Time-Consistent Fiscal Policy and Heterogeneous Agents

Roc Armenter ()

Review of Economic Dynamics, 2007, vol. 10, issue 1, pages 31-54

Abstract: This paper characterizes the time-consistency properties of the set of Pareto efficient (or second best) fiscal policies, in a two-class, stochastic economy similar to that in Judd (1985). The key finding is that the continuation of any Pareto efficient policy is always Pareto efficient. Hence, to require any policy revision to be approved by unanimity safeguards the time consistency of efficient fiscal policy. I also show that any Pareto efficient policy from a timeless perspective can be rendered time consistent by a policymaker whose objective function is given by a utilitarian social welfare function with precise welfare weights. These results link the policymaker's equity considerations with the credibility of efficient fiscal policy. (Copyright: Elsevier)

Keywords: Fiscal policy; Time-consistency; Equity considerations (search for similar items in EconPapers)
JEL-codes: E61 E62 (search for similar items in EconPapers)
Date: 2007
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