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The University of Southampton
EconomicsPart of Economic, Social and Political Science

1406 Optimal Fiscal Policy in the Neoclassical Growth Model Revisited (M. Gervais & A. Mennuni)

By : Martin Gervais (University of Iowa) & Alessandro Mennuni
(University of Southampton)

Paper: 1406

This paper studies optimal taxation in a version of the neoclassical growth model in which investment becomes productive within the period, thereby making the supply of capital elastic in the short run. Because taxing capital is distortionary in the short run,the government's ability/desire to raise revenues through capital income taxation in the initial period or when the economy is hit with a bad shock is greatly curtailed. Our timing assumption also leads to a tractable Ramsey problem without state-contingent debt, which can give rise to debt-financed budget deficits during recessions.

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