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| Author: | Aiyagari, S.R. Marcet, A. Sargent, T.J. Seppälä, J. |
| Title: | Optimal taxation without state-contingent debt |
| Journal: | Journal of Political Economy
2002 : DEC, VOL. 110:6, p. 1220-1254 |
| Index terms: | PUBLIC EXPENDITURE Taxation Debt Political economy Models |
| Language: | eng |
| Abstract: | In an economy studied by Lucas and Stokey, tax rates inherit the serial correlation structure of government expenditures, belying Barros earlier result that taxes should be a random walk for any stochastic process of government expenditures. To recover a version of Barros random walk tax-smoothing outcome, we modify Lucas and Stokeys economy to permit only risk-free debt. The paper shows that without ad hoc limits on the governments asset holdings, outcomes can diverge in important ways from Barros. |
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