DP768 | Optimal Tax Policy, Government Myopia and Insolvency

Publication Date

31/05/1993

JEL Code(s)

Keyword(s)

Programme Area(s)

Network(s)

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.