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

  1. Novales Cinca, Alfonso
  2. Pérez Sánchez, Rafaela María
  3. Ruiz Andújar, Jesús
Revista:
Documentos de Trabajo (ICAE)

ISSN: 2341-2356

Any de publicació: 2013

Número: 23

Pàgines: 1-36

Tipus: Document de treball

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Altres publicacions en: Documentos de Trabajo (ICAE)

Resum

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.

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