Copyright (c) 2008 All rights reserved. http://works.bepress.com/bassetto Recent documents in Marco Bassetto en-us Wed, 02 Apr 2008 20:26:47 PDT 3600 http://works.bepress.com/bassetto/13 http://works.bepress.com/bassetto/13 Sun, 15 Jul 2007 08:41:46 PDT We consider the effect of excluding government investment from the deficit subject to the limits of the European Stability and Growth Pact. In the model we consider, residents of a given country discount future costs and benefits of government spending more than efficiency would dictate, because they fail to take into account the portion that will accrue to people that have not yet been born or immigrated into the country. It is thus in principle desirable to design budget rules that favor long-term investment (by allowing more borrowing) over other government spending that only carries short-term benefits. However, given the low rates of population growth, mortality, and mobility across European countries, we find that the distortions arising from treating all government spending equally are likely to be modest. We also show that these modest distortions can be alleviated only if net government investment is excluded from the deficit computation; excluding gross investment may even be counterproductive, as it promotes overspending in government capital. Marco Bassetto Political Economy and Optimal Taxation http://works.bepress.com/bassetto/11 http://works.bepress.com/bassetto/11 Fri, 26 Jan 2007 11:50:52 PST Many authorities at home and abroad questioned Italy's ability to meet the strict criteria to join the European Monetary Union. The author looks at the interaction between fiscal policy and monetary policy in Italy between 1992, when it exited the European Exchange Rate Mechanism, and 1998, when an official announcement was made that it would join the union. Marco Bassetto Design of Government Strategies and Equilibrium Selection http://works.bepress.com/bassetto/10 http://works.bepress.com/bassetto/10 Fri, 26 Jan 2007 11:42:00 PST This paper analyzes the effects of intergenerational conflict on capital and labor income tax rates, transfers, and government spending in a model of multidimensional policy choice. The different nature of tax liabilities for the young and the old can explain why the old receive large gross lump-sum transfers through social security, while the young receive little or none. A natural link also emerges between the size of the government as a provider of public goods and the magnitude of transfers that the same government will implement. Marco Bassetto Political Economy and Optimal Taxation http://works.bepress.com/bassetto/9 http://works.bepress.com/bassetto/9 Fri, 26 Jan 2007 11:39:24 PST The aim of this paper is to study how the intertemporal behaviour of taxes affects the distribution of wealth among heterogeneous agents. The optimal-taxation literature has often concentrated on representative-agent models, in which it is typically optimal to smooth taxes over time. The purpose of my analysis is to show that this conclusion hides important distributional conflicts: if tax liabilities are unevenly spread in the population, deviations from tax smoothing will lead to interest rate changes that redistribute wealth among the agents. When a ``bad shock'' hits the economy, the optimal fiscal policy will then call for smaller or larger deficits depending on the political power of different groups of agents in the economy. The model is applied to war financing and the introduction of a balanced-budget policy. Marco Bassetto Political Economy and Optimal Taxation http://works.bepress.com/bassetto/8 http://works.bepress.com/bassetto/8 Fri, 26 Jan 2007 11:36:47 PST How should a government use the power to commit to ensure a desirable equilibrium outcome? In this paper, I show a misleading aspect of what has become a standard approach to this question, and I propose an alternative. I show that the complete description of an optimal (indeed, of any) policy scheme requires outlining the consequences of paths that are often neglected. The specification of policy along those paths is crucial in determining which schemes implement a unique equilibrium and which ones leave room for multiple equilibria that depend on the expectations of the private sector.A slightly older version is available as Federal Reserve Bank of Minneapolis Working Paper #624, September 2002 Marco Bassetto Design of Government Strategies and Equilibrium Selection http://works.bepress.com/bassetto/7 http://works.bepress.com/bassetto/7 Fri, 26 Jan 2007 11:34:07 PST The goal of this paper is to probe the validity of the fiscal theory of the price level by modelling explicitly the market structure in which households and the government make their decisions. I describe the economy as a game, and I am thus able to state precisely the consequences of actions that are out of the equilibrium path. I show that there exist government strategies that lead to a version of the fiscal theory, in which the price level is determined by fiscal variables alone. These strategies are however more complex than the simple budgetary rules usually associated with the fiscal theory, and the government budget constraint cannot be merely viewed as an equilibrium condition.An earlier version is available as Federal Reserve Bank of Minneapolis Working Paper #612, March 2001 Marco Bassetto Design of Government Strategies and Equilibrium Selection http://works.bepress.com/bassetto/6 http://works.bepress.com/bassetto/6 Fri, 26 Jan 2007 11:30:35 PST We consider a government that can only raise funds by levying distortionary taxes. We allow the government to collect taxes in a given period that are based on incomes earned in previous periods. We show that once we do so, given any debt path, the government can adjust its tax policy so as to attain that debt path without affecting equilibrium allocations or prices. Marco Bassetto Political Economy and Optimal Taxation http://works.bepress.com/bassetto/5 http://works.bepress.com/bassetto/5 Fri, 26 Jan 2007 11:27:08 PST Marco Bassetto Design of Government Strategies and Equilibrium Selection http://works.bepress.com/bassetto/4 http://works.bepress.com/bassetto/4 Fri, 26 Jan 2007 11:19:20 PST This paper considers an optimal taxation environment where household income is private information, and the government randomly audits and punishes households found to be underreporting. We prove that the optimal mechanism derived using standard mechanism design techniques has a bad equilibrium (a tax riot) where households underreport their incomes, precisely because other households are expected to do so as well. We then consider three alternative approaches to designing a tax scheme when one is worried about bad equilibria. Marco Bassetto Design of Government Strategies and Equilibrium Selection http://works.bepress.com/bassetto/3 http://works.bepress.com/bassetto/3 Fri, 26 Jan 2007 11:16:24 PST We study a simple model of production, accumulation, and redistribution, where agents are heterogeneous in their initial wealth, and a sequence of redistributive tax rates is voted upon. Though the policy is infinite-dimensional, we prove that a median voter theorem holds if households have identical, Gorman aggregable preferences; furthermore, the tax policy preferred by the median voter has the "bang-bang" property.An older version with some typos is available as Federal Reserve Bank of Chicago Working Paper 2006-02. Marco Bassetto Political Economy and Optimal Taxation