Implications of uncertainty for optimal policies

Todd Lensman and Maxim Troshkin

Journal of Economic Theory, 2022, vol. 199, issue C

Abstract: We study the implications of ambiguity for optimal fiscal policy in macro public finance environments with heterogeneous agents and private idiosyncratic shocks. We describe conditions under which ambiguity implies that it is optimal to periodically reform policies. Periodic reforms lead to simplified optimal policies that are not fully contingent on future shocks; at times they also lose dependence on the full history of past shocks. These simplified policies can be characterized without complete backward induction when the time horizon is finite. However, linear policies can be far from optimal. We also show that equilibria in decentralized versions of these economies are not generally efficient, implying a meaningful role for government provision of insurance, unlike in conventional environments with a narrower view of uncertainty.

Keywords: Social insurance; Redistribution; Taxation; Reforms; History dependence; Efficiency of competitive equilibria (search for similar items in EconPapers)
JEL-codes: D8 E62 H11 H21 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:199:y:2022:i:c:s0022053121000235

DOI: 10.1016/j.jet.2021.105206

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