Optimal Fiscal Policy with Heterogeneous Agents and Capital: Should We Increase or Decrease Public Debt and Capital Taxes?

François Le Grand and Xavier Ragot ()
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François Le Grand: ESSEC Business School
Xavier Ragot: Sciences Po - Sciences Po, OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po

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Abstract: We analyze optimal fiscal policy in a heterogeneous-agent model with capital accumulation and aggregate shocks, where the government uses public debt, a capital tax, and a progressive labor tax to finance public spending. We first study a tractable model and show that the steady-state optimal capital tax can be positive if credit constraints are occasionally binding. However, the existence of such an equilibrium depends on the shape of the utility function. We also characterize the optimal dynamic of public debt after a public spending shock. We confirm these findings by solving for optimal policy in a general heterogeneous-agent model.

Keywords: D31; E44; H21; public debt JEL codes: E21; optimal fiscal policy; Heterogeneous agents; Heterogeneous agents optimal fiscal policy public debt JEL codes: E21 H21 E44 D31 (search for similar items in EconPapers)
Date: 2025-07-01
Note: View the original document on HAL open archive server: https://hal.science/hal-05547657v1
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Published in Journal of Political Economy, 2025, 133 (7), pp.2320-2369. ⟨10.1086/734877⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05547657

DOI: 10.1086/734877

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