Optimal fiscal policy in a stochastic growth model (Q1207490)

The model is a stochastic version of a one sector neoclassical growth model augmented with a government sector. It is formulated in discrete time with an infinite horizon. The economy has households with preferences, one good with a production technology (a function of capital, labor and a given stochastic process representing the shocks to the production technology), and a government. The economy is decentralized with three perfectly competitive markets, the labor, the capital, and the government bond market. All the results would carry through if one assume that the capital market opens after the shocks are realized but the household's saving decisions have to be made before the shocks are realized. After the description of the model competitive equilibria with labor and capital income taxes are characterized. The indeterminacy of capital income, tax rates, and levels of public debts payments is also discussed. Then the structure of optimal capital and labor income taxation is analyzed. The dynamics of the Ramsey equilibrium in a simple economy is characterized. It follows discussions for the extension of the results and directions for future researches.