Time-Consistent Public Policy

Klein, Paul; Krusell, Per; Ŕıos-Rull, José-V́ıctor

doi:10.1111/j.1467-937x.2008.00491.x

Cited by 234 publications

(256 citation statements)

References 37 publications

(44 reference statements)

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“…This mechanism was not allowed by previous models that imposed budget balance. This paper is also related to the work of Klein Rull (2006), who look at time consistent Markov equilibria in taxation models. Since Markov equilibria preclude the use of trigger strategies, the set of equilibria that can be implemented is signi…cantly smaller and in general a steady state with zero capital taxes will not be optimal even if the government is allowed to break budget balance.…”

Section: Introductionmentioning

confidence: 99%

Taxation without commitment

Reis

2011

Econ Theory

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This paper considers a Ramsey model of linear capital and labor income taxation in which a benevolent government cannot commit ex-ante to a sequence of taxes for the future. In this setup, if the government is allowed to borrow and lend to the consumers, the optimal capital income tax is zero in the long run. This result stands in marked contrast with the recent literature on optimal taxation without commitment, which imposes budget balance and typically …nds that the optimal capital income tax does not converge to zero. Since it is e¢ cient to backload incentives, breaking budget balance allows the government to generate surplus that reduces its debt or increases its assets over time until the lack of commitment is no longer binding and the economy is back in the full commitment solution. Therefore, while the lack of commitment does not change the optimal capital tax in the long run, it may impose an upper bound on the level of long run debt.

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Section: Introductionmentioning

confidence: 99%

Taxation without commitment

Reis

2011

Econ Theory

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“…However, the multiple equilibria are associated with discontinuous decision rules. If we parameterize the ψ(·) function as a continuous function of the economy's state variables, then implicitly the government's policy rules are also continuous functions of the economy's state variables: Klein, Krusell and Ríos-Rull (2004) argue that imposing a differentiability requirement on the government's policy function is an important "refinement tool" for reducing the number of Markov-perfect equilibria. In some applications, such as the application presented below, proof of unicity will be straightforward.…”

Section: Numerical Solutionmentioning

confidence: 99%

Time-consistent control in nonlinear models

Ambler

Pelgrin

2010

Journal of Economic Dynamics and Control

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We show how to use optimal control theory to derive optimal time-consistent Markov-perfect government policies in nonlinear dynamic general equilibrium models, extending the result of Cohen and Michel (1988) for models with quadratic objective functions and linear dynamics. We replace private agents' costates by flexible functions of current states in the government's maximization problem. The functions are verified in equilibrium to an arbitrarily close degree of approximation. They can be found numerically by perturbation or projection methods. We use a stochastic model of optimal public spending to illustrate the technique.

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“…We use the same equilibrium concept as Klein, Krusell and Ríos-Rull (2008) and the "government-moves-first" case in Ortigueira (2006).…”

Section: The Time-consistent Optimal Policymentioning

confidence: 99%

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

Novales

Pérez

Andujar

2014

Journal of Macroeconomics

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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. JEL classification: E61, E62, H21

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Time-Consistent Public Policy

Cited by 234 publications

References 37 publications

Taxation without commitment

Taxation without commitment

Time-consistent control in nonlinear models

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

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