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Optimal Fiscal Policy with Heterogeneous Agents and Aggregate Shocks

Xavier Ragot () and Francois Le Grand
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Francois Le Grand: EMLyon Business School

No 969, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: We show that allocations in incomplete insurance-market economies can be represented as the solution of the program of a constrained planner. This representation allows for solving Ramsey programs in incomplete-market economies with aggregate shocks. We apply this framework to derive optimal fiscal policy and public debt dynamics in an economy with capital after persistent technology shocks, when the planner can use distorting taxes on capital and labor and positive lump-sum transfers. Average capital taxation is a simple function of the tightness of credit constraints. In a quantitative exercise, it is shown that private savings increase too much after a technology shock, and are absorbed by an increase in public debt and a decrease in capital taxes. Simulations of these optimal solutions can be obtained by simple perturbation methods.

New Economics Papers: this item is included in nep-dge and nep-mac
Date: 2017
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Related works:
Working Paper: Optimal Fiscal Policy with Heterogeneous Agents and Aggregate Shocks (2017) Downloads
Working Paper: Optimal Fiscal Policy with Heterogeneous Agents and Aggregate Shocks (2017) Downloads
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