will give a presentation on
Abstract:In this paper, we investigate the properties of optimal fiscal policy when heterogeneity between households is accounted for. The Ramsey planner uses labor taxes and transfers to finance the deficit and redistribute resources between households. We first show that in the long-run steady-state, it is not always optimal for the planner to use lump-sum taxes (negative transfers) to generate fiscal surpluses. Then, we study the cyclical properties of fiscal policy and show that the presence of transfers allows the planner to reduce the volatility of distortionary labor taxes and bring the economy closer to the complete market allocation, and that this policy can be implemented without having much impact on cross-sectional heterogeneity. Finally, we choose the parameters of the model to match moments related to fiscal variables in the US. We show that the presence of household-specific income shocks allows the model to successfully match the key features of the data.
(co-authored with Boris Chafwehé)