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Ramsey Tax Competition with Real Exchange Rate Determination

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Abstract

How should governments choose tax rates when they face competition from other jurisdictions? This questions is answered by solving for the Nash equilibrium of the game played between Ramsey planners in a two good, two country open economy macroeconomic model. It is shown, analytically, that the planers do not tax capital income in the long run. Short term results, obtained computationally, reveal that the government of the larger country manages the path of the real exchange rate in order to manipulates its smaller rival's choice of tax rates. Tax competition does not lead to a "race to the bottom."

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  • Paul Gomme, 2019. "Ramsey Tax Competition with Real Exchange Rate Determination," Working Papers 19004, Concordia University, Department of Economics.
  • Handle: RePEc:crd:wpaper:19004
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    File URL: http://paulgomme.github.io/ramsey-tax-competition-2019-07.pdf
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    References listed on IDEAS

    as
    1. Bucovetsky, S., 1991. "Asymmetric tax competition," Journal of Urban Economics, Elsevier, vol. 30(2), pages 167-181, September.
    2. Auray, Stéphane & Eyquem, Aurélien & Gomme, Paul, 2018. "Ramsey-optimal tax reforms and real exchange rate dynamics," Journal of International Economics, Elsevier, vol. 115(C), pages 159-169.
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    1. Ramsey Tax Competition with Real Exchange Rate Determination
      by Christian Zimmermann in NEP-DGE blog on 2019-08-20 15:32:37

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    More about this item

    Keywords

    Optimal fiscal policy; open economy macroeconomics; Ramsey taxation;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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