Tax Policy and Aggregate Demand Management Under Catching Up with the Joneses

Lars Ljungqvist; Harald Uhlig

doi:10.1257/aer.90.3.356

American Economic Review Vol. 90 No. 3 2000

Tax Policy and Aggregate Demand Management Under Catching Up with the Joneses

¹ Stockholm School of Economics, Box 6501, SE-113 83 Stockholm, Sweden, Center for Economic Research (CEPR). · ² Center, Tilburg University, Postbus 90153, 5000 LE Tilburg, The Netherlands, Center for Economic Research (CEPR).

Abstract

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.

DOI: 10.1257/aer.90.3.356
Volume: 90
Issue: 3
Pages: 356-366
Language: en
Sources: bibtex:phds-export.bib openalex crossref

Tax Policy and Aggregate Demand Management Under Catching Up with the Joneses

Abstract

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