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Optimal Fiscal Policy with Heterogeneous Agents and Aggregate Shocks

François Le Grand and Xavier Ragot ()
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François Le Grand: EMLYON Business School

No 2017-03, Sciences Po Economics Discussion Papers from Sciences Po Departement of Economics

Abstract: We provide a theory of truncation for incomplete insurance-market economies with aggregate shocks, which is shown to be a consistent representation of standard incomplete-market economies. This representation allows deriving optimal policies with capital and aggregate shock. We apply this framework to an economy where the government can use capital and labor taxes, positive transfers and public debt to smooth aggregate shocks. The average capital tax is shown to be positive if and only if credit constraints are binding for some households. In a quantitative exercise, the capital tax appears to be more volatile than the labor tax and public debt is countercyclical and mean-reverting.

Keywords: Incomplete markets; Optimal policy; Public debt (search for similar items in EconPapers)
JEL-codes: E21 E44 D91 D31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2017-07
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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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