Optimal Time Consistent Fiscal Policy with Overlapping Generations

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Optimal Time Consistent Fiscal Policy with Overlapping Generations

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Steve Ambler () (CREFE, UQAM and European University Institute)

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Steven Ambler

Abstract

The paper analyzes optimal fiscal policy in an overlapping generations model with two-period lived households. The government must choose tax rates and borrowing to finance an exogenous stream of expenditures. It cannot commit to future policies, so announced policies that are not time consistent are not credible. Optimal time-consistent policies are derived using dynamic programming. In contrast to representative agent models with commitment, optimal capital tax rates are positive in the long run, and bounded below one in the short run for a wide range of parameter values. The paper also considers the response of optimal tax rates to technology shocks.

Dans ce texte nous analysons la politique fiscale optimale dans un modèle à générations imbriquées où les ménages ont un horizon de deux périodes. Le gouvernement doit choisir ses taux de taxation et l'emprunt afin de financer des dépenses qui lui sont exogènes. Il ne peut se comettre à ses politiques futures, et pour cette raison les politiques qui ne sont pas dynamiquement cohérentes ne sont pas crédibles. Nous dérivons des politiques optimales et dynamiquement cohérentes en utilisant la programmation dynamique. Par opposition aux modèles à agent représentatif où le gouvernement peut se comettre, les taux de taxation optimaux sur le revenu du capital sont positifs à long terme et inférieurs à l'unité pour des valeurs de paramètre raisonnables. Nous analysons aussi la réponse des taux de taxation optimaux aux chocs technologiques

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Publisher Info
Paper provided by CREFE, Université du Québec à Montréal in its series Cahiers de recherche CREFE / CREFE Working Papers with number 111.

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Length: 25 pages
Date of creation: May 2000
Date of revision:
Handle: RePEc:cre:crefwp:111

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Find related papers by JEL classification:
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
C63 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computational Techniques

This paper has been announced in the following NEP Reports:

NEP-ALL-2000-06-05 (All new papers)
NEP-DGE-2000-06-05 (Dynamic General Equilibrium)
NEP-PUB-2000-06-05 (Public Finance)

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Cited by:
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Baltasar Manzano & Jesús Ruiz, 2002. "Política Fiscal Óptima: el estado de la Cuestión," Documentos del Instituto Complutense de AnÃ¡lisis EconÃ³mico 0212, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales. [Downloadable!]
Other versions:
- Baltasar Manzano & Jesús Ruiz, 2004. "Política fiscal óptima: el estado de la cuestión," Investigaciones Economicas, Fundación SEPI, vol. 28(1), pages 5-41, January. [Downloadable!]

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