Optimal fiscal policy in a model with efficiency wages: the case of Bulgaria

Aleksandar Vasilev

International Journal of Social Economics, 2022, vol. 50, issue 2, 195-209

Abstract: Purpose - This paper aims to explore the effects of fiscal policy in an economy with efficiency wages, consumption taxes and a common income tax rate. Design/methodology/approach - A dynamic general-equilibrium model with the government sector is calibrated to Bulgarian data (1999–2018). Two regimes are compared and contrasted – the exogenous (observed) vs optimal policy (Ramsey) case. Findings - The main findings are as follows: (1) The optimal steady-state income tax rate is zero. (2) The benevolent Ramsey planner provides three times lower amount of the utility-enhancing public services. (3) The optimal steady-state consumption tax needed to finance the optimal level of government spending is 18.7%. Originality/value - The focus of the paper is on the relative importance of consumption vs income taxation, as well as on the provision of utility-enhancing public services. Bulgarian economy was chosen as a case study due to its major dependence on consumption taxation as a source of tax revenue. Peer review - The peer review history for this article is available at:https://publons.com/publon/10.1108/IJSE-08-2021-0488.

Keywords: Ramsey policies; Efficiency wages; Unemployment; Bulgaria; E24; E32; J41 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijsepp:ijse-08-2021-0488

DOI: 10.1108/IJSE-08-2021-0488

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