Intergenerational Allocation of Government Expenditures: Externalities and Optimal Taxation

This paper studies optimal taxation in the context of provision of public goods when benefits are age-dependent. We develop a two period overlapping generations model with endogenous labor supply in both periods. We examine how the optimal Ramsey capital and labor income taxes change when the government fails to choose the optimal public provision for each cohort. The deviations of public expenditure from the optimal level create distortions at the intra and inter temporal margins and taxes are required to correct these distortions. We show that regardless of preferences, the government may choose to tax capital in the long run if spending on each cohort is not optimal. We also show that when sufficient tax instruments are available the Ramsey equilibrium can attain the first-best optimum.

RAMSEY FISCAL AND MONETARY POLICY UNDER STICKY PRICES AND LIQUID BONDS

We construct a monetary model where government bonds also provide liquidity service. Liquid government bonds create an endogenous interest-rate spread; affect equilibrium allocations and inflation by altering the Ramsey planner’s sequence of implementability and sticky-price constraints. The trade-off confronting a planner in a sticky-price world, shown in recent literature, between using inflation surprise and labor-income tax is modified by the existence of the liquid bond. We find that the more sticky prices become, the more the planner stabilizes prices and also creates less distortionary and less volatile income taxes by taxing the liquidity service of bonds in order to replicate ex post real state-contingent debt.

An Incentive Mechanism to Break the Low-skill Immigration Deadlock

Although movements of capital, goods and services are growing in importance, workers movements are impeded by restrictive policies in rich countries. Such regulations carry substantial economic costs for developing countries, and prevent global inequality from declining. Even if rich countries are averse to global inequality, a single country lacks incentives to welcome additional migrants as it would bear the costs alone while the benefits accrue to all rich states. Aversion to global inequality confers a public good nature to the South-North migration of low-skill workers. We propose an alternative allocation of labor maximizing global welfare subject to the constraints that the rich countries are at least as well off as in the current "nationalist" (or "Nashionalist") situation. This "no regret" allocation can be decentralized by a tax-subsidy scheme which makes people internalize the fact that as soon as a rich country welcomes an additional migrant, global inequalities are reduced, and each citizen in the rich world is better off too. Our model is calibrated using statistics on immigration, working-age population and output. We simulate the proposed scheme on different sets of rich countries.Public Good, Inequality Aversion, Immigration policy

Linear-quadratic approximation, external habit and targeting rules

We examine the linear-quadratic (LQ) approximation of non-linear stochastic dynamic optimization problems in macroeconomics, in particular for monetary policy. We make four main contributions: first, we draw attention to a general Hamiltonian framework for LQ approximation due to Magill (1977). We show that the procedure for the ‘large distortions’ case of Benigno and Woodford (2003, 2005) is equivalent to the Hamiltonian approach, but the latter is far easier to implement. Second, we apply the Hamiltonian approach to a Dynamic Stochastic General Equilibrium model with external habit in consumption. Third, we introduce the concept of target-implementability which fits in with the general notion of targeting rules proposed by Svensson (2003, 2005). We derive sufficient conditions for the LQ approximation to have this property in the vicinity of a zero-inflation steady state. Finally, we extend the Hamiltonian approach to a non-cooperative equilibrium in a two-country model. JEL Classification: E52, E37, E58dynamic stochastic general equilibrium models, Linear-quadratic approximation, utility-based loss function

Dynamic Monetary-Fiscal Interactions and the Role of Monetary Conservatism

The present paper reassesses the role of monetary conservatism in a setting with nominal government debt and endogenous fiscal policy. We assume that macroeconomic policies are chosen by monetary and fiscal policy makers who interact repeatedly but cannot commit to future actions. The real level of public liabilities is an endogenous state variable, and policies are chosen in a non-cooperative fashion. We focus on Markovperfect equilibria and investigate the role of fiscal impatience and monetary conservatism as determinants of the economy�s steady state and the associated welfare implications. Fiscal impatience creates a tendency of accumulating debt, and monetary conservatism actually exacerbates such excessive debt accumulation. Increased conservatism implies that any given level of real liabilities can be sustained at a lower rate of inflation. However, since this is internalized by the fiscal authority, the Markov-perfect equilibrium generates a steady state with higher indebtedness. As a result, increased monetary conservatism has adverse welfare implications.

The optimal mix of taxes on money, consumption and income

We determine the optimal combination of taxes on money, consumption and income in transactions technology models where exogenous government expenditures must be financed with distortionary taxes. We show that the optimal policy does not tax money, regardless of whether the government can use as alternative fiscal instruments an income tax, a consumption tax, or the two taxes jointly. These results are at odds with recent literature. We argue that the reason for this divergence is an inappropriate specification of the transactions technology adopted in the literature.Consumption (Economics) ; Income ; Taxation

Stability and Nash implementation in matching markets with couples

We consider two-sided matching markets with couples. First, we extend a result by Klaus and Klijn (2005, Theorem 3.3) and show that for any weakly responsive couples market there always exists a "double stable" matching, i.e., a matching that is stable for the couples market and for any associated singles market. Second, we show that for weakly responsive couples markets the associated stable correspondence is (Maskin) monotonic and Nash implementable. In contrast, the correspondence that assigns all double stable matchings is neither monotonic nor Nash implementable.matching with couples, (Maskin) monotonicity, Nash implementation, stability, weakly responsive preferences