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Time-Consistent Fiscal Policy and Heterogeneous Agents

Author

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  • Roc Armenter

    (Federal Reserve Bank of New York)

Abstract

This paper characterizes the time-consistency properties of the set of Pareto efficient (or second best) fiscal policies, in a two-class, stochastic economy similar to that in Judd (1985). The key finding is that the continuation of any Pareto efficient policy is always Pareto efficient. Hence, to require any policy revision to be approved by unanimity safeguards the time consistency of efficient fiscal policy. I also show that any Pareto efficient policy from a timeless perspective can be rendered time consistent by a policymaker whose objective function is given by a utilitarian social welfare function with precise welfare weights. These results link the policymaker's equity considerations with the credibility of efficient fiscal policy. (Copyright: Elsevier)

Suggested Citation

  • Roc Armenter, 2007. "Time-Consistent Fiscal Policy and Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(1), pages 31-54, January.
    • Handle: RePEc:red:issued:06-38
    DOI: 10.1016/j.red.2006.08.003
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    Cited by:

    1. Garth Heutel, 2014. "Crowding Out and Crowding In of Private Donations and Government Grants," Public Finance Review, , vol. 42(2), pages 143-175, March.
    2. Katharina Greulich & Sarolta Laczó & Albert Marcet, 2023. "Pareto-Improving Optimal Capital and Labor Taxes," Journal of Political Economy, University of Chicago Press, vol. 131(7), pages 1904-1946.
    3. Juan Carlos Conesa & Begoña Domínguez, 2019. "The timing of optimal capital income tax reforms: the role of intangible capital investment," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 10(3), pages 419-438, November.
    4. Juan Carlos Conesa & Begona Dominguez, 2020. "Capital Taxes and Redistribution: The Role of Management Time and Tax Deductible Investment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 156-172, July.
    5. Acemoglu, Daron & Golosov, Mikhail & Tsyvinski, Aleh, 2011. "Political economy of Ramsey taxation," Journal of Public Economics, Elsevier, vol. 95(7-8), pages 467-475, August.

    More about this item

    Keywords

    Fiscal policy; Time-consistency; Equity considerations;
    All these keywords.

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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