Hodge, Andrew
(2015)
Essays on the social welfare effects of fiscal policy.
PhD thesis, London School of Economics and Political Science.
Abstract
This thesis contains three chapters, each concerning the social welfare effects of fiscal policy. The first chapter examines the changes to government spending and tax rates that achieve a potentially substantial reduction in government debt at least cost to social welfare. The consequences of altering the speed of debt reduction are also examined. The second chapter considers how differences in monetary policy regime and stance may alter the optimal mix of spending and tax rate changes for government debt reduction. These two chapters make use of the representative agent theoretical framework. By contrast, the third chapter uses a framework of heterogeneous agents, in which there is a non-trivial distribution of wealth and income. The framework includes both aggregate and idiosyncratic uncertainty. The third chapter characterises a constrained efficient outcome in this framework. This outcome is treated as a welfare benchmark. The competitive equilibrium outcome is compared to this benchmark and shown to be constrained inefficient in certain circumstances. The sign and magnitude of constrained inefficiency in competitive equilibrium depends critically on the way in which aggregate shocks affect the distribution of idiosyncratic shocks. The extent of wealth inequality is also an important determining factor. Competitive equilibria under different fiscal policies are then considered as potential welfare improvements.
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