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Optimal Fiscal Policy with Heterogeneous Agents and Aggregate Shocks

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  • Xavier Ragot

    (Sciencespo)

  • Francois Le Grand

    (EMLyon Business School)

Abstract

We show that allocations in incomplete insurance-market economies can be represented as the solution of the program of a constrained planner. This representation allows for solving Ramsey programs in incomplete-market economies with aggregate shocks. We apply this framework to derive optimal fiscal policy and public debt dynamics in an economy with capital after persistent technology shocks, when the planner can use distorting taxes on capital and labor and positive lump-sum transfers. Average capital taxation is a simple function of the tightness of credit constraints. In a quantitative exercise, it is shown that private savings increase too much after a technology shock, and are absorbed by an increase in public debt and a decrease in capital taxes. Simulations of these optimal solutions can be obtained by simple perturbation methods.

Suggested Citation

  • Xavier Ragot & Francois Le Grand, 2017. "Optimal Fiscal Policy with Heterogeneous Agents and Aggregate Shocks," 2017 Meeting Papers 969, Society for Economic Dynamics.
    • Handle: RePEc:red:sed017:969
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    Cited by:

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    8. Boris Chafwehé & François Courtoy, 2021. "Optimal Taxes and Transfers with Household Heterogeneity," LIDAM Discussion Papers IRES 2021009, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
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    11. Cui, Wei & Sterk, Vincent, 2021. "Quantitative easing with heterogeneous agents," Journal of Monetary Economics, Elsevier, vol. 123(C), pages 68-90.
    12. Yikai Wang & Hans Holter & Marcus Hagedorn, 2015. "The Optimum Quantity of Capital and Debt," 2015 Meeting Papers 1220, Society for Economic Dynamics.
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    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution

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