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Optimal Taxation with Incomplete Markets

Author

Listed:
  • Thomas Sargent

    (New York University)

  • Mikhail Golosov

    (Princeton University)

  • David Evans

    (New York University)

  • anmol bhandari

    (New York University)

Abstract

This paper characterizes tax and debt dynamics in Ramsey plans for incomplete markets economies that generalize an Aiyagari et al. (2002) economy by allowing a single asset traded by the government to be risky. Long run debt and tax dynamics can be attracted not only to the first-best continuation allocations discovered by Aiyagari et al. for quasi-linear preferences, but instead to a continuation allocation associated with a level of (marginal-utility-scaled) government debt that would prevail in a Lucas-Stokey economy that starts from a particular initial level of government debt. The paper formulates, analyzes, and numerically solves Bellman equations for two value functions for a Ramsey planner, one for t ≥ 1, the other for t = 0.

Suggested Citation

  • Thomas Sargent & Mikhail Golosov & David Evans & anmol bhandari, 2014. "Optimal Taxation with Incomplete Markets," 2014 Meeting Papers 1276, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:1276
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    References listed on IDEAS

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    1. Constantinides, George M & Duffie, Darrell, 1996. "Asset Pricing with Heterogeneous Consumers," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 219-240, April.
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    3. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "Growth in a Time of Debt," American Economic Review, American Economic Association, vol. 100(2), pages 573-578, May.
    4. Anmol Bhandari & David Evans & Mikhail Golosov & Thomas J. Sargent, 2013. "Taxes, Debts, and Redistributions with Aggregate Shocks," NBER Working Papers 19470, National Bureau of Economic Research, Inc.
    5. Elisa Faraglia & Albert Marcet & Andrew Scott, 2012. "Debt management and optimal fiscal policy with long bonds," BIS Papers chapters, in: Bank for International Settlements (ed.), Threat of fiscal dominance?, volume 65, pages 177-212, Bank for International Settlements.
    6. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-971, October.
    7. Buera, Francisco & Nicolini, Juan Pablo, 2004. "Optimal maturity of government debt without state contingent bonds," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 531-554, April.
    8. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
    9. Kydland, Finn E. & Prescott, Edward C., 1980. "Dynamic optimal taxation, rational expectations and optimal control," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 79-91, May.
    10. George-Marios Angeletos, 2002. "Fiscal Policy with Noncontingent Debt and the Optimal Maturity Structure," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(3), pages 1105-1131.
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    12. S. Rao Aiyagari & Albert Marcet & Thomas J. Sargent & Juha Seppala, 2002. "Optimal Taxation without State-Contingent Debt," Journal of Political Economy, University of Chicago Press, vol. 110(6), pages 1220-1254, December.
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    Cited by:

    1. Pham, Ngoc-Sang, 2017. "Dividend taxation in an infinite-horizon general equilibrium model," MPRA Paper 80580, University Library of Munich, Germany.

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