The Inconsistency Puzzle Resolved: an Omitted Variable

Arbeitspapier

The contemporary version of the dynamic Ramsey problem omits expectations of a household’s initial lump-sum wealth taxation due to policy revision; therefore, the attainable resource allocation set in this problem is ill-defined. This omission leads to misleading conclusions about the optimal policy in the short run and, in particular, that the Ramsey policy is dynamically inconsistent. The effect of introducing the expectations into the analysis of dynamic inconsistency is similar to that of introducing expected inflation into the Phillips curve: we show that only an unexpected policy surprise affects the attainable resource allocation set and the optimal policy. In contrast to Chamley (1986), we show that intensive capital income taxation at the beginning of an optimal policy does not imply a lump-sum taxation of household wealth and cannot reduce the excess tax burden. We also demonstrate that the Ramsey policy is dynamically consistent even without commitment. We resolve the Ramsey problem and compare our results to those of Chamley on optimal capital income taxation.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: EERI Research Paper Series ; No. 15/2008

Classification and Topics

• Classification: Wirtschaft ; Policy Objectives; Policy Designs and Consistency; Policy Coordination ; Fiscal Policy ; Taxation and Subsidies: Efficiency; Optimal Taxation
• Subject: Consistency ; Equilibrium policy ; Optimal taxation

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Arefiev, Nikolay
• Event: Veröffentlichung
• (who): Economics and Econometrics Research Institute (EERI)
• (where): Brussels
• (when): 2008

Further information

• Handle: http://hdl.handle.net/10419/142526
• Last update: 10.03.2025, 11:43 AM CET