Time-Consistent Optimal Fiscal Policy

Student: Smirnov Leonid

Educational Programme: Applied Economics (Master)

Year of Graduation: 2017

Current thesis was mainly inspired by the two papers of Jose-Victor Rios-Rull et. al, “Time-Consistent Optimal Fiscal Policy” and “Time-Consistent Public Policy”. We use their setting to study two growth models, the basic one with a simplifying assumption on labour (L = l = 1), and then an extended version with endogenously determined level of labour. For both models we present and explain the framework and derive how the level of steady state capital (and labour for the second model) depends on steady state tax rate. We show the computational algorithm that allows us to solve a dynamic maximization problem using the linear-quadratic optimization to find the policy rule and the steady state tax rate. We proceed to the sensitivity analysis that shows a very strong stability of obtained solution in regard to changes of the structural economic parameters. We conclude with the scope for further research.

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