Optimal Fiscal Policy with Recursive Preferences
Anastasios Karantounias ()
Review of Economic Studies, 2018, vol. 85, issue 4, 2283-2317
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)
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Working Paper: Optimal Fiscal Policy with Recursive Preferences (2018)
Working Paper: Optimal fiscal policy with recursive preferences (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:85:y:2018:i:4:p:2283-2317.
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