Working Paper: CEPR ID: DP768
Authors: Paul Levine; Joseph Pearlman
Abstract: 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.
Keywords: optimal taxation; solvency; government myopia
JEL Codes: C61; E62; H21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government myopia (H11) | insolvency (G33) |
| high discount rates (E43) | optimal taxation unattainable (H21) |
| debt-to-GDP ratio target (H68) | existence of optimal taxation (H21) |
| higher discount rate (E43) | incompatibility between optimization and solvency (G33) |
| social discount rate (H43) | optimal policies (C61) |
| real interest rate (E43) | optimal policies (C61) |