TY  - JOUR
AU  - Chari,V. V.
AU  - Christiano,Lawrence J.
AU  - Kehoe,Patrick J.
TI  - Optimal Fiscal Policy in a Business Cycle Model
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4490
PY  - 1993
Y2  - October 1993
UR  - http://www.nber.org/papers/w4490
L1  - http://www.nber.org/papers/w4490.pdf
N1  - Author contact info:
Varadarajan V. Chari
Department of Economics
University of Minnesota
1035 Heller Hall
271 - 19th Avenue South
Minneapolis, MN 55455
Tel: 612/626-5171
Fax: (612) 624-0209
E-Mail: varadarajanvchari@gmail.com

Lawrence Christiano
Department of Economics
Northwestern University
2001 Sheridan Road
Evanston, IL 60208
Tel: 847/491-8231
Fax: 847/491-7001
E-Mail: l-christiano@northwestern.edu

Patrick Kehoe
Research Department
Federal Reserve Bank of Minneapolis
90 Hennepin Avenue
Minneapolis, MN  55480-0291
Tel: 612/204-5525
Fax: 612/204-5515
E-Mail: pkehoe@res.mpls.frb.fed.us
AB  - This paper develops the quantitative implications of optimal fiscal policy in a business cycle model.  In a stationary equilibrium the ex ante tax rate on capital income is approximately zero.  There is an equivalence class of ex post capital income tax rates and bond policies that support a given allocation.  Within this class the optimal ex post capital tax rates can range from being close to i.i.d. to being close to a random walk.  The tax rate on labor income fluctuates very little and inherits the persistence properties of the exogenous shocks and thus there is no presumption that optimal labor tax rates follow a random walk.  The welfare gains from smoothing labor tax rates and making ex ante capital income tax rates zero are small and most of the welfare gains come from an initial period of high taxation on capital income.
ER  -