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Optimal Time Consistent Fiscal Policy with Overlapping Generations



The paper analyzes optimal fiscal policy in an overlapping generations model with two-period lived households. The government must choose tax rates and borrowing to finance an exogenous stream of expenditures. It cannot commit to future policies, so announced policies that are not time consistent are not credible. Optimal time-consistent policies are derived using dynamic programming. In contrast to representative agent models with commitment, optimal capital tax rates are positive in the long run, and bounded below one in the short run for a wide range of parameter values. The paper also considers the response of optimal tax rates to technology shocks. Dans ce texte nous analysons la politique fiscale optimale dans un modèle à générations imbriquées où les ménages ont un horizon de deux périodes. Le gouvernement doit choisir ses taux de taxation et l'emprunt afin de financer des dépenses qui lui sont exogènes. Il ne peut se comettre à ses politiques futures, et pour cette raison les politiques qui ne sont pas dynamiquement cohérentes ne sont pas crédibles. Nous dérivons des politiques optimales et dynamiquement cohérentes en utilisant la programmation dynamique. Par opposition aux modèles à agent représentatif où le gouvernement peut se comettre, les taux de taxation optimaux sur le revenu du capital sont positifs à long terme et inférieurs à l'unité pour des valeurs de paramètre raisonnables. Nous analysons aussi la réponse des taux de taxation optimaux aux chocs technologiques

Suggested Citation

  • Steve Ambler, 2000. "Optimal Time Consistent Fiscal Policy with Overlapping Generations," Cahiers de recherche CREFE / CREFE Working Papers 111, CREFE, Université du Québec à Montréal.
  • Handle: RePEc:cre:crefwp:111

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    References listed on IDEAS

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    Cited by:

    1. Cristina POMBO RIVERA & Oscar Mauricio VALENCIA, 2007. "Tributación óptima en un sistema PAYGO," ARCHIVOS DE ECONOMÍA 003660, DEPARTAMENTO NACIONAL DE PLANEACIÓN.
    2. Pierre Pestieau & Gregory Ponthiere & Motohiro Sato, 2008. "Longevity, Health Spending, and Pay-as-you-Go Pensions," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 64(1), pages 1-18, March.
    3. Nathalie Mathieu-Bolh, 2011. "Optimal taxation and borrowing constraints," Economía, Instituto de Investigaciones Económicas y Sociales (IIES). Facultad de Ciencias Económicas y Sociales. Universidad de Los Andes. Mérida, Venezuela, vol. 36(31), pages 9-53, January-j.
    4. repec:zbw:rwirep:0165 is not listed on IDEAS
    5. Baltasar Manzano & Jesús Ruiz, 2004. "Política fiscal óptima: el estado de la cuestión," Investigaciones Economicas, Fundación SEPI, vol. 28(1), pages 5-41, January.
    6. Schmidt, Torsten & Vosen, Simeon, 2013. "Demographic change and the labour share of income," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 357-378.
    7. Gregory Ponthiere, 2009. "Rectangularization And The Rise In Limit-Longevity In A Simple Overlapping Generations Model," Manchester School, University of Manchester, vol. 77(1), pages 17-46, January.
    8. Torsten Schmidt & Simeon Vosen, 2010. "Demographic Change and the Labour Share of Income," Ruhr Economic Papers 0165, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    9. Alessandro Sommacal, 2006. "Pension systems and intragenenerational redistribution when labor supply is endogenous," Oxford Economic Papers, Oxford University Press, vol. 58(3), pages 379-406, July.
    10. Ambler, Steve, 1999. "Les modèles à agent représentatif et la politique de taxation optimale," L'Actualité Economique, Société Canadienne de Science Economique, vol. 75(4), pages 539-557, décembre.

    More about this item


    Optimal Fiscal Policy; Time Consistency; Overlapping Generations;

    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
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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