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Optimal Fiscal Policy with Recursive Preferences

Anastasios Karantounias ()

No 2013-07, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta

Abstract: I study the implications of recursive utility, a popular preference specification in macrofinance, for the design of optimal fiscal policy. Standard Ramsey tax-smoothing prescriptions are substantially altered. The planner overinsures 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; labor tax; capital tax; martingale; fiscal insurance (search for similar items in EconPapers)
JEL-codes: D80 E62 H21 H63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-pbe and nep-upt
Date: 2013-09-01, Revised 2018-01-01
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Related works:
Journal Article: Optimal Fiscal Policy with Recursive Preferences (2018) Downloads
Working Paper: Optimal fiscal policy with recursive preferences (2012) Downloads
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