Essays on fiscal policy

Macroeconomics has paid profound attention to policy studies over the last decades. My PhD thesis discusses how to assess scal policy over the business cycle in unconventional but justifiable environments - either with nonstandard preferences or with less-studied idiosyncratic risks. Chapter 1 justifies policy interventions with exotic preferences. I study a production economy with preferences featuring loss aversion, a core concept commonly accepted in behavioral economics. The representative household obtains utility directly from fluctuations of asset returns, in addition to consumption. I ask whether loss aversion affects equilibrium conditions, whether equilibrium is efficient, and what Ramsey optimal fiscal policy is. I show analytically that the more loss aversion and the more concerns on the psychological utility, the less investment in risky assets in the risky steady state of equilibrium. Numerical results show that capital stock, consumption and output decrease as loss aversion parameters increase. I uncover that the competitive equilibrium is inefficient as long as the agent is loss averse due to pecuniary externality. The household does not internalize the price effect on her welfare so that she invests more in capital than the optimum requires. The Ramsey allocation rationalizes policy interventions: the government should tax capital accumulation to reduce capital stock and raise equity premium. Chapter 2 studies the effect of fiscal policy on investment and the welfare of heterogeneous agents over the business cycle considering independent and identically distributed idiosyncratic investment risks whose volatility is assumed to be countercyclical in line with data. All entrepreneurs make identical saving and portfolio choices each period, allowing for exact aggregation which facilitates computation. The model matches income inequality and dynamics of the income distribution over the cycle in the US data. The government sets rules of capital income tax rate and debt as functions of current output. I calibrate the cyclicality of scal policy to the US data as the baseline and adjust the parameters indicating cyclicality to study the effect of counterfactual policy. Both capital tax and debt policy create welfare conflicts between entrepreneurs and workers. The policy that optimizes utilitarian social utility specifies that the capital income tax rate should increase by 0.45 percentage point and the debt should increase by 0.37% facing a 1% decrease in output. It is possible that the government should reduce the capital tax in the recession if it increases the weight of workers on social welfare. The impulse response of aggregate variables to a negative productivity shock indicates that in general, the higher capital tax rate and the less debt when the adverse shock hits, the higher capital and output in the early stage after the shock. The result of the welfare conflict is robust to a constant labor tax and a varying consumption tax, but not to the removal of countercyclicality of idiosyncratic investment risks or to no idiosyncratic risks.Programa Oficial de Doctorado en Empresa y FinanzasPresidente: Anastasios Karantounias; Secretario: Javier Pérez; Vocal: Andrés Erosa Etchebeher