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Tax Policy and Aggregate Demand Management under Catching Up with the Joneses

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  • Harald Uhlig
  • Lars Ljungqvist

Abstract

This paper examines the role for tax policies in productivity-shock driven economies with catching-up-with-the-Joneses utility functions. The optimal tax policy is shown to affect the economy countercyclically via procyclical taxes, i.e., "cooling down" the economy with higher taxes when it is "overheating" in booms and "stimulating" the economy with lower taxes in recessions to keep consumption up. Thus, models with catching-up-with-the-Joneses utility functions call for traditional Keynesian demand-management policies but for rather unorthodox reasons.

Suggested Citation

  • Harald Uhlig & Lars Ljungqvist, 2000. "Tax Policy and Aggregate Demand Management under Catching Up with the Joneses," American Economic Review, American Economic Association, vol. 90(3), pages 356-366, June.
    • Handle: RePEc:aea:aecrev:v:90:y:2000:i:3:p:356-366
    Note: DOI: 10.1257/aer.90.3.356
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    References listed on IDEAS

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    1. Gali, Jordi, 1994. "Keeping Up with the Joneses: Consumption Externalities, Portfolio Choice, and Asset Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(1), pages 1-8, February.
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    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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