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Welfare effects of tax policy in open economies: stabilization and cooperation

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  • Jinill Kim
  • Sunghyun Henry Kim

Abstract

This paper studies an international tax policy design problem by employing a two-country dynamic general equilibrium model with incomplete asset markets. We investigate the possibility of welfare improving active tax policies, in particular capital and labor income tax, under the non-cooperative Nash equilibrium and the cooperative equilibrium. Unlike the conventional wisdom regarding stabilization policies, optimal tax policies in our economy are procyclical. Relative to the non-cooperative setting, international tax policy cooperation requires more active tax policies (about two times) and generates large extra welfare gains (by about a third).

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2003-51.

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Date of creation: 2003
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Handle: RePEc:fip:fedgfe:2003-51

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Keywords: Welfare ; Income tax;

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References

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  1. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
  2. Ellen R. McGrattan, 1991. "The macroeconomic effects of distortionary taxation," Discussion Paper / Institute for Empirical Macroeconomics 37, Federal Reserve Bank of Minneapolis.
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  9. Jinill Kim and Sunghyun Henry Kim, 2001. "Spurious Welfare Reversals in International Business Cycle Models," Computing in Economics and Finance 2001 3, Society for Computational Economics.
  10. Kollmann, Robert, 1998. "US trade balance dynamics: the role of fiscal policy and productivity shocks and of financial market linkages," Journal of International Money and Finance, Elsevier, vol. 17(4), pages 637-669, August.
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  14. Jinill Kim & Sunghyun Kim & Ernst Schaumburg & Christopher A. Sims, 2003. "Calculating and using second order accurate solutions of discrete time dynamic equilibrium models," Finance and Economics Discussion Series 2003-61, Board of Governors of the Federal Reserve System (U.S.).
  15. Jinill Kim & Dale Henderson, 2002. "Inflation Targeting and Nominal Income Growth Targeting: When and Why Are They Suboptimal?," Computing in Economics and Finance 2002 59, Society for Computational Economics.
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  26. repec:sae:niesru:v:149:y::i:1:p:30-52 is not listed on IDEAS
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  28. Kim, Sunghyun Henry & Kose, M. Ayhan, 2003. "Dynamics Of Open-Economy Business-Cycle Models: Role Of The Discount Factor," Macroeconomic Dynamics, Cambridge University Press, vol. 7(02), pages 263-290, April.
  29. Marianne Baxter, 1995. "International Trade and Business Cycles," NBER Working Papers 5025, National Bureau of Economic Research, Inc.
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