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Optimal Time-Consistent Fiscal Policy with Uncertain Lifetimes

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  • Guillermo A. Calvo
  • Maurice Obstfeld

Abstract

This paper studies optimal fiscal policy in an economy where heterogeneous agents with uncertain lifetimes coexist. We show that some plausible social welfare functions lead to time-inconsistent optimal plans, and we suggest restrictions on social preferences that avoid the problem. The normative prescriptions of a time-consistent utilitarian planner generalize the 'two-part Golden Rule" suggested by Samuelson, and imply aggregate dynamics similar to those arisingin the Cass-Koopmans-Ramsey optimal growth framework. We characterize lump-sum transfer schemes that allow the optimal allocation to be decentralized as the competitive equilibrium of an economy with actuarially fair annuities. The lump-sum transfers that accomplish this decentralization are age dependent in general.

Suggested Citation

  • Guillermo A. Calvo & Maurice Obstfeld, 1985. "Optimal Time-Consistent Fiscal Policy with Uncertain Lifetimes," NBER Working Papers 1593, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1593
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    References listed on IDEAS

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    1. Calvo, Guillermo A, 1978. "On the Time Consistency of Optimal Policy in a Monetary Economy," Econometrica, Econometric Society, vol. 46(6), pages 1411-1428, November.
    2. Jacob A. Frenkel & Assaf Razin, 1987. "The International Transmission of Fiscal Expenditures and Budget Deficits in the World Economy," Palgrave Macmillan Books, in: Assaf Razin & Efraim Sadka (ed.), Economic Policy in Theory and Practice, chapter 2, pages 51-100, Palgrave Macmillan.
    3. Willem Buiter, 1987. "Fiscal Policy in Open, Interdependent Economies," Palgrave Macmillan Books, in: Assaf Razin & Efraim Sadka (ed.), Economic Policy in Theory and Practice, chapter 3, pages 101-144, Palgrave Macmillan.
    4. Abba P. Lerner, 1959. "Consumption-Loan Interest and Money," Journal of Political Economy, University of Chicago Press, vol. 67(5), pages 512-512.
    5. E. S. Phelps & J. G. Riley, 1978. "Rawlsian Growth: Dynamic Programming of Capital and Wealth for Intergeneration "Maximin" Justice," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 45(1), pages 103-120.
    6. Menahem E. Yaari, 1965. "Uncertain Lifetime, Life Insurance, and the Theory of the Consumer," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 32(2), pages 137-150.
    7. David Cass, 1965. "Optimum Growth in an Aggregative Model of Capital Accumulation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 32(3), pages 233-240.
    8. Abba P. Lerner, 1959. "Consumption-Loan Interest and Money: Rejoinder," Journal of Political Economy, University of Chicago Press, vol. 67(5), pages 523-523.
    9. 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 473-491, June.
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    1. Kehoe, Patrick J., 1987. "Coordination of fiscal policies in a world economy," Journal of Monetary Economics, Elsevier, vol. 19(3), pages 349-376, May.
    2. Bennett T. McCallum, 1986. "The Optimal Inflation Rate in an Overlapping-Generations Economy with Land," NBER Working Papers 1892, National Bureau of Economic Research, Inc.

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