Journal Article

Optimal Fiscal Policy with Labor Selection

Journal of Economic Dynamics and Control, 2018 (94): 142-189

This paper characterizes long-run and short-run optimal fiscal policy in the labor selection framework. In a calibrated non-Ramsey decentralized equilibrium, labor market volatility is inefficient. Keeping fixed the structural parameters, the Ramsey government achieves efficient labor market volatility; doing so requires labor-income tax volatility that is orders of magnitude larger than the tax-smoothing results based on Walrasian labor markets, but a few times smaller than the results based on search and matching markets. We analytically characterize selection-modelconsistent wedges and inefficiencies in order to understand optimal tax volatility.


Sanjay K. Chugh
Wolfgang Lechthaler - Kiel Institute
Wolfgang Lechthaler
Christian Merkl