OPTIMAL TAXATION POLICY, MONETARY POLICY AND STATE-CONTINGENT DEBT, TIME INCONSISTENCY IN RAMSEY PROBLEM, TAX SMOOTHING, NON-CRRA PREFERENCES AND TAXATION IN LQ ECONOMY
Keywords:
optimal fiscal policy, optimal monetary policy, state-contingent dept, time inconsistency, Ramsey problem, LQ economy
Abstract
This paper illustrates optimal fiscal and monetary policies with state-contingent debt as in Lucas,Stokey (1983) and the issue of time inconsistency in the Ramsey problem, tax smoothing as in Barro (1979) and Tax smoothing and Ramsey time inconsistency and non-CRRA preferences and taxation in LQ economy. Results show how the government lowers the interest rate by raising consumption. In the case of fall of consumption (in case of shock), labor supply increases during this two-time period tax rate increases for six periods, government consumption and output increase for two periods. Results differ from the results for LQ economy. When a state variable is negative, optimal tax is positive (obviously state variable here can be interest rate), and when there is positive state variable optimal tax rate becomes negative In LQ economy interest rate and inflation rate respond differently to technology and government consumption shocks respectively.
References
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2. Aiyagari, S Rao, Marcet,A. Sargent,T.J. Seppälä,J.(2002). Optimal taxation without state-contingent debt. Journal of Political Economy, 110(6),pp.1220–1254.
3. Albanesi, S., Sleet, C. (2006). Dynamic Optimal Taxation with Private Information. The Review of Economic Studies, 73(1), 1–30. http://www.jstor.org/stable/3700615
4. Albanesi, Stefania, (2003), Optimal and Time-Consistent Monetary and Fiscal Policy with Heterogeneous Agents, No 3713, CEPR Discussion Papers, C.E.P.R. Discussion Papers.
5. Ales,L.Maziero,P.(2008). Accounting for private information. Federal Reserve Bank of Minneapolis, working paper
6. Angeletos, G.-M. (2003). [Optimal Monetary and Fiscal Policy: A Linear-Quadratic Approach]: Comment. NBER Macroeconomics Annual, 18, 350–361. http://www.jstor.org/stable/3585262
7. Arrow, J. (1951). An Extension of the Basic Theorems of Classical Welfare Economics. In J. Neyman (ed.), Proceedings of the Second Berkeley Symposium on Mathematical Statistics and Probability (p./pp. 507--532), : University of California Press.
8. Arrow, K. J.; Debreu, G. (1954). Existence of an equilibrium for a competitive economy. Econometrica. 22 (3),pp.265–290.
9. Barro, R. J. (1979), On the Determination of the Public Debt, Journal of Political Economy 87 (5),pp.940–971.
10. Benigno, P., Woodford, M. (2003). Optimal Monetary and Fiscal Policy: A Linear-Quadratic Approach. NBER Macroeconomics Annual, 18, 271–333. http://www.jstor.org/stable/3585260
11. Calvo, G. (1983). Staggered Prices in a Utility-Maximizing Framework. Journal of Monetary Economics 12:383-398.
12. Chamley, C. (1986). Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives. Econometrica, 54(3), 607–622. https://doi.org/10.2307/1911310
13. Chari, V. V., Christiano,L. ,Kehoe.P. (1991). Optimal fiscal and monetary policy: Some recent results. Journal of Money, Credit, and Banking23:pp. 519-539
14. Chari, V. V., Lawrence Christiano, and Patrick Kehoe. (1995). Policy analysis in business cycle models. In Frontiers of Business Cycle Research, Thomas J. Cooley, (ed.). Princeton, NJ: Princeton University Press
15. Clarida, Richard, Jordi Gali, and Mark Gertler. (1999). The science of monetary policy: A new Keynesian perspective. Journal of Economic Literature 37(4):1661-1707
16. Diamond, Peter and Mirrlees, James, (1978).A model of social insurance with variable retirement, Journal of Public Economics, 10, issue 3, p. 295-336.
17. Friedman,M. (1969), The Optimum Quantity of Money, Macmillan
18. Golosov, M., Kocherlakota, N., & Tsyvinski, A. (2003). Optimal Indirect and Capital Taxation. The Review of Economic Studies, 70(3), 569–587. http://www.jstor.org/stable/3648601
19. Golosov, Mikhail, Aleh Tsyvinski, and Ivan Werning. (2006). New dynamic public finance: A users guide. NBER Macroeconomics Annual 21:317-363.
20. Golosov,M-Troshkin,M,-Tsyvinsky,A.(2011). Optimal Dynamic Taxes. NBER
21. Goodfriend, Marvin, and Robert G. King. (1997). The new neoclassical synthesis and the role for monetary policy. In NBER Macroeconomics Annual 1997
22. Hansen,L.P. Sargent,T.J., Roberds,W. (1991). Time Series Implications of Present Value Budget Ballance and of Martingale Models of Consumption and Taxes. In Rational Expectations Econometrics, edited by Lars Hansen and Thomas Sargent. Boulder, Colorado: Westview Press,
23. Judd, Kenneth L.(1985). Redistributive taxation in a simple perfect foresight model, Journal of Public Economics, Elsevier, vol. 28(1), pages 59-83, October.
24. Kocherlakota, Narayana, (2010). The New Dynamic Public Finance, 1 ed., Princeton University Press.
25. Kydland, F. E., Prescott, E. C. (1982). Time to Build and Aggregate Fluctuations. Econometrica, 50(6), 1345–1370. https://doi.org/10.2307/1913386
26. Long, J. B., Plosser, C. I. (1983). Real Business Cycles. Journal of Political Economy, 91(1), 39–69. http://www.jstor.org/stable/1840430
27. 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.
28. Murphy, G. M., (1960). Ordinary Differential Equations and Their Solutions, D. Van Nostrand, New York.
29. Papoulis, A. (1984) Probability, Random Variables, and Stochastic Processes. McGraw Hill, New York.
30. Polyanin, A. D. and Zaitsev, V. F.(2003). Handbook of Exact Solutions for Ordinary Differential Equations, 2nd Edition , Chapman & Hall/CRC, Boca Raton.
31. Ramsey, F. P. (1927). A Contribution to the Theory of Taxation. The Economic Journal, 37(145),pp. 47–61. https://doi.org/10.2307/2222721
32. Reid, W. T.(1972). Riccati Differential Equations, Academic Press, New York.
33. Rotemberg, Julio, and Michael Woodford. (1997). An optimization based framework for the evaluation of monetary policy. NBER Macroeconomics Annual 1997,B. S. Bernanke and J. J. Rotemberg (eds.). Cambridge, MA: NBER, 297-346.
34. Sargent,T.J., Velde,F.R.( 1998). Optimal Fiscal Policy in a Linear Stochastic Economy, QM&RBC Codes 130, Quantitative Macroeconomics & Real Business Cycles.
35. Shimer, R., & Werning, I. (2008). Liquidity and Insurance for the Unemployed. The American Economic Review, 98(5), 1922–1942. http://www.jstor.org/stable/29730157
36. Woodford, Michael. (2000). Interest and prices. Princeton University. Manuscript
37. Woodford, Michael. (2003). Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton, NJ: Princeton University Press
Published
2024-06-25
Section
Articles
