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Welfare Effects of Tax Policy in Open Economies: Stabilization and Cooperation

  • Sunghyun Henry Kim
  • Jinill Kim

This paper studies optimal tax policy design problem by employing a two-country dynamic general equilibrium model with incomplete asset markets. We investigate the possibility of welfare-improving active, contingent tax policies (tax rates respond to changes in productivity) on consumption, and capital and labor income taxes. Unlike the conventional wisdom regarding stabilization policies, procyclical factor income tax policy is optimal in open economy. Procyclical tax policy generates efficiency gains by correcting market incompleteness. Optimal tax policy under cooperative equilibrium is similar to that under the Nash equilibrium and welfare gains from tax policy coordination is quite small.

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2003 with number 259.

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Date of creation: 01 Aug 2003
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Handle: RePEc:sce:scecf3:259
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  1. Hairault, Jean-Olivier & Langot, Francois & Portier, Franck, 2001. "Efficiency and stabilization: reducing Harberger triangles and Okun gaps," Economics Letters, Elsevier, vol. 70(2), pages 209-214, February.
  2. Robert Kollmann, 1998. "U.S. trade balance dynamics: the role of fiscal policy and productivity shocks and of financial market linkages," ULB Institutional Repository 2013/7634, ULB -- Universite Libre de Bruxelles.
  3. 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.
  4. Mendoza, Enrique G. & Razin, Assaf & Tesar, Linda L., 1994. "Effective tax rates in macroeconomics: Cross-country estimates of tax rates on factor incomes and consumption," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 297-323, December.
  5. Obstfeld, Maurice & Rogoff, Kenneth, 2001. "Global Implications of Self-Oriented National Monetary Rules," Center for International and Development Economics Research, Working Paper Series qt6412m5b7, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  6. Gorostiaga Alonso, Miren Arantzazu, 2002. "Should Fiscal Policy be different in a Non-Competitive Framework?," DFAEII Working Papers 2002-28, University of the Basque Country - Department of Foundations of Economic Analysis II.
  7. Jeremy Greenwood & Gregory W. Huffman, 1991. "Tax analysis in a real business cycle model: on measuring Harberger triangles and Okun gaps," Staff Report 138, Federal Reserve Bank of Minneapolis.
  8. Heathcote, Jonathan & Perri, Fabrizio, 2002. "Financial autarky and international business cycles," Journal of Monetary Economics, Elsevier, vol. 49(3), pages 601-627, April.
  9. Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 2002. "The Need for International Policy Coordination: What's Old, What's New, What's Yet to Come?," NBER Working Papers 8765, National Bureau of Economic Research, Inc.
  10. Marianne Baxter & Mario J. Crucini, 1994. "Business Cycles and the Asset Structure of Foreign Trade," NBER Working Papers 4975, National Bureau of Economic Research, Inc.
  11. Ireland, Peter N, 1996. "The Role of Countercyclical Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 704-23, August.
  12. Enrique G. Mendoza & Linda L. Tesar, 1995. "Supply-Side Economics in a Global Economy," NBER Working Papers 5086, National Bureau of Economic Research, Inc.
  13. Marianne Baxter, 1995. "International Trade and Business Cycles," NBER Working Papers 5025, National Bureau of Economic Research, Inc.
  14. Gorostiaga, Arantza, 2003. "Should fiscal policy be different in a non-competitive framework?," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1311-1331, September.
  15. Kim, Sunghyun Henry & Kose, M. Ayhan, 2003. "Dynamics Of Open-Economy Business-Cycle Models: Role Of The Discount Factor," Macroeconomic Dynamics, Cambridge University Press, vol. 7(02), pages 263-290, April.
  16. Easley, David & Kiefer, Nicholas M & Possen, Uri M, 1993. "An Equilibrium Analysis of Fiscal Policy with Uncertainty and Incomplete Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(4), pages 935-52, November.
  17. Jinill Kim & Sunghyun Kim & Ernst Schaumburg & Christopher A. Sims, 2003. "Calculating and using second order accurate solutions of discrete time dynamic equilibrium models," Finance and Economics Discussion Series 2003-61, Board of Governors of the Federal Reserve System (U.S.).
  18. Martin Feldstein, 2002. "The Role for Discretionary Fiscal Policy in a Low Interest Rate Environment," NBER Working Papers 9203, National Bureau of Economic Research, Inc.
  19. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1991. "International real business cycles," Staff Report 146, Federal Reserve Bank of Minneapolis.
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  21. repec:sae:niesru:v:149:y::i:1:p:30-52 is not listed on IDEAS
  22. Stephanie Schmitt-Grohe & Martin Uribe, 2002. "Closing Small Open Economy Models," NBER Working Papers 9270, National Bureau of Economic Research, Inc.
  23. Jinill Kim & Dale W. Henderson, 2002. "Inflation targeting and nominal income growth targeting: when and why are they suboptimal?," International Finance Discussion Papers 719, Board of Governors of the Federal Reserve System (U.S.).
  24. William Easterly & Sergio Rebelo, 1993. "Fiscal Policy and Economic Growth: An Empirical Investigation," NBER Working Papers 4499, National Bureau of Economic Research, Inc.
  25. Karayalcin, Cem, 1995. "Capital income taxation and welfare in a small open economy," Journal of International Money and Finance, Elsevier, vol. 14(6), pages 785-800, December.
  26. Irina Yakadina, 2002. "Optimal Capital-Labor Taxes under Uncertainty and Limits on Debt," Computing in Economics and Finance 2002 329, Society for Computational Economics.
  27. McGrattan, Ellen R., 1994. "The macroeconomic effects of distortionary taxation," Journal of Monetary Economics, Elsevier, vol. 33(3), pages 573-601, June.
  28. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
  29. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
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  32. Kim, Jinill, 2003. "Functional equivalence between intertemporal and multisectoral investment adjustment costs," Journal of Economic Dynamics and Control, Elsevier, vol. 27(4), pages 533-549, February.
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