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Marco Del Negro, Teoria y Politica Monetaria, Spring 2000
Problem Set 4
Consider an economy where the government budget constraint is:
where Bts is the supply of nominal (one period) bonds,
Rt is the it nominal interest rate,
gt is government spending (in units of the consumption good), and
are taxes
(in units of the consumption good).
The objective function of the household is:
subject to the budget constraints:
where B is some positive number.
a) find the equilibrium under the following assumptions:
b) Consider now the case in which taxes are ``distortive" (because of collection costs like in the model of Barro JPE
1979),
in the sense that higher tax rates decrease disposable output. In particular, assume that the intertemporal
budget constraint of the household is now:
where
where the term
indicates collection costs.
Find the equilibrium under the same set of assumptions as in point a).
Marco Del Negro
2000-02-09