Balanced budget vs. Tax smoothing in a small open economy: A welfare comparison

Constantine Angyridis

Journal of Macroeconomics, 2009, vol. 31, issue 3, 438-463

Abstract: The objective of this paper is to investigate the effect of lending and borrowing constraints on the dynamics of public debt and optimal taxation policy in the context of a general equilibrium model with tax smoothing. The results from the numerical simulation of the model show significant welfare gains, provided that the policymaker is allowed to borrow and lend in order to smooth taxes across time instead of maintaining a balanced budget at all times. Moreover, for a specific process for asset prices, it is also shown that if the government can issue state-contingent debt then overall welfare can be further improved substantially.

Keywords: Balanced; budget; Complete; markets; Incomplete; markets; Welfare; analysis (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:31:y:2009:i:3:p:438-463

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