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Optimal fiscal policy in a model with efficiency wages: the case of Bulgaria

Aleksandar Vasilev (University of Lincoln, Lincoln, UK)

International Journal of Social Economics

ISSN: 0306-8293

Article publication date: 22 September 2022

Issue publication date: 3 February 2023




This paper aims to explore the effects of fiscal policy in an economy with efficiency wages, consumption taxes and a common income tax rate.


A dynamic general-equilibrium model with the government sector is calibrated to Bulgarian data (1999–2018). Two regimes are compared and contrasted – the exogenous (observed) vs optimal policy (Ramsey) case.


The main findings are as follows: (1) The optimal steady-state income tax rate is zero. (2) The benevolent Ramsey planner provides three times lower amount of the utility-enhancing public services. (3) The optimal steady-state consumption tax needed to finance the optimal level of government spending is 18.7%.


The focus of the paper is on the relative importance of consumption vs income taxation, as well as on the provision of utility-enhancing public services. Bulgarian economy was chosen as a case study due to its major dependence on consumption taxation as a source of tax revenue.

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Vasilev, A. (2023), "Optimal fiscal policy in a model with efficiency wages: the case of Bulgaria", International Journal of Social Economics, Vol. 50 No. 2, pp. 195-209.



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