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Optimal tax and expenditure policies in a market economy with life‐cycle savings

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  • Howell H. Zee

Abstract

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.

Suggested Citation

  • Howell H. Zee, 2009. "Optimal tax and expenditure policies in a market economy with life‐cycle savings," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 36(3), pages 265-283, July.
    • Handle: RePEc:eme:jespps:v:36:y:2009:i:3:p:265-283
    DOI: 10.1108/01443580910983852
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    Cited by:

    1. Masaya Yasuoka, 2021. "How should a government finance pension benefits?," Australian Economic Papers, Wiley Blackwell, vol. 60(1), pages 138-152, March.

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