IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper

Time-Consistent Public Expenditures

  • Paul Klein
  • Per Krusell
  • José-Víctor Ríos-Rull

How should aggregate public expenditures be traded off against their financing costs? We incorporate public expenditures into a standard neoclassical growth setup with model policy choice as made by a government choosing tax rates and spending so that the resulting competitive equilibrium allocation maximizes consumer welfare. An additional key restriction that the government faces in our model is that it cannot commit to future policy. This restriction binds: current income taxes influence past savings decisions as well as past work decisions, and these effects are ignored by governments without access to commitment. We solve for equilibria where ‘reputational’ mechanisms are not operative: we characterize Markov-perfect equilibria of the dynamic game between successive governments. We characterize equilibria in terms of an intertemporal first-order condition (a ‘generalized Euler equation’, GEE) for the government and we use this condition both to gain insight into the nature of the equilibrium and as a basis for computation. The GEE reveals how the government optimally trades off tax wedges over time. For a calibrated economy, we find that when the tax base available to the government is capital income – an inelastic source of funds at any moment in time – the government still refrains from taxing at confiscatory rates. As a result, the economy is far from the mix of public and private goods that would be optimal in a static context; in return, steady-state savings are less distorted.

(This abstract was borrowed from another version of this item.)

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://rincewind.iies.su.se/%7Ekrusell/wp/submitcaerp.pdf
Download Restriction: no

Paper provided by UCLA Department of Economics in its series Levine's Bibliography with number 122247000000000652.

as
in new window

Length:
Date of creation: 06 Nov 2004
Date of revision:
Handle: RePEc:cla:levrem:122247000000000652
Contact details of provider: Web page: http://www.dklevine.com/

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  2. Per Krusell & Burhanettin Kuruscu & Anthony A. Smtih, Jr., . "Equilibrium Welfare and Government Policy with Quasi-Geometric Discounting," GSIA Working Papers 2001-06, Carnegie Mellon University, Tepper School of Business.
  3. Giorgia Giovannetti & Ramon Marimon & Pedro Teles, 2000. "Nominal Debt as a Burden to Monetary Policy," Econometric Society World Congress 2000 Contributed Papers 1387, Econometric Society.
  4. V. V. Chari & Patrick J Kehoe, 1998. "Sustainable Plans," Levine's Working Paper Archive 600, David K. Levine.
  5. John Hassler & José V. Rodríguez Mora & Kjetil Storesletten & Fabrizio Zilibotti, 2003. "The Survival of the Welfare State," American Economic Review, American Economic Association, vol. 93(1), pages 87-112, March.
  6. Marco Bassetto & Thomas Sargent, 2005. "Politics and Efficiency of Separating Capital and Ordinary Government Budgets," NBER Working Papers 11030, National Bureau of Economic Research, Inc.
  7. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
  8. Krusell, Per & Smith Jr., Anthony A, 2001. "Consumption-Savings Decisions with Quasi-Geometric Discounting," CEPR Discussion Papers 2651, C.E.P.R. Discussion Papers.
  9. Krusell, Per & Quadrini, Vincenzo & Rios-Rull, Jose-Victor, 1997. "Politico-economic equilibrium and economic growth," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 243-272, January.
  10. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, Oxford University Press, vol. 100(4), pages 1169-1189.
  11. Daniel Cohen & Philippe Michel, 1988. "How Should Control Theory Be Used to Calculate a Time-Consistent Government Policy?," Review of Economic Studies, Oxford University Press, vol. 55(2), pages 263-274.
  12. Paul Klein & JosÈ-VÌctor RÌos-Rull, 2003. "Time-consistent optimal fiscal policy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(4), pages 1217-1245, November.
  13. David R. Stockman, 2001. "Balanced-Budget Rules: Welfare Loss and Optimal Policies," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(2), pages 438-459, July.
  14. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  15. John Hassler & Per Krusell & Kjetil Storesletten & Fabrizio Zilibotti, 2007. "On the Optimal Timing of Capital Taxes," IEW - Working Papers 343, Institute for Empirical Research in Economics - University of Zurich.
  16. Jose-Victor Rios-Rull & Per Krusell, 1999. "On the Size of U.S. Government: Political Economy in the Neoclassical Growth Model," American Economic Review, American Economic Association, vol. 89(5), pages 1156-1181, December.
  17. Marina Azzimonti-Renzo & Pierre-Daniel G. Sarte & Jorge Soares, 2003. "Optimal public investment with and without government commitment," Working Paper 03-10, Federal Reserve Bank of Richmond.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:cla:levrem:122247000000000652. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (David K. Levine)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.