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Optimal Fiscal Policy In A Business Cycle Model: Alternative Identifications Of The Optimal Expost Capital Income Tax Rates

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  • Baltasar Manzano

    (Universidad de Vigo)

  • Jess Ruz

    (Universitat Autnoma de Barcelona)

Abstract

This paper deals with the indeterminacy of optimal fiscal policy treated by Zhu (1992) and Chari, Christiano and Kehoe (1994). These authors identify the optimal fiscal policy restricting the debt return to be uncontingent to the state of nature. In this paper we use other kind of restrictions in order to identify the optimal fiscal policy. Using the solution method proposed by Sims (1998), we can select an equilibrium by enforcing a stable path for the bonds allocation, to identify all the fiscal policy variables contingent to the state of nature. We also use a decomposition of the expectational terms that allow us to obtain the ex-ante capital income tax rate in order to be compared with the ex-post (contingent) tax rate. We can demonstrate that the risk aversion changes the relationship between the expectational errors of the private agents and the sources of fluctuations. The numerical simulation provides some different results: the optimal tax rate on capital incom e is constant, instead of the very volatile tax rate obtained by Chari, Christiano and Kehoe (1994). This property remains unaltered when we use alternative restrictions (exogenous debt path and exogenous expectational errors) to identify the contingent optimal fiscal policy.

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2000 with number 351.

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Date of creation: 05 Jul 2000
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Handle: RePEc:sce:scecf0:351

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Postal: CEF 2000, Departament d'Economia i Empresa, Universitat Pompeu Fabra, Ramon Trias Fargas, 25,27, 08005, Barcelona, Spain
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  1. Scott, Andrew, 1999. "Does Tax Smoothing Imply Smooth Taxes?," CEPR Discussion Papers 2172, C.E.P.R. Discussion Papers.
  2. Larry E. Jones & Rodolfo E. Manuelli & Peter E. Rossi, 1993. "On the Optimal Taxation of Capital Income," NBER Working Papers 4525, National Bureau of Economic Research, Inc.
  3. Benhabib Jess & Farmer Roger E. A., 1994. "Indeterminacy and Increasing Returns," Journal of Economic Theory, Elsevier, vol. 63(1), pages 19-41, June.
  4. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2000. "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?," Econometrica, Econometric Society, vol. 68(5), pages 1151-1180, September.
  5. V. V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1993. "Optimal Fiscal Policy in a Business Cycle Model," NBER Working Papers 4490, National Bureau of Economic Research, Inc.
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  7. Bohn, Henning, 1994. "Optimal state-contingent capital taxation: when is there an indeterminacy?," Journal of Monetary Economics, Elsevier, vol. 34(1), pages 125-137, August.
  8. Jones, Larry E & Manuelli, Rodolfo E & Rossi, Peter E, 1993. "Optimal Taxation in Models of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 485-517, June.
  9. Roger E. A. Farmer, 1997. "Money in a real business cycle model," Proceedings, Federal Reserve Bank of Cleveland, issue Nov, pages 568-623.
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  11. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
  12. Kevin J. Lansing, 1998. "Optimal Fiscal Policy in a Business Cycle Model with Public Capital," Canadian Journal of Economics, Canadian Economics Association, vol. 31(2), pages 337-364, May.
  13. Albert Marcet & Thomas J. Sargent & Juha Seppala, 1996. "Optimal taxation without state-contingent debt," Economics Working Papers 170, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2001.
  14. Alfonso Novales & Emilio Dominguez & Javier J. Perez & Jesus Ruiz, 1998. "Solving Non-linear Rational Expectations Models By Eigenvalue-Eigenvector Decompositions," QM&RBC Codes 124, Quantitative Macroeconomics & Real Business Cycles.
  15. Roger E. A. Farmer, 1999. "Macroeconomics of Self-fulfilling Prophecies, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062038.
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  17. V. V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1991. "Optimal fiscal policy in a stochastic growth model (technical appendix)," Working Papers 473, Federal Reserve Bank of Minneapolis.
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