Optimal Fiscal Policy with Recursive Preferences

Anastasios Karantounias

The Review of Economic Studies, 2018, vol. 85, issue 4, 2283-2317

Abstract: I study the implications of recursive utility, a popular preference specification in macro-finance, for the design of optimal fiscal policy. Standard Ramsey tax-smoothing prescriptions are substantially altered. The planner over-insures by taxing less in bad times and more in good times, mitigating the effects of shocks. At the intertemporal margin, there is a novel incentive for introducing distortions that can lead to an ex-ante capital subsidy. Overall, optimal policy calls for a much stronger use of debt returns as a fiscal absorber, leading to the conclusion that actual fiscal policy is even worse than we thought.

Keywords: Ramsey plan; Tax smoothing; Epstein-Zin; Recursive utility; Excess burden; Labour tax; Capital tax; Martingale; Fiscal insurance (search for similar items in EconPapers)
JEL-codes: D80 E62 H21 H63 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

Downloads: (external link)
http://hdl.handle.net/10.1093/restud/rdy005 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Optimal Fiscal Policy with Recursive Preferences (2013)
Working Paper: Optimal fiscal policy with recursive preferences (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:85:y:2018:i:4:p:2283-2317.

Access Statistics for this article

The Review of Economic Studies is currently edited by Thomas Chaney, Xavier d’Haultfoeuille, Andrea Galeotti, Bård Harstad, Nir Jaimovich, Katrine Loken, Elias Papaioannou, Vincent Sterk and Noam Yuchtman

More articles in The Review of Economic Studies from Review of Economic Studies Ltd
Bibliographic data for series maintained by Oxford University Press ().