Optimal Fiscal Policy with Recursive Preferences

• Autores: Anastasios G. Karantounias
• Localización: Review of economic studies, ISSN 0034-6527, Vol. 85, Nº 4, 2018, págs. 2283-2317
• Idioma: inglés
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• Resumen

  • I study the implications of recursive utility, a popular preference specification in macro-finance, for the design of optimal fiscal policy. Standard Ramsey tax-smoothing prescriptions are substantially altered. The planner over-insures by taxing less in bad times and more in good times, mitigating the effects of shocks. At the intertemporal margin, there is a novel incentive for introducing distortions that can lead to an ex-ante capital subsidy. Overall, optimal policy calls for a much stronger use of debt returns as a fiscal absorber, leading to the conclusion that actual fiscal policy is even worse than we thought.