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Optimal taxation without state-contingent debt

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  • Albert Marcet
  • Thomas J. Sargent
  • Juha Seppala

Abstract

To recover a version of Barro's (1979) `random walk' tax smoothing outcome, we modify Lucas and Stokey's (1983) economy to permit only risk--free debt. This imparts near unit root like behavior to government debt, independently of the government expenditure process, a realistic outcome in the spirit of Barro's. We show how the risk--free--debt--only economy confronts the Ramsey planner with additional constraints on equilibrium allocations that take the form of a sequence of measurability conditions. We solve the Ramsey problem by formulating it in terms of a Lagrangian, and applying a Parameterized Expectations Algorithm to the associated first--order conditions. The first--order conditions and numerical impulse response functions partially affirm Barro's random walk outcome. Though the behaviors of tax rates, government surpluses, and government debts differ, allocations are very close for computed Ramsey policies across incomplete and complete markets economies.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 170.

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Date of creation: Apr 1996
Date of revision: Oct 2001
Handle: RePEc:upf:upfgen:170

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Web page: http://www.econ.upf.edu/

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Keywords: Optimal taxation; incomplete markets; recursive contracts; tax smoothing; parameterized expectations;

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  1. Lawrence J. Christiano & Jonas D.M. Fisher, 1997. "Algorithms for solving dynamic models with occasionally binding constraints," Working Paper 9711, Federal Reserve Bank of Cleveland.
  2. Per Krusell & Anthony A. Smith & Jr., 1998. "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 867-896, October.
  3. Buera, Francisco & Nicolini, Juan Pablo, 2004. "Optimal maturity of government debt without state contingent bonds," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 531-554, April.
  4. Huggett, Mark, 1993. "The risk-free rate in heterogeneous-agent incomplete-insurance economies," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 953-969.
  5. Albert Marcet & Ramon Marimon, 1992. "Communication, commitment, and growth," Discussion Paper / Institute for Empirical Macroeconomics 74, Federal Reserve Bank of Minneapolis.
  6. Albert Marcet & Andrew Scott, 2003. "Debt and Deficit Fluctuations and the Structure of Bond Markets," Working Papers 171, Barcelona Graduate School of Economics.
  7. Wouter J. den Haan & Albert Marcet, 1993. "Accuracy in simulations," Economics Working Papers 42, Department of Economics and Business, Universitat Pompeu Fabra.
  8. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
  9. Albert Marcet & David A. Marshall, 1994. "Solving nonlinear rational expectations models by parameterized expectations: Convergence to stationary solutions," Economics Working Papers 76, Department of Economics and Business, Universitat Pompeu Fabra.
  10. Duffie, Darrell & Shafer, Wayne, 1985. "Equilibrium in incomplete markets: I : A basic model of generic existence," Journal of Mathematical Economics, Elsevier, vol. 14(3), pages 285-300, June.
  11. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers 502, Federal Reserve Bank of Minneapolis.
  12. S. Rao Aiyagari, 1994. "Optimal capital income taxation with incomplete markets, borrowing constraints, and constant discounting," Working Papers 508, Federal Reserve Bank of Minneapolis.
  13. Sargent, Thomas J & Velde, Francois R, 1995. "Macroeconomic Features of the French Revolution," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 474-518, June.
  14. Albert Marcet & Ramon Marimon, 2011. "Recursive Contracts," CEP Discussion Papers dp1055, Centre for Economic Performance, LSE.
  15. Stephanie Schmitt-Grohe & Martin Uribe, 2002. "Optimal Fiscal and Monetary Policy Under Sticky Prices," NBER Working Papers 9220, National Bureau of Economic Research, Inc.
  16. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October.
  17. George-Marios Angeletos, 2002. "Fiscal Policy With Noncontingent Debt And The Optimal Maturity Structure," The Quarterly Journal of Economics, MIT Press, vol. 117(3), pages 1105-1131, August.
  18. repec:fth:starer:8415 is not listed on IDEAS
  19. S. Rao Aiyagari & Albert Marcet & Thomas J. Sargent & Juha Seppala, 2002. "Optimal Taxation without State-Contingent Debt," Journal of Political Economy, University of Chicago Press, vol. 110(6), pages 1220-1254, December.
  20. Kydland, Finn E. & Prescott, Edward C., 1980. "Dynamic optimal taxation, rational expectations and optimal control," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 79-91, May.
  21. Gary Chamberlain & Charles A. Wilson, 2000. "Optimal Intertemporal Consumption Under Uncertainty," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(3), pages 365-395, July.
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  1. Recursive Macroeconomic Theory

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