Optimal Time-Consistent Fiscal Policy with Uncertain Lifetimes

32 Pages Posted: 22 Jun 2004

See all articles by Guillermo A. Calvo

Guillermo A. Calvo

Columbia University - School of International & Public Affairs (SIPA); National Bureau of Economic Research (NBER)

Maurice Obstfeld

University of California, Berkeley; Peterson Institute for International Economics; National Bureau of Economic Research; Centre for Economic Policy Research

Date Written: March 1985

Abstract

This paper studies optimal fiscal policy in an economy where heterogeneous agents with uncertain lifetimes coexist. We show that some plausible social welfare functions lead to time-inconsistent optimal plans, and we suggest restrictions on social preferences that avoid the problem. The normative prescriptions of a time-consistent utilitarian planner generalize the 'two-part Golden Rule" suggested by Samuelson, and imply aggregate dynamics similar to those arisingin the Cass-Koopmans-Ramsey optimal growth framework. We characterize lump-sum transfer schemes that allow the optimal allocation to be decentralized as the competitive equilibrium of an economy with actuarially fair annuities. The lump-sum transfers that accomplish this decentralization are age dependent in general.

Suggested Citation

Calvo, Guillermo A. and Obstfeld, Maurice, Optimal Time-Consistent Fiscal Policy with Uncertain Lifetimes (March 1985). NBER Working Paper No. w1593. Available at SSRN: https://ssrn.com/abstract=324035

Guillermo A. Calvo (Contact Author)

Columbia University - School of International & Public Affairs (SIPA) ( email )

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National Bureau of Economic Research (NBER) ( email )

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Maurice Obstfeld

University of California, Berkeley ( email )

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Berkeley, CA 94720
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HOME PAGE: http://www.mauriceobstfeld.com

Peterson Institute for International Economics ( email )

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National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research ( email )

London
United Kingdom

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