Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 147: Dynamic Tax Smoothing with Financial Instruments

Anders Paalzow ()
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Anders Paalzow: Department of Economics, Postal: Stockholm School of Economics, Box 6501, 113 83 Stockholm, Sweden

Abstract: This paper discusses dynamic tax smoothing with financial instruments within a two-period deterministic framework where the interest rate is endogenously determined and affected by fiscal policy. The analysis focusses on the timing of taxes and how the interest rate affects the costs for tax smoothing through public debt. It shows that elasticity of the interest rate with respect to the supply of government-issued bonds is crucial when characterizing the optimal path of taxes.

Keywords: optimal taxation and public debt

JEL-codes: H21

12 pages, December 1996

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