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Optimal tax and expenditure policies in a market economy with life‐cycle savings: Revisiting the golden rule

Howell H. Zee (Xiamen University, Xiamen, China and Monash University, Melbourne, Australia)

Journal of Economic Studies

ISSN: 0144-3585

Article publication date: 31 July 2009

779

Abstract

Purpose

This paper aims to investigate whether the concept of the golden rule of capital accumulation is an applicable normative guidepost for a market economy even in the absence of the distortions usually associated with income and consumption taxes.

Design/methodology/approach

The paper uses a simple two‐period overlapping generations model with productive public and private capital.

Findings

As long as the government is subject to some instrument limitation that constrains its ability to effect non‐distortive optimal inter‐generational income redistributions, the market optimum for capital accumulation would generally deviate from the golden rule towards either side of the rule.

Originality/value

The paper provides a transparent characterization of the nature of the optimal deviation from the golden rule in terms of easily interpretable consumption and production parameters.

Keywords

Citation

Zee, H.H. (2009), "Optimal tax and expenditure policies in a market economy with life‐cycle savings: Revisiting the golden rule", Journal of Economic Studies, Vol. 36 No. 3, pp. 265-283. https://doi.org/10.1108/01443580910983852

Publisher

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Emerald Group Publishing Limited

Copyright © 2009, Emerald Group Publishing Limited

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