New Dynamic Public Finance

Preface ix Chapter 1: Introduction 1 1.1 Scope 4 1.2 Lessons 5 1.3 Structure 9 References 11 Chapter 2: The Ramsey Approach and Its Problems 13 2.1 A Simple Model of Government Finance 14 2.2 The Dynamic Ramsey Taxation Problem: Setup 16 2.3 The Dynamic Ramsey Taxation Problem: Solution 19 2.4 Problems with the Ramsey Approach 24 2.5 Summary 28 2.6 Technical Notes 28 References 33 Chapter 3: Basics of Dynamic Social Contracting 34 3.1 Class of Environments 35 3.2 Incentive-Compatibility 39 3.3 Remarks on Incentive-Compatibility 42 3.4 Pareto Optimal Allocations 45 3.5 The Reciprocal Euler Equation 47 3.6 Dynamics of Pareto Optimal Consumption 58 3.7 Long-Run Properties of Pareto Optima 61 3.8 Summary 69 3.9 Technical Notes 71 References 79 Chapter 4: Dynamic Optimal Taxation: Lessons for Macroeconomists 81 4.1 A Nonlinear Tax Problem 82 4.2 Any Tax Equilibrium Is Incentive-Compatible 87 4.3 Building an Optimal Tax System 89 4.4 Properties of the Optimal Tax System 112 4.5 Remarks about the Optimal System 125 4.6 Summary 130 4.7 Technical Notes 131 References 137 Chapter 5: Optimal Intergenerational Taxation 140 5.1 An Intergenerational Tax Problem 141 5.2 Another Reciprocal Euler Equation 150 5.3 Properties of Socially Optimal Allocations 154 5.4 Optimal Bequest Taxation 159 5.5 Summary 164 5.6 Technical Notes 165 References 167 Chapter 6: Quantitative Analysis: Methods and Results 168 6.1 Immortal Agents in an Open Economy 169 6.2 A Closed Overlapping Generations Economy 184 6.3 Summary 198 References 199 Chapter 7: The Way Forward 201 7.1 More Widely Applicable Tax Systems 201 7.2 New Solution Methods 204 7.3 Inputs from the Data 208 7.4 Summary 210 7.5 Technical Notes 211 References 213 Index 215

Narayana R. Kocherlakota is professor of economics at the University of Minnesota.

"This is the first major overview of the new dynamic public finance, and the first summary of the subject that can be used as a graduate textbook or research reference. The book covers all the main areas of the literature, from theoretical developments to numerical implementations and practical applications. It should be a required text for any student who takes an advanced public finance course."--Mikhail Golosov, Yale University