Optimal Fiscal Policy with Labor Selection

Autoren

• Chugh
• S.K.
• Lechthaler
• W.
• Merkl
• C.

Erscheinungsdatum

JEL Classification

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This paper characterizes long-run and short-run optimal fiscal policy in the labor selection framework. In a calibrated non-Ramsey decentralized equilibrium, labor market volatility is inefficient. Keeping fixed the structural parameters, the Ramsey government achieves efficient labor market volatility; doing so requires labor-income tax volatility that is orders of magnitude larger than the tax-smoothing results based on Walrasian labor markets, but a few times smaller than the results based on search and matching markets. We analytically characterize selection-modelconsistent wedges and inefficiencies in order to understand optimal tax volatility.