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Optimal Fiscal Policy with Endogenous Product Variety

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  • Fabio Ghironi

    (Boston College)

  • Sanjay K. Chugh

    (University of Maryland)

Abstract

We study optimal fiscal policy when product variety is endogenous and products are long-lived assets for firms. Depending on preferences, product creation should be either subsidized or taxed in the long run, by subsidizing or taxing dividends. In the most empirically relevant case, dividends should be taxed quite heavily (positive capital income taxation). Moreover, regardless of preferences, labor income tax smoothing is not optimal. The standard deviation of the optimal tax rate is much larger than tax-smoothing results. Both long-run dividend taxation and lack of tax smoothing follow from the long-lived nature of products with optimally priced product creation.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 812.

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Date of creation: 2010
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Handle: RePEc:red:sed010:812

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Cited by:
  1. Totzek, Alexander & Winkler, Roland C., 2010. "Fiscal stimulus in a model with endogenous firm entry," Economics Working Papers 2010,05, Christian-Albrechts-University of Kiel, Department of Economics.
  2. V. Lewis, 2010. "Product Diversity, Strategic Interactions and Optimal Taxation," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 10/661, Ghent University, Faculty of Economics and Business Administration.
  3. Lewis, Vivien & Poilly, Céline, 2012. "Firm entry, markups and the monetary transmission mechanism," Journal of Monetary Economics, Elsevier, vol. 59(7), pages 670-685.
  4. Bilbiie, Florin Ovidiu & Fujiwara, Ippei & Ghironi, Fabio, 2011. "Optimal Monetary Policy with Endogenous Entry and Product Variety," CEPR Discussion Papers 8565, C.E.P.R. Discussion Papers.

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