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Optimal Time-Consistent Fiscal Policy with Uncertain Lifetimes


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  • Guillermo A. Calvo
  • Maurice Obstfeld


This paper studies optimal fiscal policy in an economy where heterogeneous agents with uncertain lifetimes coexist. We show that some plausible social welfare functions lead to time-inconsistent optimal plans, and we suggest restrictions on social preferences that avoid the problem. The normative prescriptions of a time-consistent utilitarian planner generalize the 'two-part Golden Rule" suggested by Samuelson, and imply aggregate dynamics similar to those arisingin the Cass-Koopmans-Ramsey optimal growth framework. We characterize lump-sum transfer schemes that allow the optimal allocation to be decentralized as the competitive equilibrium of an economy with actuarially fair annuities. The lump-sum transfers that accomplish this decentralization are age dependent in general.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1593.

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Date of creation: Mar 1985
Date of revision:
Publication status: published as "Optimal Time-Consistent Fiscal Policy with Finite Lifetimes: Analysis and Extensions." From Economic Effectts of the Government Budget, edited by Elhanan Helpman, Assaf Razin, and Efraim Sadka, pp. 163-198. Cambridge, MA: MIT Press, 1988.
Handle: RePEc:nbr:nberwo:1593

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Cited by:
  1. Patrick J. Kehoe, 1986. "Coordination of fiscal policies in a world economy," Staff Report, Federal Reserve Bank of Minneapolis 98, Federal Reserve Bank of Minneapolis.
  2. Bennett T. McCallum, 1988. "The Optimal Inflation Rate in an Overlapping-Generations Economy with Land," NBER Working Papers 1892, National Bureau of Economic Research, Inc.


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