OPTIMAL TAXATION AND DEBT IN AN OPEN-ECONOMY

We characterize the time profile of the optimal consumption tax in a small open economy under foreseen fluctuations in the taste for current consumption, productivity, or external interest rates. We give conditions for the efficient tax to be lowered or raised when productivity rises. Taste fluctuations are parameterized to be equivalent to effective consumption price fluctuations. We give conditions under which the optimal tax rises or falls with the effective price. In contrast, the optimal tax rate is invariant to changes in the interest rate. The associated behavior of optimal debt is also characterized.