Optimal Fiscal Policy with Labor Selection

Sanjay Chugh, Wolfgang Lechthaler and Christian Merkl

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)
Pages: 88 pages
Date: 2018-06
New Economics Papers: this item is included in nep-dge, nep-lma and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published - published in: Journal of Economic Dynamics and Control, 2018, 94, 142-189

Downloads: (external link)
https://docs.iza.org/dp11600.pdf (application/pdf)

Related works:
Journal Article: Optimal fiscal policy with labor selection (2018)
Working Paper: Optimal Fiscal Policy with Labor Selection (2018)
Working Paper: Optimal Fiscal Policy with Labor Selection (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:iza:izadps:dp11600

Ordering information: This working paper can be ordered from
IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany

Access Statistics for this paper

More papers in IZA Discussion Papers from Institute of Labor Economics (IZA) IZA, P.O. Box 7240, D-53072 Bonn, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Holger Hinte ().