Optimal tax and expenditure policies in a market economy with life-cycle savings: Revisiting the golden rule
Purpose - This paper aims to investigate whether the concept of the golden rule of capital accumulation is an applicable normative guidepost for a market economy even in the absence of the distortions usually associated with income and consumption taxes. Design/methodology/approach - The paper uses a simple two-period overlapping generations model with productive public and private capital. Findings - As long as the government is subject to some instrument limitation that constrains its ability to effect non-distortive optimal inter-generational income redistributions, the market optimum for capital accumulation would generally deviate from the golden rule towards either side of the rule. Originality/value - The paper provides a transparent characterization of the nature of the optimal deviation from the golden rule in terms of easily interpretable consumption and production parameters.
Volume (Year): 36 (2009)
Issue (Month): 3 (July)
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