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Optimal fiscal policy with labor selection

Sanjay K. Chugh, Wolfgang Lechthaler and Christian Merkl ()

Journal of Economic Dynamics and Control, 2018, vol. 94, issue C, 142-189

Abstract: This paper characterizes long-run and short-run optimal fiscal policy in the labor selection framework. In a calibrated non-Ramsey decentralized equilibrium, labor market volatility is inefficient. Keeping fixed the structural parameters, the Ramsey government achieves efficient labor market volatility; doing so requires labor-income tax volatility that is orders of magnitude larger than the “tax-smoothing” results based on Walrasian labor markets, but a few times smaller than the results based on search and matching markets. We analytically characterize selection-model-consistent wedges and inefficiencies in order to understand optimal tax volatility.

Keywords: Labor market frictions; Hiring costs; Efficiency; Optimal taxation; Labor wedge; Zero intertemporal distortions (search for similar items in EconPapers)
JEL-codes: E24 E32 E50 E62 E63 J20 (search for similar items in EconPapers)
Date: 2018
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Working Paper: Optimal Fiscal Policy with Labor Selection (2018) Downloads
Working Paper: Optimal Fiscal Policy with Labor Selection (2018) Downloads
Working Paper: Optimal fiscal policy with labor selection (2016) Downloads
Working Paper: Optimal Fiscal Policy with Labor Selection (2015) Downloads
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