REFORMS AND THE UNIFORM TAXATION PRINCIPLE THE ROL


     !#!$%&



 
    
 !#!$%&
           ! #! #   $ #%%%$&' %(' )!*     #    !   +,,!!  '' (    #++,, ! !, -.****** $ #%%(%+/01012%+ 3!  !0$ ##(%+
451522%+ 3!!



 
    !  #$$%& !  #'& ()))*  &+,,---.%/. 0()))'0)))%/
           
  
 
 

 !#
$
%
&

$'()
*+) # ,&- .
/
* 
0-)1-
2
).

!3 )/ ! &'*/32-2'
  AbstractThispaperstudiestheroleofasset-marketcompletenessforthepropertiesofop-timalfiscalandmonetarypolicy.Asuitableframeworkforthispurposeisthesmallopeneconomywithcompleteinternationalassetmarkets.Forinthisenvironmentchangesinpolicyrepresentcountry-specificriskdiversifiableinworldmarkets.Ourmainfindingisthatthefundamentalpublicfinanceprinciplewherebywhentaxesonallfinalgoodsareavailable,itisoptimaltotaxfinalgoodsuniformlyfailstoob-tain.Ingeneral,uniformtaxationisoptimalbecauseitamountstoanondistortingtaxonfixedfactorsofproduction.Intheopeneconomythisprinciplefailsbecausewhenhouseholdscaninsureagainsttheriskofapolicyreform,initialprivateassetholdingsarecontingentonactualpolicyandthusnolongerrepresentaninelasticallysuppliedsourceofincome.FurthermoreoptimalconsumptionandincometaxesdonotrespondtogovernmentpurchasesshocksandtheFriedmanruleisoptimalonlyiftheRamseyplannerhasaccesstoconsumptiontaxes.JELClassification:F41,E52,E61,E63.Keywords:OptimalMonetaryandFiscalPolicy,OpenEcomomies,AnticipatedRamseypolicy
 Non-TechnicalSummaryThispaperpresentsaninvestigationintotheroleofassetmarketcompletenessforthepropertiesofoptimalpolicyindynamicgeneralequilibriummodelsofthemacroeconomy.Wefocusonenvironmentsinwhichitispossibleforindividualagentstoinsurethemselvesagainstpolicyuncertainty.Anidealframeworkforthispurposeisthesmallopeneconomymodelwithcompleteinternationalassetmarkets.Inthisenvironment,policychangesrepresentidiosyncratic,country-specificshocks,againstwhichdomesticresidentscaninsurebytradingininternationalfinancialmarkets.SincetheseminalworkofLucasandStokey(1983),alargebodyofresearchhasbeendevotedtocharac-terizingoptimalfiscalandmonetarypolicyindynamicmacroeconomicsettings.Mostoftheexistingwork,however,haslimitedattentiontoclosedeconomyenvironments.Intheclosedeconomy,policychangesrep-resentaggregateuninsurablerisk.WeinsteadstudyRamseyallocationsinasmallopeneconomywithaccesstocompleteinternationalassetmarkets.Tofacilitatecomparison,allotheraspectsofthemodeleconomyaredeliberatelykeptasinexistingrelatedclosed-economystudies.Inparticular,moneydemandismotivatedbyacash-in-advanceconstraint,andaninterest-elasticvelocityofcirculationisrationalizedbyassumingtheexistenceofcashandcreditgoodsasinLucasandStokey(1983).Thegovernmentmustfinanceastreamofunproductiveconsumptionbyprintingmoney,issuingone-period,state-noncontingentnominaldebt,andlevyingproportionaltaxesonincomeandconsumption.Thegovernmentisassumedtobebenevolentinthesensethatitconductspolicysoastomaximizethewelfareoftherepresentativeagent.Thegovernmenthas