Optimal fiscal policy in a model with efficiency wages: the case of Bulgaria

<p>Design/Methodology Approach: A dynamic general-equilibrium model with government sector is calibrated toBulgarian data (1999-2018). Two regimes are compared and contrasted - the exogenous (observed) vs. optimal policy (Ramsey) case.Purpose: This paper explores the effects of fiscal policy in an economy with efficiency wages, consumption taxes, and a common income tax rate.Findings: The main findings are: (i) The optimal steady-state income tax rate is zero; (ii) The benevolent Ramsey plannerprovides three times lower amount of the utility-enhancing public services; (iii) The optimal steady-state consumption tax needed to finance the optimal level of government spending is 18.7 %.Originality/Value: The focus of the paper is on the relative importance of consumption vs. income taxation, as well as on the provision of utility-enhancing public services. Bulgarian economy was chosen as a case study due to its major dependence on consumption taxation as a source of tax revenue.</p>