The Inconsistency Puzzle Resolved: an Omitted Variable
AbstractWe find that the contemporary version of the dynamic Ramsey problem omits one important variable that we take into consideration in this paper. The effect of introducing of this variable into the analysis of dynamic inconsistency is similar to that of introducing expected inflation into the Phillips curve: we show that only a policy surprise affects the attainable resource allocation set and the optimal policy. In contrast to Chamley (1986), we show that intensive capital income taxation at the beginning of optimal policy does not imply a lump-sum taxation of household wealth and cannot reduce the excess tax burden. We also demonstrate that the Ramsey policy is dynamically consistent even without commitment. We resolve the Ramsey problem and compare our results to those of Chamley on optimal capital income taxation.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 9300.
Date of creation: 2008
Date of revision:
Inconsistency; Equilibrium policy; Optimal taxation;
Other versions of this item:
- Nikolay Arefiev, 2008. "The Inconsistency Puzzle Resolved: an Omitted Variable," EERI Research Paper Series EERI_RP_2008_15, Economics and Econometrics Research Institute (EERI), Brussels.
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-07-05 (All new papers)
- NEP-DGE-2008-07-05 (Dynamic General Equilibrium)
- NEP-MAC-2008-07-05 (Macroeconomics)
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