Intertemporal Distortions in the Second Best

Joint with: Roc Armenter

We consider a very general class of public finance problems that encompasses Ramsey models of optimal taxation as well as economies with limited commitment, private information, and political economy frictions. We identify a sufficient condition to rule out permanent intertemporal distortions at the optimum: If there exists an admissible allocation that converges to the first best steady state, then all intertemporal distortions are temporary in the second best. We analyze a series of applications to illustrate the significance of this result.

For more information, contact Dirk Krueger.