Fiscal policy choices affect both the degree of progressivity of the tax system and the amount of public debt in circulation. What is the connection between these two elements? In this paper, I consider a benevolent optimizing government and explore how both progressivity and indebtedness depend on the government’s preferences for redistribution. Somewhat surprisingly, I show that differences in preferences for redistribution lead to a negative correlation between progressivity and indebtedness, as a planner that cares more for redistribution favors lower levels of public debt.

Models of lumpy capital adjustment are too responsive to interest rates relative to empirical evidence. We argue that allowing for small convex adjustment costs in labour can help these models better match the data. Convex costs cause labour to increase slowly in response to a shock thus smoothing out the impact on the marginal product of capital. Due to both depreciation and uncertainty over future productivity, this delay in the benefits of additional capital can have a large impact on the responsiveness of capital investment.

We use a simple model to study the effects of tariffs on the current account balance when a country runs permanent trade deficits. The model features a country that supplies a liquid asset to the rest of the world, which allows the country to run a permanent and sustainable current account deficit. Unlike in models based on the traditional intertemporal approach, tariffs do not affect saving through their effects on real interest rates, and have muted effects on the current account balance. We also show how shifts in liquidity demand and taxes on world liquidity can be interpreted from a trade-policy perspective.

We study the implications of rationally inattentive behavior for the design of optimal taxes. Our main finding is an irrelevance result—when inattention satisfies two key properties, “invariance” and “state separability”, optimal taxes satisfy exactly the same type of sufficient-statistics formula as that found in classical public finance. Away from this benchmark, inattention can lead to novel considerations for the design of optimal taxes. First, violations of state-separability generate interdependence of the optimal taxes across states. Second, violations of invariance help accommodate the idea that markets may be excessively complex, even when firms are perfectly competitive. Finally, we clarify that inattention does not necessarily make agents less responsive and may thus call for lower taxes.

This chapter sheds some light on the prospects for the Ecuadorian economy in the aftermath of the Revolución Ciudadana and a permanent reduction in oil prices. Given that the economy’s progress is contingent on whether or not private sector investment can take over and replace the public sector as the main engine of the economy, I have focused on how fiscal policy can affect private investment decisions. So, this analysis relates to the importance of solving the implementation problem in order to ensure that the economy moves toward a period of growth and increasing living standards. Whether fiscal authorities manage to construct a credible and strategic fiscal policy will determine the economic outcomes to be realized in the future. Moreover, given that individual preferences may not be separable from government expenditures, the need to create a fiscal stabilization fund has been emphasized, as well as the importance of focusing adjustments on current rather than capital expenditures.