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Intertemporal Distortions in the Second Best

  • Stefania Albanesi

    ()

    (Department of Economics, Columbia University)

  • Roc Armenter

    ()

    (Federal Reserve Bank of New York)

We consider a very general class of public finance problems that encompasses Ramsey models of optimal taxation as well as economies with limited commitment, private information, and political economy frictions. We identify a sufficient condition to rule out permanent intertemporal distortions at the optimum: If there exists an admissible allocation that converges to the first best steady state, then all intertemporal distortions are temporary in the second best. We analyze a series of applications to illustrate the significance of this result.

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File URL: http://www.econ.columbia.edu/RePEc/pdf/DP0708-08.pdf
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Paper provided by Columbia University, Department of Economics in its series Discussion Papers with number 0708-08.

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Length: 38 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:clu:wpaper:0708-08
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