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Optimal Ramsey taxation with endogenous risk aversion

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  • Ateşağaoğlu, Orhan Erem
  • Torul, Orhan

Abstract

In this paper, we study optimal Ramsey taxation under endogenous risk aversion formulation in an otherwise standard real business cycle economy. We show that when the risk aversion coefficient co-moves counter-cyclically, the canonical Chamley–Judd (Chamley, 1986; Judd, 1985) result does not hold true, and the Ramsey planner chooses a positive capital income tax rate in the long run. We report that result is due to additional wedges both in the intratemporal and the intertemporal optimality condition of the representative household.

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  • Ateşağaoğlu, Orhan Erem & Torul, Orhan, 2018. "Optimal Ramsey taxation with endogenous risk aversion," Economics Letters, Elsevier, vol. 171(C), pages 87-92.
    • Handle: RePEc:eee:ecolet:v:171:y:2018:i:c:p:87-92
    DOI: 10.1016/j.econlet.2018.07.005
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    Cited by:

    1. Matsue, Toyoki, 2020. "The impact of short-term employment contracts on employment volatility and economic fluctuations," MPRA Paper 102731, University Library of Munich, Germany.

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    More about this item

    Keywords

    Real business cycle model; Time-varying risk preferences; Optimal tax policy;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy

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