Optimal Taxation with Incomplete Markets

Thomas Sargent, Mikhail Golosov, David Evans and Anmol Bhandari
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David Evans: New York University
Anmol Bhandari: New York University

No 1276, 2014 Meeting Papers from Society for Economic Dynamics

Abstract: This paper characterizes tax and debt dynamics in Ramsey plans for incomplete markets economies that generalize an Aiyagari et al. (2002) economy by allowing a single asset traded by the government to be risky. Long run debt and tax dynamics can be attracted not only to the first-best continuation allocations discovered by Aiyagari et al. for quasi-linear preferences, but instead to a continuation allocation associated with a level of (marginal-utility-scaled) government debt that would prevail in a Lucas-Stokey economy that starts from a particular initial level of government debt. The paper formulates, analyzes, and numerically solves Bellman equations for two value functions for a Ramsey planner, one for t ≥ 1, the other for t = 0.

Date: 2014
New Economics Papers: this item is included in nep-dge, nep-mfd, nep-pbe, nep-pub and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed014:1276

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