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Taxes, Debts, and Redistributions with Aggregate Shocks

  • Anmol Bhandari
  • David Evans
  • Mikhail Golosov
  • Thomas J. Sargent

A planner sets a lump sum transfer and a linear tax on labor income in an economy with incomplete markets, heterogeneous agents, and aggregate shocks. The planner's concerns about redistribution impart a welfare cost to fluctuating transfers. The distribution of net asset holdings across agents affects optimal allocations, transfers, and tax rates, but the level of government debt does not. Two forces shape long-run outcomes: the planner's desire to minimize the welfare costs of fluctuating transfers, which calls for a negative correlation between the distribution of net assets and agents' skills; and the planner's desire to use fluctuations in the real interest rate to adjust for missing state-contingent securities. In a model parameterized to match stylized facts about US booms and recessions, distributional concerns mainly determine optimal policies over business cycle frequencies. These features of optimal policy differ markedly from ones that emerge from representative agent Ramsey models like Aiyagari et al (2002).

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19470.

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Date of creation: Sep 2013
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Handle: RePEc:nbr:nberwo:19470
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