Public Economics II,
Last Revised, Wednesday, May 3,
429, McNeill Bdg,
Tfn: 215 8987767
Fax: 215 5732057,
or 215 573-4217
Department of Economics
University of Pennsylvania
3718 Locust Walk
Philadelphia, PA 19104
The take home
exam about your assessment of The fiscal theory of the
price level should be given to Michele Souli by the date of the
exam. Tuesday May 9th at 11:00 am.
- Classes are M, W 1:30-3:00 in McNeil
- Sometimes it will be on Fridays somewhere between 12:00
and 4:30 pm. Please take a look at this page every
Monday morning to check for the weekly schedule.
- Off Hours: Wed 10:30 to 11:30. (better by
- The account to deposit the homeworks is /econ/econ751 in
What is in this page?
This page contains material that is relevant for
the Course. It will grow with the semester. Students should
check it from time to time. It will include papers and links
to papers, codes, descriptions of what we are doing and
homeworks. In parenthesis I place the date of the latest
change. Specifically there is
homeworks and due dates.
Course description. (1/15/00)
Brief description of previous classes and next one.
Info about change of dates/locations/instructors/office
Textbooks or other class material
Grading rules. Never
Guest Stars (1/15/00)
List of invitees to lecture in class.
What are we doing?
Day 1. We
read this document. After that we looked at the general
problem of optimal taxation. We almost finished proving
the fundamental theorem of optimal taxation that shows
the equivalence between a Comp Eq and an allocation that
satisfies feasibility and implementability.
Day 2. We
finished the discussion of the Ramsey problem in the
static context with n goods and labor and start
characterizing the solution: We argued for higher
taxation for income inelastic goods (under separability)
and for equal taxation under homotheticity.
Day 3. We
talked about the no taxation of intermediate goods. We
started defining the notation for the stochastic growth
We continued setting up the Ramsey equilibrium in the
stochastic growth model. In particular we look at
the government budget constraint and at the proposition
that yields the Ramsey problem.
We finished the proof of the main proposition, and talked
about the indeterminacy of the capital income tax rates,
and of possible additional criteria to fix them. We also
restated the problem by using a function W, that makes
the problem have two separate parts that can be solved
sequentially. One of those parts is time independent,
while the other is not.
We showed the properties of taxation if the
economy converges to a stationary situation. We also
discussed taxation with two types of agents.
We showed that if utility is separable in cons and
labor and if the cons part is CRRA, then taxes on
capital are zero after the first period..
We showed how in a model without capital, optimal
taxation inherits the structure of the shock. We also
documented the nature of the time consistency problem
in the simple model of Chari in the QR.
We defined Markov perfect equilibria of the
We reviewed Markov perfect equilibria. We looked at
some of its quantitative properties and we will
expand it to look at economies with debt.
Day 11. Marina
started telling us how to thnk of all possible equilibria
of these economies as outcomes of repeated games and also
of how to work with them in a recursive manner. She
follows Phelan and Stachetti. We devoted some time to
two issues that are not obvious. First that a Walrasian
equilibrium given a strategy by the government is
NOT the same that given a policy. The
difference is that that former specifies the outcomes of
the public sector for policies that future governments
will not take, but would have taken had current
governments done something different. The other issue
pertains the definition of the new state variable for the
use of recursive formulations and its timing
conventions. This will be resolved on Wednesday.
Marina continued with her job. She dealt with the
problems raised. She mapped the set of equilibria in
sequence language into the set of equilibria in
recurcusive language, by using two things. First, the
original equilibria is used to define one shot
games. Then Marina defined an operator that takes
possible continuation values and maps to
current continuation values with the aid of the auxiliary
one period games that she had defined. It turns out that
the largest fixed point of that operator is the set of
values of all equilibria of the original game.
Marina gave us her final thoughts on the Phelan
Stachetti paper. Then we discussed loosely some of the
problems associated to policy analysis. Finally, we
started discussing political economy. The issue at hand
being political aggregators.
We looked more at political economy growth models. We
posed a recursive notioin of the problem and started
comparing the equilibrium concepts with full and limited
rationality. What we do is in part from my JEDC paper
with Krusell and Quadrini.
We finished with the problem of how to distinguish
the fully rational with the boundededly rational model of
We started looking at the problem of how do taxes get
determined in a a multicountry economy with the
possibility of capital flight.
We finished looking at the problem of how do taxes get
determined in a a multicountry economy with the
possibility of capital flight. In particular, contrary
to what we had guessed in class we established what the
dynamic problem of firms are. This is important because
firms do not maximize expected profits, just
Next Day, 18.
Andrea will talk to us regarding the issue of how is
it that minorities get perks from the government.
Homeworks and due dates.
Students will place the solution in electronic form in
/work/econ/econ751 in subdirectories that each student
should create under her own name. The solutions should be in
pdf format. You will not have access for another week or
Homework 1. (1/24/00), Due February 10.
Show that the solution to the Ramsey problem of the first
model that we looked at can be implemented with the tax
rate of good one being zero as long as we can tax labor.
Homework 2. (1/31/00), Due February 19.
Show that equations 2-19, 2-20 and 2-21 are such that one
of the them is linearly dependent of the other. Assume
that the t+1 conditions hold and that the Euler equation
for capital holds and show that the Euler for bonds also
Homework 3. (1/31/00), Due February 19.
State and proof a version of the fundamental theorem of
Ramsey stuff in an economy with consumption and income
taxes (but no differences between labor and capital). If
the solution were optimal, state a similar condition to
that in the main model we are looking at, that the first
period capital income tax is given. This last thing may
prove to be unncessary, I do not know.
4. (2/17/00), Due February 26. Define Markov perfect
equilibrium for an economy with debt where the government
inherits a commitment to a labor income tax rate.
5. (4/17/00), Due February 26. Show in a two
country economy that any equilibrium were we keep track of
the agents portfolio can be restated while keeping track
only of total wealth.
Course Description (this may change).
Optimal policy: The primal approach.
will look at the optimal fiscal and monetary policies in
a basic static model and in the standard growth
model. (Chari and Kehoe, 1998, SR 251).
The time consistency problem.
We will look at why
most optimal policies are not implementable in a natural
setting. (Chari, QR, 1989).
How to do policy analysis in Applied
steady state analysis, transition economies and stochastic
processes for policies. We will look at some recent examples
(Heathcote 97 and others).
Social Security Issues: Reform
. Current social
security policy is not sustainable. What are the changes in
policies that have been considered to fix this problem and
obtain a feasible policy. (Imrohoroglu, Joines and Sargent
(97), Huggett and Ventura (19978), Storesletten, Telmer and
Yaron (1998, CR), Storesletten (1996), Conesa and Krueger
This encompasses a
large literature that attempts to treat the policies as
endogenous. We will use chunks of the recent book by Persson
and Tabellini (2000).
There are regular lectures on every foreseeable Monday and
What about textbooks?
I will go over some material from Chari and Kehoe, 1998, FRB Mpls
Staff Report # 251. It may be also in the Handbook of Public
Finance. I will add more reading as needed. For sure (or
almost) we will also add some material from the most recent
book from Persson and Tabellini (2000). The material in here
may be borrowed for up to two hours from Michele Souli in the
fourth floor of McNeil.
To satisfactorily complete the course, students will do some
homeworks, and pass an exam. The homeworks are about things
closely related to class. They should be written in pdf and
placed in appropriate subdirectories of the directory with
your name that is in /econ/econ751 of the sun.ssc
machine. Please label the homework files with hw1.pdf for the
first homework and so on. If there is more than one file per
homework, name them sequentially hw1-1.pdf, hw1-2.pdf and so
on. Otherwise, grading becomes a nightmare. The homeworks
only count if they are posted before their deadline. The exam
should show understanding of the main concepts of the
course. The homeworks account for two thirds of the grade.
Students are encouraged to do a presentation of some material
in class. I recommend this highly, since any practice to
deliver material is very valuable. To give some incentive, I
give students the option of giving a presentation of some
material and using it as part of the grade, yielding a very
little role for the final exam. Of course, this is not
compulsory but, as I said, I recommend that you do it under
Here, I will list our confirmed guest stars, to talk
about topics that they know well.