Ramsey-optimal Tax Reforms and Real Exchange Rate Dynamics

Stéphane Auray, Aurélien Eyquem and Paul Gomme

No 2017-62, Working Papers from Center for Research in Economics and Statistics

Abstract: We solve for the Ramsey-optimal path for government debt, labor income taxes and capital income taxes for a small open economy with an endogenously-determined real exchange rate. Due to the endogenous exchange rate, the model must be solved using the ‘primal problem’: maximize the lifetime utility of the representative household subject to equilibrium conditions and the government budget constraint. The open economy constrains the government’s setting of the capital income tax rate since physical capital cannot be dominated in rate of return by foreign assets. However, the endogenous real exchange rate loosens this constraint relative to a one good open economy model in which the real exchange rate is necessarily fixed.

Keywords: optimal fiscal policy; tax reforms; welfare (search for similar items in EconPapers)
JEL-codes: E32 E52 F41 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2017-12-01
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Related works:
Journal Article: Ramsey-optimal tax reforms and real exchange rate dynamics (2018)
Working Paper: Ramsey-optimal Tax Reforms and Real Exchange Rate Dynamics (2018)
Working Paper: Ramsey-optimal tax reforms and real exchange rate dynamics (2018)
Working Paper: Ramsey-optimal Tax Reforms and Real Exchange Rate Dynamics (2017)
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