Chapter 11 Fiscal policies in the nonstochastic growth model . Introduction This chapter studies the effects of technology and fiscal shocks on equilibrium outcomes in a nonstochastic growth model. We exhibit some classic doctrines about the effects of various taxes. | Chapter 11 Fiscal policies in the nonstochastic growth model . Introduction This chapter studies the effects of technology and fiscal shocks on equilibrium outcomes in a nonstochastic growth model. We exhibit some classic doctrines about the effects of various taxes. We also use the model as a laboratory to exhibit some numerical techniques for approximating equilibria and to display the structure of dynamic models in which decision makers have perfect foresight about future government decisions. Following Hall 1971 we augment a nonstochastic version of the standard growth model with a government that purchases a stream of goods and finances itself with an array of distorting flat rate taxes. We take government behavior as exogenous 1 which means that for us a government is simply a list of sequences for government purchases gt t 0 and for taxes Tct Tit Tkt Tnt Tht t 0. Here Tct Tkt Tnt are respectively time-varying flat rate rates on consumption earnings from capital and labor earnings Tit is an investment tax credit and Tht is a lump sum tax a head tax or poll tax . Distorting taxes prevent the competitive equilibrium allocation from solving a planning problem. To compute an equilibrium we solve a system of nonlinear difference equations consisting of the first-order conditions for decision makers and the other equilibrium conditions. We solve the system first by using a method known as shooting that produces very accurate solutions. Less accurate but in some ways more revealing approximations can be found by following Hall 1971 who solved a linear approximation to the equilibrium conditions. We show how to apply the lag operators described by Sargent 1987a to find and represent the solution in a way that is especially helpful in studying the dynamic effects of perfectly foreseen alterations in taxes and The solution 1 In chapter 15 we take up a version of the model in which the government chooses taxes to maximize the utility of a .
