Ramsey Tax Competition with Real Exchange Rate Determination

Paul Gomme

No 19004, Working Papers from Concordia University, Department of Economics

Abstract: How should governments choose tax rates when they face competition from other jurisdictions? This questions is answered by solving for the Nash equilibrium of the game played between Ramsey planners in a two good, two country open economy macroeconomic model. It is shown, analytically, that the planers do not tax capital income in the long run. Short term results, obtained computationally, reveal that the government of the larger country manages the path of the real exchange rate in order to manipulates its smaller rival's choice of tax rates. Tax competition does not lead to a "race to the bottom."

Keywords: Optimal fiscal policy; open economy macroeconomics; Ramsey taxation (search for similar items in EconPapers)
JEL-codes: E32 E52 F41 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2019-07-02
New Economics Papers: this item is included in nep-dge, nep-gth, nep-mac, nep-opm and nep-pbe
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Persistent link: https://EconPapers.repec.org/RePEc:crd:wpaper:19004

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