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

63 Pages Posted: 6 Feb 2003  

Stephanie Schmitt-Grohé

Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Martín Uribe

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

Multiple version iconThere are 3 versions of this paper

Date Written: January 2003

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.

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

JEL Classification: F41, E52, E61, E63

Suggested Citation

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

Stephanie Schmitt-Grohe (Contact Author)

Centre for Economic Policy Research (CEPR) ( email )

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Martin Uribe

Columbia University - Graduate School of Arts and Sciences - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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