Optimal Taxation in an RBC Model: A Linear-Quadratic Approach

Pierpaolo Benigno and Michael Woodford

No 11029, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We reconsider the optimal taxation of income from labor and capital in the stochastic growth model analyzed by Chari et al. (1994, 1995), but using a linear-quadratic (LQ) approximation to derive a log-linear approximation to the optimal policy rules. The example illustrates how inaccurate "naive" LQ approximation --- in which the quadratic objective is obtained from a simple Taylor expansion of the utility function of the representative household --- can be, but also shows how a correct LQ approximation can be obtained, which will provide a correct local approximation to the optimal policy rules in the case of small enough shocks. We also consider the numerical accuracy of the LQ approximation in the case of shocks of the size assumed in the calibration of Chari et al. We find that the correct LQ approximation yields results that are quite accurate, and similar in most respects to the results obtained by Chari et al. using a more computationally intensive numerical method.

JEL-codes: C63 H21 (search for similar items in EconPapers)
Date: 2005-01
New Economics Papers: this item is included in nep-dge and nep-pub
Note: EFG ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Published as Benigno, Pierpaolo & Woodford, Michael, 2006. "Optimal taxation in an RBC model: A linear-quadratic approach," Journal of Economic Dynamics and Control, Elsevier, vol. 30(9-10), pages 1445-1489.

Downloads: (external link)
http://www.nber.org/papers/w11029.pdf (application/pdf)

Related works:
Journal Article: Optimal taxation in an RBC model: A linear-quadratic approach (2006)
Working Paper: Optimal Taxation in an RBC Model: A Linear-Quadratic Approach (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:11029

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w11029

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().