Catching with the Keynesians

Lars Ljungqvist and Harald Uhlig ()

No WP-96-15, Working Paper Series, Macroeconomic Issues from Federal Reserve Bank of Chicago

Abstract: This paper examines the role for tax policies in productivity-shock driven economies with \"catching-up-with-the-Joneses\" utility functions. The optimal tax policy is shown to affect the economy counter-cyclically via procyclical taxes, i.e., \"cooling down\" the economy with higher taxes when it is \"overheating\" in booms and \"stimulating\" the economy with lower taxes in recessions to keep consumption up. Thus, models with catching-up-with-the-Joneses utility functions call for traditional Keynesian demand management policies. Parameter values from Campbell and Cochrane (1995) are also used to illustrate that the necessary labor taxes can be very high, in the order of 50 percent. However, Campbell and Cochrane's nonlinear version of the aspiration level in the catching-up-with-the-Joneses preferences has the additional implication that consumption bunching can be welfare enhancing.

Keywords: Keynesian economics; Labor productivity; Taxation (search for similar items in EconPapers)
Date: 1996
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Related works:
Working Paper: Catching up with the Keynesians (1998)
Working Paper: Catching up with the Keynesians (1996)
Working Paper: Catching up with the Keynesians (1996)
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