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Optimal Fiscal Policy with Labor Selection

Sanjay K. Chugh (), Wolfgang Lechthaler and Christian Merkl ()
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Sanjay K. Chugh: Boston College

No 11600, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper characterizes long-run and short-run optimal fiscal policy in the labor selection framework. In a calibrated non-Ramsey decentralized equilibrium, labor market volatility is inefficient. Keeping fixed the structural parameters, the Ramsey government achieves efficient labor market volatility; doing so requires labor-income tax volatility that is orders of magnitude larger than the "tax-smoothing" results based on Walrasian labor markets, but a few times smaller than the results based on search and matching markets. We analytically characterize selection-model-consistent wedges and inefficiencies in order to understand optimal tax volatility.

Keywords: labor market frictions; hiring costs; efficiency; optimal taxation; labor wedge; zero intertemporal distortions (search for similar items in EconPapers)
JEL-codes: E24 E32 E50 E62 E63 J20 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-lma and nep-mac
Date: 2018-06
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Published in: Journal of Economic Dynamics and Control, 2018, 94, 142-189

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Related works:
Journal Article: Optimal fiscal policy with labor selection (2018) Downloads
Working Paper: Optimal Fiscal Policy with Labor Selection (2018) Downloads
Working Paper: Optimal fiscal policy with labor selection (2016) Downloads
Working Paper: Optimal Fiscal Policy with Labor Selection (2015) Downloads
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