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)
New Economics Papers: this item is included in nep-dge and nep-pub
Date: 2005-01
Note: EFG ME
View list of references View citations in EconPapers

Downloads: (external link)
http://www.nber.org/papers/w11029.pdf (application/pdf)
Access to the full text is generally limited to series subscribers, however if the top level domain of the client browser is in a developing country or transition economy free access is provided. More information about subscriptions and free access is available at http://www.nber.org/wwphelp.html.

Related works:
Working Paper: Optimal Taxation in an RBC Model: A Linear-Quadratic Approach (2004)
Working Paper: Optimal taxation in an RBC model: A linear-quadratic approach (2004)
Journal Article: Optimal taxation in an RBC model: A linear-quadratic approach (2006)
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: http://EconPapers.repec.org/RePEc:nbr:nberwo:11029

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w11029
The price is Paper copy available by mail.

Access Statistics for this paper

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