Optimal Fiscal Policy with Labor Selection

Sanjay Chugh, Wolfgang Lechthaler and Christian Merkl

No 7120, CESifo Working Paper Series from CESifo

Abstract: This paper characterizes long-run and short-run optimal fiscal policy in the labor selection framework. In a calibrated non-Ramsey decentralized equilibrium, labor market volatility is inefficient. Keeping fixed the structural parameters, the Ramsey government achieves efficient labor market volatility; doing so requires labor-income tax volatility that is orders of magnitude larger than the “tax-smoothing” results based on Walrasian labor markets, but a few times smaller than the results based on search and matching markets. We analytically characterize selection-model-consistent wedges and inefficiencies in order to understand optimal tax volatility.

Keywords: labor market frictions; hiring costs; efficiency; optimal taxation; labor wedge; zero intertemporal distortions (search for similar items in EconPapers)
JEL-codes: E24 E32 E50 E62 E63 J20 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Optimal fiscal policy with labor selection (2018)
Working Paper: Optimal Fiscal Policy with Labor Selection (2018)
Working Paper: Optimal Fiscal Policy with Labor Selection (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_7120

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