Three essays in macroeconomics

Chapter 1 analyzes the theoretical and quantitative implications of optimal fiscal policy in a business cycle model with incomplete markets. I first consider the problem of a government facing expenditure shocks in an economy where the only asset is a real risk-free bond. The model features a representative-agent economy with proportional taxes on labor and capital. Taxes on capital must be set one period in advance, reflecting inertia in tax codes. This rules out replication of the complete markets allocation. In the model, capital taxation and capital ownership provide a state contingent source of revenues - creating a new potential role for capital taxation and ownership as risk sharing instruments between the government and private agents. For a baseline case, I show that the optimal policy features a zero tax on capital. Numerical simulations show that the baseline case provides an excellent benchmark: the average tax on capital, while not theoretically zero, turns out to be small. The volatility of capital taxes decreases sharply as the period length is increased. I then allow the government to hold a non trivial position in capital. Capital ownership allows the government to realize about 90% of the welfare gains from moving to complete markets.

Department dc:contributor.department

Massachusetts Institute of Technology. Dept. of Economics.

Grantor dc:publisher

Massachusetts Institute of Technology

Year dc:date.issued

2006

Author dc:creator

• Farhi, Emmanuel

Advisor dc:contributor.advisor

• Ricardo Caballero and Iván Werning.

• Economics.

Statement dc:rights

• M.I.T. theses are protected by copyright. They may be viewed from this source for any purpose, but reproduction or distribution in any format is prohibited without written permission. See provided URL for inquiries about permission.

Licence dc:rights.uri

• http://dspace.mit.edu/handle/1721.1/7582

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/1721.1/37412

OAI identifier oai:identifier

oai:dspace.mit.edu:1721.1/37412