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Optimal Policy and (the Lack of) Time Inconsistency: Insights from Simple Models

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  • Jorge Soares, Marina Azzimonti, Pierre-Daniel Sarte

    (Department of Economics, University of Iowa)

  • Pierre-Daniel Sarte

    ()
    (Federal Reserve Bank of Richmond)

  • Jorge Soares

    ()
    (Department of Economics,University of Delaware)

Abstract

In the standard neoclassical model with a representative agent, a benevolent planner who can commit to future policies will, if feasible, levy a single confiscatory tax on capital in the initial period and commit never to set positive taxes thereafter. We show that this policy, which allows for the disposal of distortional taxes entirely, can arise even when sequential governments are unable to credibly promise future tax rates, regardless of how public expenditures are determined.

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File URL: http://graduate.lerner.udel.edu/sites/default/files/ECON/PDFs/RePEc/dlw/WorkingPapers/2006/UDWP2006-08.pdf
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Bibliographic Info

Paper provided by University of Delaware, Department of Economics in its series Working Papers with number 06-08.

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Length: 39 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:dlw:wpaper:06-08

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Postal: Purnell Hall, Newark, Delaware 19716
Phone: (302) 831-2565
Fax: (302) 831-6968
Web page: http://www.lerner.udel.edu/departments/economics/department-economics/
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Related research

Keywords: Capital Taxation; Ramsey; Commitment; Markov-Perfect equilibrium; Time consistent policy; Overlapping Generations;

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References

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  1. Klein, Paul & Krusell, Per & Ríos-Rull, José-Víctor, 2004. "Time Consistent Public Expenditures," CEPR Discussion Papers 4582, C.E.P.R. Discussion Papers.
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Cited by:
  1. Salvador Ortigueira & Joana Pereira, 2007. "Markov-Perfect Optimal Fiscal Policy: The Case of Unbalanced Budgets," Economics Working Papers ECO2007/41, European University Institute.
  2. Catarina Reis, 2007. "Taxation without Commitment," 2007 Meeting Papers 470, Society for Economic Dynamics.

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