Optimal Policy and (the Lack of) Time Inconsistency: Insights from Simple Models

Marina Azzimonti (), Daniel Sarte () and Jorge Soares ()
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Daniel Sarte: Federal Reserve Bank of Richmond
Jorge Soares: Department of Economics,University of Delaware
Authors registered in the RePEc Author Service: Pierre Daniel Sarte () and Jorge Soares ()

No 06-08, Working Papers from University of Delaware, Department of Economics

Abstract: In the standard neoclassical model with a representative agent, a benevolent planner who can commit to future policies will, if feasible, levy a single confiscatory tax on capital in the initial period and commit never to set positive taxes thereafter. We show that this policy, which allows for the disposal of distortional taxes entirely, can arise even when sequential governments are unable to credibly promise future tax rates, regardless of how public expenditures are determined.

Keywords: Capital Taxation; Ramsey; Commitment; Markov-Perfect equilibrium; Time consistent policy; Overlapping Generations (search for similar items in EconPapers)
JEL-codes: H3 H6 H21 E62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-pbe
Date: 2006
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Persistent link: http://EconPapers.repec.org/RePEc:dlw:wpaper:06-08

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