Tax Policy and Aggregate Demand Management under Catching up with the Joneses

This paper examines the role for tax policies in productivity-shock driven economies with catching-up-with-the-Joneses utility functions. The optimal tax policy is shown to affect the economy countercyclically via procyclical taxes, i.e., "cooling down" the economy with higher taxes when i...

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Bibliographic Details
Published inThe American economic review Vol. 90; no. 3; pp. 356 - 366
Main Authors Ljungqvist, Lars, Uhlig, Harald
Format Journal Article
LanguageEnglish
Published Menasha, Wis American Economic Association 01.06.2000
Subjects
Aggregate demand
Consumer economics
Consumption taxes
Demand analysis
Demand management
Economic management
Economic models
Economic theory
Fiscal policy
Income taxes
Keynesianism
Optimal taxation
Productivity
Social stratification
Steady state economies
Studies
Tax rates
Taxation
Taxes
Utility functions
Welfare economics
United States > US
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Summary:This paper examines the role for tax policies in productivity-shock driven economies with catching-up-with-the-Joneses utility functions. The optimal tax policy is shown to affect the economy countercyclically via procyclical taxes, i.e., "cooling down" the economy with higher taxes when it is "overheating" in booms and "stimulating" the economy with lower taxes in recessions to keep consumption up. Thus, models with catching-up-with-the-Joneses utility functions call for traditional Keynesian demand-management policies but for rather unorthodox reasons.
Bibliography:ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
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ISSN:0002-8282
1944-7981
1944-7981
DOI:10.1257/aer.90.3.356