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http://ssrn.com/abstract=315400
 
 

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Anticipated Ramsey Reforms and the Uniform Taxation Principle: The Role of International Financial Markets


Stephanie Schmitt-Grohe


Duke University - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Martin Uribe


Columbia University - Graduate School of Arts and Sciences - Department of Economics; National Bureau of Economic Research (NBER)

January 2003

ECB Working Paper No. 210

Abstract:     
This paper studies the role of asset-market completeness for the properties of optimal fiscal and monetary policy. A suitable framework for this purpose is the small open economy with complete international asset markets. For changes in policy represent country-specific risk diversifiable in world markets. Our main finding is that the fundamental public finance principle whereby when taxes on all final goods are available, it is optimal to tax final goods uniformly fails to obtain. In general, uniform taxation is optimal because it amounts to a nondistorting tax on fixed factors of production. In the open economy this principle fails because when households can insure against the risk of a policy reform, initial private asset holdings are contingent on expected policy and not an inelastically supplied source of income. Furthermore, we find that the Friedman rule is optimal only if the Ramsey planner has access to consumption taxes.

Number of Pages in PDF File: 63

Keywords: Optimal monetary and fiscal policy, open economies, anticipated Ramsey policy

JEL Classification: F41, E52, E61, E63

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Date posted: February 6, 2003  

Suggested Citation

Schmitt-Grohe, Stephanie and Uribe, Martin, Anticipated Ramsey Reforms and the Uniform Taxation Principle: The Role of International Financial Markets (January 2003). ECB Working Paper No. 210. Available at SSRN: http://ssrn.com/abstract=376240

Contact Information

Stephanie Schmitt-Grohe (Contact Author)
Duke University - Department of Economics ( email )
Durham, NC 27708-0204
United States
919-660-1889 (Phone)
919-684-8974 (Fax)
HOME PAGE: http://www.econ.duke.edu/~grohe
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Martin Uribe
Columbia University - Graduate School of Arts and Sciences - Department of Economics ( email )
420 W. 118th Street
1022 International Affairs Building, MC 3308
New York, NY 10027
United States
212-851-4008 (Phone)
212-854-8059 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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