Discussion paper

DP768 Optimal Tax Policy, Government Myopia and Insolvency

This paper explores the relationship between the myopia, the solvency and the reputation of a government choosing the optimal financing policy given a particular path of government spending. A central result is the demonstration of a logical link between government myopia and insolvency in the sense that there is a class of models for which a solution to the optimal taxation problem does not exist. Results are shown analytically for a very simple non-monetary economy, for a seigniorage model examined by Obstfeld and, using simulations, for a more developed non-Ricardian model with capital.

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Citation

Levine, P and J Pearlman (1993), ‘DP768 Optimal Tax Policy, Government Myopia and Insolvency‘, CEPR Discussion Paper No. 768. CEPR Press, Paris & London. https://cepr.org/publications/dp768