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

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

Author Info

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)

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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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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
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Handle: RePEc:dlw:wpaper:06-08

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Find related papers by JEL classification:
H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
H6 - Public Economics - - National Budget, Deficit, and Debt
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

This paper has been announced in the following NEP Reports:

NEP-ALL-2007-04-21 (All new papers)
NEP-CBA-2007-04-21 (Central Banking)
NEP-DGE-2007-04-21 (Dynamic General Equilibrium)
NEP-MAC-2007-04-21 (Macroeconomics)
NEP-PBE-2007-04-21 (Public Economics)

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Reis, Catarina, 2006. "Taxation without Commitment," MPRA Paper 2071, University Library of Munich, Germany. [Downloadable!]
Salvador Ortigueira & Joana Pereira, 2007. "Markov-Perfect Optimal Fiscal Policy: The Case of Unbalanced Budgets," Economics Working Papers ECO2007/41, European University Institute. [Downloadable!]

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