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Optimal Time-Consistent Fiscal Policy with Finite Lifetimes

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  • Calvo, Guillermo A
  • Obstfeld, Maurice

Abstract

This paper analyzes aspects of optimal fiscal policy for economies with capital ac cumulation and finitely-lived, heterogeneous agents. For a particular utilitarian social welfare function, the problem faced by a central planner can be broken down into two subproblems: a standard problem o f optimally allocating aggregate consumption over time and a problem of distributing aggregate consumption optimally at each moment among those alive. If it can use a sufficiently rich set of lump-sum taxes and transfers, the government can replicate the command optimum as a market equilibrium outcome. No issue of government debt is needed to achieve this decentralization. Copyright 1988 by The Econometric Society.

Suggested Citation

  • Calvo, Guillermo A & Obstfeld, Maurice, 1988. "Optimal Time-Consistent Fiscal Policy with Finite Lifetimes," Econometrica, Econometric Society, vol. 56(2), pages 411-432, March.
  • Handle: RePEc:ecm:emetrp:v:56:y:1988:i:2:p:411-32
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