Working Paper: NBER ID: w1593
Authors: Guillermo A. Calvo; Maurice Obstfeld
Abstract: This paper studies optimal fiscal policy in an economy where heterogeneous agents with uncertain lifetimes coexist. We show that some plausible social welfare functions lead to time-inconsistent optimal plans, and we suggest restrictions on social preferences that avoid the problem. The normative prescriptions of a time-consistent utilitarian planner generalize the 'two-part Golden Rule" suggested by Samuelson, and imply aggregate dynamics similar to those arisingin the Cass-Koopmans-Ramsey optimal growth framework. We characterize lump-sum transfer schemes that allow the optimal allocation to be decentralized as the competitive equilibrium of an economy with actuarially fair annuities. The lump-sum transfers that accomplish this decentralization are age dependent in general.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| optimal fiscal policy in the context of uncertain lifetimes (D15) | time-inconsistent plans (D15) |
| time-consistent utilitarian planner (D15) | optimal allocation can be decentralized (D61) |
| lump-sum transfers that are age-dependent (J26) | optimal allocation (D61) |
| planner's decisions (R58) | welfare of current and future generations (I31) |
| social welfare function chosen (D69) | planner's decisions (R58) |
| first-best fiscal policy tools unavailable (E62) | aggregate fiscal policies fail to achieve optimal allocation (E62) |
| planner's choices (R58) | intertemporal resource allocation (D15) |
| intertemporal resource allocation (D15) | dynamics similar to Cass-Koopmans-Ramsey optimal growth framework (C61) |
| appropriate fiscal policies (O23) | optimal allocation realized as equilibrium of competitive economy with actuarially fair annuities (D51) |