15,059 research outputs found
Welfare Effects of Tax Policy in Open Economies: Stabilization and Cooperation.
This paper studies optimal tax policy design problem by employing a two-country dynamic general equilibrium model with incomplete asset markets. We investigate the possibility of welfare-improving active, contingent tax policies (tax rates respond to changes in productivity) on consumption, and capital and labor income taxes. Unlike the conventional wisdom regarding stabilization policies, procyclical factor income tax policy is optimal in open economy. Procyclical tax policy generates efficiency gains by correcting market incompleteness. Optimal tax policy under cooperative equilibrium is similar to that under the Nash equilibrium and welfare gains from tax policy coordination is quite small.optimal tax, procyclical, countercyclical, stabilization, cooperation.
Spurious Welfare Reversals in International Business Cycle Models
Several papers on international business cycles have documented spurious welfare reversals, in that incomplete market economies can produce higher welfare than the complete market economy. This paper demonstrates how conventional linearization, as used in King, Plosser, and Rebelo (1988), can generate approximation errors that are large enough to result in such reversals. Using a two-country production economy without capital, we argue that spurious welfare reversals are not only possible but also plausible under reasonable parameter values. As a constructive alternative, this paper proposes an approximation method that modifies the conventional linearization method by a bias correction---the linear approximation around a 'stochastic' steady state. We show that this method can be easily implemented to accurately approximate the exact solution and therefore produce the correct welfare ordering. The accuracy of the proposed method is far better than that of the conventional linearization method and as good as that of a method involving a second-order expansion.Linearization, Stochastic steady state, Welfare, Risk sharing
Welfare Effects of Tax Policy in Open Economies: Stabilization and Cooperation
This paper studies optimal tax policy problem by employing a two-country dynamic general equilibrium model with incomplete asset markets. We investigate the possibility of welfare-improving active, contingent tax policies (under which tax rates respond to changes in productivity) on capital and labor income and consumption. Unlike the conventional wisdom regarding stabilization policies, procyclical factor-income tax policies in general improves welfare in open economies. Procyclical tax policies generate efficiency gains by correcting asset market incompleteness. Optimal tax policy under cooperative equilibrium is similar to that under the Nash equilibrium, and welfare gains from tax policy coordination is quite smalloptimal tax, procyclical, countercyclical, stabilization, cooperation
International Capital Flows and Boom-Bust Cycles in the Asia Pacific Region
This paper documents evidence of business cycle synchronization in selected Asia Pacific countries in the 1990s. We explain business cycle synchronization by the channel of international capital flows. Using the VAR method, we find that most Asian countries experience boom-bust cycles following capital inflows, where the boom in output is mostly driven by consumption and investment. Empirical evidence shows that capital flows in the region are highly correlated, which supports the conclusion that capital market liberalization has contributed to business cycle synchronization in Asia. We also find that business cycles in the Asian crisis countries are highly synchronized with those in Japan.business cycle synchronization, capital flows, boom-bust cycles, financial integration
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