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Optimal Fiscal Policy in a Multisector Model: The Price Consequences of Government Spending

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  • STEVEN P. CASSOU
  • ARANTZA GOROSTIAGA

Abstract

This paper investigates optimal fiscal policy in a static multisector model. A Ramsey type planner chooses tax rates on each good type as well as spending levels on each good type subject to an exogenous total expenditure constraint. It is shown that, like taxes, government spending policy has price effects and that these price effects have significant implications for optimal policy. These price effects imply a U shape to the government's objective function and this U shape results in boundary values for the choice of the spending allocation. In particular, it is shown that the optimal allocation of government spending tends to be concentrated on one good rather than spread among many goods.

Suggested Citation

  • Steven P. Cassou & Arantza Gorostiaga, 2009. "Optimal Fiscal Policy in a Multisector Model: The Price Consequences of Government Spending," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 11(2), pages 177-201, April.
    • Handle: RePEc:bla:jpbect:v:11:y:2009:i:2:p:177-201
    DOI: 10.1111/j.1467-9779.2009.01406.x
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    References listed on IDEAS

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    1. Steven Cassou & Arantza Gorostiaga & María Gutiérrez & Stephen Hamilton, 2010. "Second-best tax policy and natural resource management in growing economies," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 17(6), pages 607-626, December.

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