The Inconsistency Puzzle Resolved: an Omitted Variable

Nikolay Arefiev

MPRA Paper from University Library of Munich, Germany

Abstract: We find that the contemporary version of the dynamic Ramsey problem omits one important variable that we take into consideration in this paper. The effect of introducing of this variable into the analysis of dynamic inconsistency is similar to that of introducing expected inflation into the Phillips curve: we show that only a policy surprise affects the attainable resource allocation set and the optimal policy. In contrast to Chamley (1986), we show that intensive capital income taxation at the beginning of optimal policy does not imply a lump-sum taxation of household wealth and cannot reduce the excess tax burden. We also demonstrate that the Ramsey policy is dynamically consistent even without commitment. We resolve the Ramsey problem and compare our results to those of Chamley on optimal capital income taxation.

Keywords: Inconsistency; Equilibrium policy; Optimal taxation (search for similar items in EconPapers)
JEL-codes: E61 E62 H21 (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-dge and nep-mac
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https://mpra.ub.uni-muenchen.de/10244/1/MPRA_paper_10244.pdf revised version (application/pdf)

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Working Paper: The Inconsistency Puzzle Resolved: an Omitted Variable (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:9300

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