Time Consistency Of Optimal Fiscal Policy In An Endogenous Growth Model
The present paper analyses the time-consistency of optimal fiscal policies in a model with private capital and endogenous growth achieved via public capital. A benevolent government chooses both public spending and taxation plans in order to maximise the welfare of the representative individual. When a full-commitment technology is assumed, the optimal policy is obviously implementable. Nevertheless, in the absence of full-commitment, it is well known that the debt restructuring method cannot make the optimal fiscal policy time-consistent in economies with private capital. Under a zero-tax rate on capital income, we prove that debt restructuring can solve the time-inconsistency problem of fiscal policy. In order to compare this policy with the one under full-commitment, we use a numerical solution method for non-linear rational expectations models, in particular the eigenvalue-eigenvector decomposition method suggested by Novales et al. (1999), which in turn is based on Sims (1998). Both models are solved and surprisingly we find that the policy under debt-commitment is quite close to the full-commitment policy both in growth and in welfare terms.
|Date of creation:||05 Jul 2000|
|Date of revision:|
|Contact details of provider:|| Postal: |
Fax: +34 93 542 17 46
Web page: http://enginy.upf.es/SCE/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Faig, Miquel, 1994. "Debt Restructuring and the Time Consistency of Optimal Policies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(2), pages 171-81, May.
- Barro, Robert J., 1990.
"Government Spending in a Simple Model of Endogeneous Growth,"
3451296, Harvard University Department of Economics.
- Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S103-26, October.
- Robert J. Barro, 1988. "Government Spending in a Simple Model of Endogenous Growth," NBER Working Papers 2588, National Bureau of Economic Research, Inc.
- Barro, R.J., 1988. "Government Spending In A Simple Model Of Endogenous Growth," RCER Working Papers 130, University of Rochester - Center for Economic Research (RCER).
- Robert E. Lucas Jr. & Nancy L. Stokey, 1982.
"Optimal Fiscal and Monetary Policy in an Economy Without Capital,"
532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- 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.
- Persson, Mats & Persson, Torsten & Svensson, Lars E O, 1987. "Time Consistency of Fiscal and Monetary Policy," Econometrica, Econometric Society, vol. 55(6), pages 1419-31, November.
- David Aschauer, 1988.
"Is public expenditure productive?,"
88-7, Federal Reserve Bank of Chicago.
- Zhu, Xiaodong, 1995. "Endogenous capital utilization, investor's effort, and optimal fiscal policy," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 655-677, December.
- V. V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1993.
"Optimal Fiscal Policy in a Business Cycle Model,"
NBER Working Papers
4490, National Bureau of Economic Research, Inc.
- Faig, Miquel, 1991. " Time Inconsistency, Capital Mobility and Debt Restructuring in a Small Open Economy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 93(3), pages 447-55.
- Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
- 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 473-91, June.
When requesting a correction, please mention this item's handle: RePEc:sce:scecf0:69. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)
If references are entirely missing, you can add them using this form.