OPTIMAL TAXATION POLICY, MONETARY POLICY AND STATE-CONTINGENT DEBT, TIME INCONSISTENCY IN RAMSEY PROBLEM, TAX SMOOTHING, NON-CRRA PREFERENCES AND TAXATION IN 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.