TY - JOUR AU - Benigno,Pierpaolo AU - Woodford,Michael TI - Optimal Taxation in an RBC Model: A Linear-Quadratic Approach JF - National Bureau of Economic Research Working Paper Series VL - No. 11029 PY - 2005 Y2 - January 2005 UR - http://www.nber.org/papers/w11029 L1 - http://www.nber.org/papers/w11029.pdf N1 - Author contact info: Pierpaolo Benigno Dipartimento di Scienze Economiche e Aziendali Luiss Guido Carli Viale Romania 32 00197 Rome - Italy Tel: 39-0685225-552 E-Mail: pbenigno@luiss.it Michael Woodford Department of Economics Columbia University 420 W. 118th Street New York, NY 10027 Tel: 212/854-1094 Fax: 212-854-8059 E-Mail: michael.woodford@columbia.edu AB - We reconsider the optimal taxation of income from labor and capital in the stochastic growth model analyzed by Chari et al. (1994, 1995), but using a linear-quadratic (LQ) approximation to derive a log-linear approximation to the optimal policy rules. The example illustrates how inaccurate "naive" LQ approximation --- in which the quadratic objective is obtained from a simple Taylor expansion of the utility function of the representative household --- can be, but also shows how a correct LQ approximation can be obtained, which will provide a correct local approximation to the optimal policy rules in the case of small enough shocks. We also consider the numerical accuracy of the LQ approximation in the case of shocks of the size assumed in the calibration of Chari et al. We find that the correct LQ approximation yields results that are quite accurate, and similar in most respects to the results obtained by Chari et al. using a more computationally intensive numerical method. ER -