamics.

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    More about this item

    Keywords

    optimal macroeconomic policy; optimal taxation; computational techniques; heterogeneous agents; distribution of wealth and income;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D30 - Microeconomics - - Distribution - - - General
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models

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