Optimal Fiscal Policy with Labor Selection

Chugh S, Lechthaler W, Merkl C (2018)

Publication Language: English

Publication Type: Journal article

Publication year: 2018


DOI: 10.1016/j.jedc.2018.06.005


This paper characterizes long-run and short-run optimal fiscal policy in the labor selection framework. In a calibrated non-Ramsey decentralized equilibrium, labor market volatility is inefficient. Keeping fixed the structural parameters, the Ramsey government achieves efficient labor market volatility; doing so requires labor-income tax volatility that is orders of magnitude larger than the “tax-smoothing” results based on Walrasian labor markets, but a few times smaller than the results based on search and matching markets. We analytically characterize selection-model-consistent wedges and inefficiencies in order to understand optimal tax volatility.

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How to cite


Chugh, S., Lechthaler, W., & Merkl, C. (2018). Optimal Fiscal Policy with Labor Selection. Journal of Economic Dynamics & Control. https://doi.org/10.1016/j.jedc.2018.06.005


Chugh, Sanjay, Wolfgang Lechthaler, and Christian Merkl. "Optimal Fiscal Policy with Labor Selection." Journal of Economic Dynamics & Control (2018).

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