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Optimal taxation without state-contingent debt

Albert Marcet (), Thomas Sargent () and Juha Seppala ()

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: To recover a version of Barro's (1979) `random walk' tax smoothing outcome, we modify Lucas and Stokey's (1983) economy to permit only risk--free debt. This imparts near unit root like behavior to government debt, independently of the government expenditure process, a realistic outcome in the spirit of Barro's. We show how the risk--free--debt--only economy confronts the Ramsey planner with additional constraints on equilibrium allocations that take the form of a sequence of measurability conditions. We solve the Ramsey problem by formulating it in terms of a Lagrangian, and applying a Parameterized Expectations Algorithm to the associated first--order conditions. The first--order conditions and numerical impulse response functions partially affirm Barro's random walk outcome. Though the behaviors of tax rates, government surpluses, and government debts differ, allocations are very close for computed Ramsey policies across incomplete and complete markets economies.

Keywords: Optimal taxation; incomplete markets; recursive contracts; tax smoothing; parameterized expectations (search for similar items in EconPapers)
JEL-codes: E62 E17 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-env, nep-pbe and nep-pub
Date: 1996-04, Revised 2001-10
References: View references in EconPapers View complete reference list from CitEc
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Journal Article: Optimal Taxation without State-Contingent Debt (2002) Downloads
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