Optimal Government Policies in Models with Heterogeneous Agents

CERGE-EI Working Paper No. 272

60 Pages Posted: 8 Feb 2006

See all articles by Radim Bohacek

Radim Bohacek

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

Michal Kejak

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

Date Written: September 2005

Abstract

In this paper we develop a new methodology for finding optimal government policies in economies with heterogeneous agents. The methodology is solely based on three classes of equilibrium conditions from the government's and individual agent's optimization problems: 1) the first order conditions; 2) the stationarity condition on the distribution function; and, 3) the aggregate market clearing conditions. These conditions form a system of functional equations which we solve numerically. The solution takes into account simultaneously the effect of government policy on individual allocations and (from the government's point of view) optimal distribution of agents in the steady state. This general methodology is applicable to a wide range of optimal government policies in models with heterogeneous agents. We illustrate it on a steady state Ramsey problem with heterogeneous agents, finding the optimal tax schedule.

Keywords: Optimal macroeconomic policy, optimal taxation, computational techniques, heterogeneous agents, distribution of wealth and income.

JEL Classification: C61, C68, D30, D58

Suggested Citation

Bohacek, Radim and Kejak, Michal, Optimal Government Policies in Models with Heterogeneous Agents (September 2005). CERGE-EI Working Paper No. 272 , Available at SSRN: https://ssrn.com/abstract=881740 or http://dx.doi.org/10.2139/ssrn.881740

Radim Bohacek (Contact Author)

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute) ( email )

P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic

HOME PAGE: http://www.cerge-ei.cz

Michal Kejak

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute) ( email )

Politickych veznu 7
Prague 1, 111 21
Czech Republic

HOME PAGE: http://www.cerge-ei.cz

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