Universidad Complutense de Madrid
E-Prints Complutense

Optimal time-consistent fiscal policy in an endogenous growth economy with public consumption and capital

Impacto

Downloads

Downloads per month over past year



Novales Cinca, Alfonso and Pérez Sánchez, Rafaela María and Ruiz Andújar, Jesús (2013) Optimal time-consistent fiscal policy in an endogenous growth economy with public consumption and capital. [ Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE); nº 23, 2013, ] (Unpublished)

[img] PDF
Creative Commons Attribution Non-commercial.

322kB

Official URL: http://eprints.ucm.es/22129/


URLURL Type
https://www.ucm.es/icaeOrganisation


Abstract

In an endogenous growth model with public consumption and public investment, we explore the time-consistent optimal choice for two policy instruments: an income tax rate and the split of government spending between consumption and investment. We show that under the time-consistent, Markov policy, the economy lacks any transitional dynamics and also that there is local and global determinacy of equilibrium. We compare the Markovian optimal policy with the Ramsey policy as well as with the solution to the planner’s problem under lump-sum taxation. For empirically plausible parameter values we find that the Markov-perfect policy implies a higher tax rate and a larger proportion of government spending allocated to consumption than those chosen under a commitment constraint. As a result, economic growth is slightly lower under the Markov-perfect policy than under the Ramsey policy, with growth under lump-sum taxes being highest.


Item Type:Working Paper or Technical Report
Additional Information:

JEL classification: E61, E62, H21.

The authors thank financial support received from the Spanish Ministry of Science and Innovation through grant ECO2009-10398, the Research Groups funding program by Universidad Complutense de Madrid and Banco Santander, the Xunta de Galicia through Grant 10PXIB300177PR and the Research Grant program in Economics at Fundación Ramón Areces.

Uncontrolled Keywords:Time-consistency, Markov-perfect optimal policy, Ramsey optimal policy, Endogenous growth, Income tax rate, Government spending composition.
Subjects:Social sciences > Economics > Econometrics
Series Name:Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE)
Volume:2013
Number:23
ID Code:22129
Deposited On:27 Jun 2013 11:46
Last Modified:09 Jan 2014 11:45

Origin of downloads

Repository Staff Only: item control page