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Time-consistent public policy

Klein, Paul, Krusell, Per and Rios-Rull, Jose-Victor (2008) Time-consistent public policy The Review of Economic Studies, 75, (3), pp. 789-808. (doi:10.1111/j.1467-937X.2008.00491.x).

Record type: Article

Abstract

In this paper we study how a benevolent government that cannot commit to future policy should trade off the costs and benefits of public expenditure. We characterize and solve for Markov-perfect equilibria of the dynamic game between successive governments. The characterization consists of an inter-temporal first-order condition (a “generalized Euler equation”) for the government, and we use it both to gain insight into the nature of the equilibrium and as a basis for computations. For a calibrated economy, we find that when the only tax base available to the government is capital income—an inelastic source of funds at any point in time—the government still refrains from taxing at confiscatory rates. We also find that when the only tax base is labour income the Markov equilibrium features less public expenditure and lower tax rates than the Ramsey equilibrium.

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Published date: July 2008
Organisations: Economics

Identifiers

Local EPrints ID: 174067
URI: http://eprints.soton.ac.uk/id/eprint/174067
ISSN: 0034-6527
PURE UUID: d8184104-d29e-4682-a604-404542ccffcf

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Date deposited: 10 Feb 2011 11:13
Last modified: 18 Jul 2017 12:12

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Contributors

Author: Paul Klein
Author: Per Krusell
Author: Jose-Victor Rios-Rull

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