Template-Type: ReDIF-Paper 1.0
Author-Name: Giorgio Motta
Author-Name-First: Giorgio
Author-Name-Last: Motta
Author-Name: Raffaele Rossi
Author-Name-First: Raffaele
Author-Name-Last: Rossi
Title: Ramsey monetary and fiscal policy: the role of consumption taxation
Abstract: We study Ramsey monetary and fiscal policy in a small scale New Keynesian<br/>model where government spending has intrinsic value, public debt is<br/>state-noncontingent and the fiscal authority is constrained by using<br/>distortive taxation. We show that Ramsey policy is remarkably altered when<br/>consumption taxation is considered as a source of government revenues<br/>alongside or as an alternative to labour income taxes. First, we show that<br/>the optimal steady-state size of the public spending is, ceteris paribus,<br/>greater under consumption taxation than under labour income tax. We further<br/>show that adopting consumption taxation has enormous long run welfare gains<br/>and that these gains are increasing in the level of outstanding public debt.<br/>These welfare gains are not limited to the steady-state, but they are also<br/>present in the dynamic stochastic equilibrium. The reason is that the<br/>dynamic nature of consumption taxation enables the policy-maker to affect<br/>the stochastic discount factor via modifications of the marginal utility of<br/>consumption. This extra wedge impacts on the pricing decisions of firms, and<br/>hence on inflation stabilization, and greatly improves welfare in the<br/>stochastic equilibrium.<br/> <br/>
Creation-Date: 2013
File-URL: http://www.lancaster.ac.uk/media/lancaster-university/content-assets/documents/lums/economics/working-papers/Ramsey_Monetary_and_Fiscal_Policy.pdf
File-Format: application/pdf
Number: 44449031
Classification-JEL: 
Keywords: 
Handle: RePEc:lan:wpaper:44449031