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American Economic Review: Vol. 90 No. 3 (June 2000)

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Tax Policy and Aggregate Demand Management under Catching Up with the Joneses

Article Citation

Ljungqvist, Lars, and Harald Uhlig. 2000. "Tax Policy and Aggregate Demand Management under Catching Up with the Joneses." American Economic Review, 90(3): 356-366.

DOI: 10.1257/aer.90.3.356

Abstract

This paper examines the role for tax policies in productivity-shock driven economies with catching-up-with-the-Joneses utility functions. The optimal tax policy is shown to affect the economy countercyclically via procyclical taxes, i.e., "cooling down" the economy with higher taxes when it is "overheating" in booms and "stimulating" the economy with lower taxes in recessions to keep consumption up. Thus, models with catching-up-with-the-Joneses utility functions call for traditional Keynesian demand-management policies but for rather unorthodox reasons.

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Authors

Ljungqvist, Lars (Stockholm School of Econ and CEPR)
Uhlig, Harald (Tilburg U and CEPR)

JEL Classifications

E62: Fiscal Policy
E21: Macroeconomics: Consumption; Saving; Wealth


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