A model is presented which is derived from some observations of Keynes on the nature of capital. The allocation of investment is analyzed in two economies with random demand shocks which are identical except for the types of markets. In the first, the combination of an asset and forward markets realizes the complete set of markets. In the second, the forward markets are replaced by spot markets. Consumers and entrepreneurs are rational and markets clear. A clear definition of the paradox of thrift is proposed and its existence is proven. The substitution of spot markets for forward markets generates fluctuations of the aggregate variables. The equilibrium with fluctuations is not always a constrained Pareto optimum.
The optimal capital income tax is analyzed in the framework of intertemporal efficient taxation. The relation between the zero tax in the long-run and the equality between private and social discount rates is emphasized. The properties of the dynamic second best path described for a specific example (convergence to a steady state and values of the capital income tax in the transition). The case where wealth is a specific utility argument is also considered.
When government liabilities (including money) are held in private portfolios only as stores of value, and do not provide additional benefits (as liquidity services), the real variables in an economy with uncertainty are not affected by the government’s trading in assets. There are also policies which alter the money supply through taxes or subsidies, and affect the price of money without changing real variables.
The optimal inflation rate is analyzed in a simple model of intertemporal general equilibrium where agents have an operative bequest motive and taxation is distortionary. Monetary balances are used as a productive input, and agents have perfect foresight. The optimal value of the permanent inflation rate can be approximated by a simple formula.
The case in which the growth of aggregate income exceeds the social discount rate is unlikely to be important, and the optimal value of the permanent inflation rate depends on the existence of a short-run trade-off between unemployment and inflation.
We present a method to analyze the welfare cost of price distortions created by taxes on the incomes of capital and labor and on consumption in an intertemporal model of general equilibrium. This efficiency cost depends in an important way on the production technology. It is not very sensitive to the ratio between the tax rates on capital and labor respectively, when the elasticity of substitution between these factors is small. Our method allows us to determine under the assumptions of the model, the optimal combination of taxes on capital and labor income respectively. The consumption tax is more efficient than the labor income tax.
The optimal taxation problem is analyzed in a general equilibrium model of optimal growth. The private sector is represented by a single competitive household endowed with perfect foresight, and an infinite life. This household maximizes an intertemporal stationary utility function. Public consumption is financed by taxes on consumption, labor income and capital income (or wealth), or by borrowing. Different policies (first-best and second-best), are analyzed for various subsets of instruments. The problem of the optimal level of the public debt is also considered. The general conclusion supports the relative efficiency of the consumption tax with respect to the other instruments.