Maurice Tutor

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    Argosy University/ Phoniex University/
    Nov-2005 - Oct-2011

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    Phoniex University
    Oct-2001 - Nov-2016

Category > Management Posted 03 Feb 2018 My Price 8.00

Barrow tax-smoothing model

Consider the Barrow tax-smoothing model. Suppose there are two possible values of G(t)—GH and GL—with GH>GL. Transitions between the two values follow Poisson processes (see Section 7.4). Specifically, if G equals GH, the probability per unit time that purchases fall to GL is a; if G equals GL , the probability per unit time that purchases rise to GH is b. Suppose also that output, Y, and the real interest rate, r, are constant and that distortion costs are quadratic.`

(a) Derive expressions for taxes at a given time as a function of whether G equals GH or GL , the amount of debt outstanding, and the exogenous parameters. (Hint: Use dynamic programming, described in Section 10.4, to find an expression for the expected present value of the revenue the government must raise as a function of G, the amount of debt outstanding, and the exogenous parameters.)

(b) Discuss your results. What is the path of taxes during an interval when G equals GH? Why are taxes not constant during such an interval? What happens to taxes at a moment when G falls to GL? What is the path of taxes during an interval when G equals GL?

Answers

Maurice Tutor
(5)
Status NEW Posted 03 Feb 2018 08:02 PM My Price 8.00

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