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Tax smoothing in a business cycle model with capital-skill complementarity

  • Konstantinos Angelopoulos
  • Stylianos Asimakopoulos
  • James Malley

This paper undertakes a normative investigation of the quantita- tive properties of optimal tax smoothing in a business cycle model with state contingent debt, capital-skill complementarity, endogenous skill formation and stochastic shocks to public consumption as well as total factor and capital equipment productivity. Our main nding is that an empirically relevant restriction which does not allow the relative supply of skilled labour to adjust in response to aggregate shocks, signi cantly changes the cyclical properties of optimal labour taxes. Under a restricted relative skill supply, the government nds it optimal to adjust labour income tax rates so that the average net returns to skilled and unskilled labour hours exhibit the same dynamic behaviour as under exible skill supply.

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Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2014_05.

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Date of creation: Mar 2014
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Handle: RePEc:gla:glaewp:2014_05
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  1. Hornstein, Andreas & Krusell, Per & Violante, Giovanni L., 2005. "The Effects of Technical Change on Labor Market Inequalities," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 20, pages 1275-1370 Elsevier.
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  4. Konstantinos Angelopoulos & Stylianos Asimakopoulos & James Malley, 2013. "The optimal distribution of the tax burden over the business cycle," Working Papers 2013_16, Business School - Economics, University of Glasgow.
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  7. V. V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1993. "Optimal fiscal policy in a business cycle model," Staff Report 160, Federal Reserve Bank of Minneapolis.
  8. Lindquist, Matthew J., 2002. "Capital-Skill Complementarity and Inequality Over the Business Cycle," Research Papers in Economics 2002:14, Stockholm University, Department of Economics, revised 01 Sep 2003.
  9. Kiminori Matsuyama, 2006. "The 2005 Lawrence R. Klein Lecture: Emergent Class Structure," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(2), pages 327-360, 05.
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  12. Per Krusell & Lee E. Ohanian & JosÈ-Victor RÌos-Rull & Giovanni L. Violante, 2000. "Capital-Skill Complementarity and Inequality: A Macroeconomic Analysis," Econometrica, Econometric Society, vol. 68(5), pages 1029-1054, September.
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  17. Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Discussion Papers 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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  21. Adjemian, Stéphane & Bastani, Houtan & Karamé, Fréderic & Juillard, Michel & Maih, Junior & Mihoubi, Ferhat & Perendia, George & Pfeifer, Johannes & Ratto, Marco & Villemot, Sébastien, 2011. "Dynare: Reference Manual Version 4," Dynare Working Papers 1, CEPREMAP, revised Jul 2014.
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  27. repec:pri:cepsud:113krusell is not listed on IDEAS
  28. George-Marios Angeletos, 2002. "Fiscal Policy with Noncontingent Debt and the Optimal Maturity Structure," The Quarterly Journal of Economics, Oxford University Press, vol. 117(3), pages 1105-1131.
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