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Fiscal policy under loose commitment

Debortoli, D and Praca Cavaco Nunes, Ricardo (2010) Fiscal policy under loose commitment Journal of Economic Theory, 145 (3). pp. 1005-1032.

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Due to time-inconsistency or political turnover, policymakers' promises are not always fulfilled. We analyze an optimal fiscal policy problem where the plans made by the benevolent government are periodically revised. In this loose commitment setting, the properties of labor and capital income taxes are significantly different than under the full-commitment and no-commitment assumptions. Because of the occasional reoptimizations, the average capital income tax is positive even in the long-run. Also, the autocorrelation of taxes is lower, their volatility with respect to output increases and the correlation between capital income taxes and output changes sign. Our method can be used to analyze the plausibility and the importance of commitment in a wide-class of dynamic problems.

Item Type: Article
Divisions : Faculty of Arts and Social Sciences > School of Economics
Authors :
Debortoli, D
Praca Cavaco Nunes,
Date : 2010
Copyright Disclaimer : Copyright 2010. Published by Elsevier.
Uncontrolled Keywords : Commitment; No-commitment; Fiscal policy
Depositing User : Melanie Hughes
Date Deposited : 10 Oct 2017 17:30
Last Modified : 16 Jan 2019 18:57

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