Efficient fiscal policy and amplification
By: Mark Aguiar, Manuel Amador, Gita Gopinath.
Contributors: Amador, Manuel.; National Bureau of Economic Research.
Series: NBER working paper series ;; working paper 11490; Working paper series (National Bureau of Economic Research : Online) ;; working paper no. 11490.
Publisher: National Bureau of Economic Research
Published: 2005
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Subjects: Fiscal policy -- Developing countries.; Taxation -- Developing countries.; Business cycles -- Developing countries.
Description: "We provide a rationale for the observed pro-cyclicality of tax policies in emerging markets and present a novel mechanism through which tax policy amplifies the business cycle.  Our explanation relies on two features of emerging markets: limited access to financial markets and limited commitment to tax policy.  We present a small open economy model with capital where a government maximizes the utility of a working population that has no access to financial markets and is subject to endowment shocks.  The government's insurance motive generates pro-cyclical taxes on capital income.  If the government could commit, this policy is not distortionary.  However, we show that if the government lacks the ability to commit, the best fiscal policy available exacerbates the economic cycle by distorting investment during recessions.  We characterize the mechanism through which limited commitment generates cycles in investment in an environment where under commitment investment would be constant.  We extend our results to standard productivity shocks and to the case where the government has access to intra-period insurance markets.  Lastly, we conjecture that our results would hold as well if the government could issue debt subject to borrowing constraints"--National Bureau of Economic Research web site.
Notes: Includes bibliographical references.
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