Optimal time-consistent fiscal policy under endogenous growth with elastic labor supply |
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| Institution: | 1. Borsa Istanbul, Research Department, Istanbul 34467, Turkey;2. Middle East Technical University, Department of Business Administration, Ankara 06531, Turkey;3. Central Bank of the Republic of Turkey, Markets Department, Ankara 06100, Turkey;4. Borsa Istanbul, Business & Product Development Department, Istanbul 34467, Turkey;1. Brunel University, London, United Kingdom;2. University of Navarra, Pamplona, Spain;1. University of Würzburg, Germany;2. CESifo, Germany;3. Netspar, The Netherlands;1. Department of Mathematics, Yonsei University, Seoul 120-749, Republic of Korea;2. Department of Mathematics, Pusan National University, Pusan 609-735, Republic of Korea;3. Department of Mathematics, Pohang University of Science and Technology, Pohang 790-784, Republic of Korea |
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| Abstract: | We explore the implications of incorporating an elastic labor supply in an endogenous growth economy when characterizing the time-consistent Markov policy. We consider two policy instruments: an income tax rate and the split of government spending between consumption and production services. The Markov-perfect policy implies a higher income tax rate and a larger proportion of government spending allocated to consumption than those chosen under a commitment constraint on the part of the government. As a consequence, economic growth is slightly lower under the Markov-perfect policy than under the Ramsey policy. Under the Markov and Ramsey optimal policies, a higher weight of leisure in households' preferences leads to a lower optimal income tax rate and a lower proportion of public resources devoted to consumption. We also show that the policy bias that would arise when imposing a Markov policy designed ignoring the presence of leisure in the utility function would lead to a significant welfare loss. |
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