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Optimal fiscal policy in the neoclassical growth model revisited

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  • Gervais, Martin
  • Mennuni, Alessandro

Abstract

This paper studies optimal taxation in a version of the neoclassical growth model in which investment becomes productive within the period, thereby making the supply of capital elastic in the short run. Because taxing capital is distortionary in the short run, the government׳s ability/desire to raise revenues through capital income taxation in the initial period or when the economy is hit with a bad shock is greatly curtailed. Our timing assumption also leads to a tractable Ramsey problem without state-contingent debt, which can give rise to debt-financed budget deficits during recessions.

Suggested Citation

  • Gervais, Martin & Mennuni, Alessandro, 2015. "Optimal fiscal policy in the neoclassical growth model revisited," European Economic Review, Elsevier, vol. 73(C), pages 1-17.
    • Handle: RePEc:eee:eecrev:v:73:y:2015:i:c:p:1-17
    DOI: 10.1016/j.euroecorev.2014.11.001
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    Cited by:

    1. Roos, Michael W. M., 2015. "The macroeconomics of radical uncertainty," Ruhr Economic Papers 592, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    2. Ge Jin & Bing Zhang, 2024. "Optimal fiscal policy with a balanced-budget restriction: revisiting Chamley and Barro," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 31(2), pages 454-485, April.
    3. Jean-Denis Garon & Alain Paquet, 2017. "Les enjeux d'efficience et la fiscalité," L'Actualité Economique, Société Canadienne de Science Economique, vol. 93(3), pages 297-337.
    4. Ge Jin, 2022. "Using the primal approach to derive the second‐best rules for different public services in a general competitive growth model," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 24(6), pages 1564-1590, December.

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    Keywords

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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