Identifying optimal contingent fiscal policies in a business cycle model |
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Authors: | Baltasar Manzano Rafaela Pérez Jesús Ruiz |
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Institution: | (1) Facultad de C.C. Económicas, Universidad de Vigo. Lagoas-Marcosende s/n, 36200 Vigo, Spain;(2) Dpto de Fundamentos del Análisis Económico I,, Facultad de C.C. Económicas, Universidad Complutense de Madrid, Campus de Somosaguas, 28223 Madrid, Spain;(3) Dpto. de Economía Cuantitativa, Facultad de C.C. Económicas, Universidad Complutense de Madrid, Campus de Somosaguas, 28223 Madrid, Spain |
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Abstract: | Optimal fiscal policy is indeterminate in a dynamic and stochastic environment. The complete characterization of the fiscal
policy requires the use of identification constraints. In the literature either capital taxes or debt have been restricted
to be not contingent on the state of nature. We propose a different type of identification constraints to have both policy
variables state-contingent. Three alternative identification conditions are considered: (i) restrictions on the dynamic and
stochastic behavior of the debt path; (ii) an exogenous debt path, and (iii) an exogenous belief function. The main result
indicates that the optimal capital tax is zero and constant over the business cycle for any of the identification conditions
used, suggesting that is optimal for the government to use debt return as a shock absorber, keeping capital taxes constant.
The result is quite different from the previous literature, which obtains very volatile capital taxes.
JEL Classification:
E62, H21.
We are grateful to Alfonso Novales, Víctor Ríos-Rull, Javier Vallés and two anonymous referees for helpful comments and suggestions.
We acknowledge financial support from Spanish Ministerio de Ciencia y Tecnología (Ruiz and Pérez: BEC 2003-039; Manzano: BEC
2002-01995). Baltasar Manzano also acknowledges support from Xunta de Galicia (PGIDIT03PXIC30001PN, PGIDIT03CSO30001PR). |
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Keywords: | Optimal taxation indeterminacy |
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