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Optimal fiscal policy in a model with efficiency wages: the case of Bulgaria

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  • Vasilev, Aleksandar

Abstract

Purpose: This paper aims to explore the effects of fiscal policy in an economy with efficiency wages, consumption taxes and a common income tax rate. Design/methodology/approach: A dynamic general-equilibrium model with the government sector is calibrated to Bulgarian data (1999–2018). Two regimes are compared and contrasted – the exogenous (observed) vs optimal policy (Ramsey) case. Findings: The main findings are as follows: (1) The optimal steady-state income tax rate is zero. (2) The benevolent Ramsey planner provides three times lower amount of the utility-enhancing public services. (3) The optimal steady-state consumption tax needed to finance the optimal level of government spending is 18.7%. Originality/value: The focus of the paper is on the relative importance of consumption vs income taxation, as well as on the provision of utility-enhancing public services. Bulgarian economy was chosen as a case study due to its major dependence on consumption taxation as a source of tax revenue. Peer review: The peer review history for this article is available at: https://publons.com/publon/10.1108/IJSE-08-2021-0488 .

Suggested Citation

  • Vasilev, Aleksandar, 2022. "Optimal fiscal policy in a model with efficiency wages: the case of Bulgaria," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 0.
    • Handle: RePEc:zbw:espost:264599
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    References listed on IDEAS

    as
    1. Vasilev Aleksandar, 2018. "Optimal Fiscal Policy with Utility-Enhancing Government Spending, Consumption Taxation and a Common Income Tax Rate: The Case of Bulgaria," Review of Economics, De Gruyter, vol. 69(1), pages 43-58, April.
    2. Aleksandar Vasilev & Hristina Manolova, 2019. "Wage Dynamics and Bulgaria Co-Movement and Causality," South-Eastern Europe Journal of Economics, Association of Economic Universities of South and Eastern Europe and the Black Sea Region, vol. 17(1), pages 91-127.
    3. Iván Werning, 2007. "Optimal Fiscal Policy with Redistribution," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 122(3), pages 925-967.
    4. Vasilev, Aleksandar, 2016. "A Real-Business-Cycle model with efficiency wages and fiscal policy: the case of Bulgaria," EconStor Preprints 148413, ZBW - Leibniz Information Centre for Economics.
    5. Vasilev, Aleksandar, 2009. "Business cycles in Bulgaria and the Baltic countries: an RBC approach," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 1(2), pages 148-170.
    6. Solow, Robert M., 1979. "Another possible source of wage stickiness," Journal of Macroeconomics, Elsevier, vol. 1(1), pages 79-82.
    7. Michelle Alexopoulos, 2003. "Growth and unemployment in a shirking efficiency wage model," Canadian Journal of Economics, Canadian Economics Association, vol. 36(3), pages 728-746, August.
    8. Aleksandar Vasilev, 2019. "Optimal fiscal policy with environmental tax and pollution abatement spending in a model with utility-enhancing environmental quality: lessons from Bulgaria," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 12(1), pages 24-35, January.
    9. Schmitt-Grohe, Stephanie & Uribe, Martin, 2007. "Optimal simple and implementable monetary and fiscal rules," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1702-1725, September.
    10. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
    11. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 3-16, January.
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    More about this item

    Keywords

    Ramsey policies; Efficiency wages; Unemployment; Bulgaria;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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