Policy and welfare effects of within-period commitment
AbstractI study the implications of different institutional frameworks for the conduct of fiscal policy, under the assumption that the government cannot commit to future policy choices. The environments analyzed vary on whether the government is endowed with the ability to commit to beginning-of-period policy announcements or not. If it cannot, then there are two variants, depending on which actions private agents take before observing the government’s policy choice. How the three possible cases rank in terms of tax rates and welfare varies substantially with the economy’s fundamentals and whether depreciation is tax deductible or not. More generally, I find that regimes with higher tax rates do not necessarily imply lower welfare. I also find that making depreciation not tax-deductible typically involves a welfare loss. Within the context of the environments studied in this paper, I find that there are only small gains from modifying the way fiscal policy is conducted in modern developed economies. Furthermore, some reforms may lead to large welfare losses.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2011-031.
Date of creation: 2011
Date of revision:
This paper has been announced in the following NEP Reports:
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.:
- Fernando Martin, 2009.
"A Positive Theory of Government Debt,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 12(4), pages 608-631, October.
- Fernando M. Martin, 2004. "A Positive Theory of Government Debt," Macroeconomics 0408013, EconWPA, revised 12 Oct 2004.
- Fernando Martin, 2009. "Code and data files for "A Positive Theory of Government Debt"," Computer Codes 07-47, Review of Economic Dynamics.
- Christopher Phelan & Ennio Stacchetti, 1999.
"Sequential equilibria in a Ramsey tax model,"
258, Federal Reserve Bank of Minneapolis.
- Martin, Fernando M., 2011.
"On the joint determination of fiscal and monetary policy,"
Journal of Monetary Economics,
Elsevier, vol. 58(2), pages 132-145, March.
- Fernando Martin, 2009. "On the Joint Determination of Fiscal and Monetary Policy," Discussion Papers dp09-01, Department of Economics, Simon Fraser University.
- Azzimonti, Marina & Sarte, Pierre-Daniel & Soares, Jorge, 2009.
"Distortionary taxes and public investment when government promises are not enforceable,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 33(9), pages 1662-1681, September.
- Jorge Soares, Marina Azzimonti, Pierre-Daniel Sarte & Pierre-Daniel Sarte & Jorge Soares, 2006. "Distortionary Taxes and Public Investment When Government Promises Are Not Enforceable," Working Papers 06-07, University of Delaware, Department of Economics.
- Guo, Jang-Ting & Lansing, Kevin J., 1999.
"Optimal taxation of capital income with imperfectly competitive product markets,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 23(7), pages 967-995, June.
- Jang-Ting Guo & Kevin J. Lansing, 1998. "Optimal taxation of capital income with imperfectly competitive product markets," Working Papers in Applied Economic Theory 98-04, Federal Reserve Bank of San Francisco.
- Salvador Ortigueira, 2006. "Markov-Perfect Optimal Taxation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(1), pages 153-178, January.
- Pecorino, Paul, 1993. "Tax structure and growth in a model with human capital," Journal of Public Economics, Elsevier, vol. 52(2), pages 251-271, September.
- Salvador Ortigueira & Joana Pereira, 2007.
"Markov-Perfect Optimal Fiscal Policy: The Case of Unbalanced Budgets,"
Economics Working Papers
ECO2007/41, European University Institute.
- Salvador Ortigueira & Joana Pereira & Paul Pichler, 2012. "Markov-perfect optimal fiscal policy : the case of unbalanced budgets," Economics Working Papers we1230, Universidad Carlos III, Departamento de Economía.
- Martin, Fernando M., 2010. "Markov-perfect capital and labor taxes," Journal of Economic Dynamics and Control, Elsevier, vol. 34(3), pages 503-521, March.
- Jan-Ting Guo & Kevin J. Lansing, 1997. "Tax structure and welfare in a model of optimal fiscal policy," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 11-23.
- David R. Stockman, 2001. "Balanced-Budget Rules: Welfare Loss and Optimal Policies," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(2), pages 438-459, July.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anna Xiao).
If references are entirely missing, you can add them using this form.