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This paper analyzes aspects of optimal fiscal policy for economies with capital ac cumulation and finitely-lived, heterogeneous agents. For a particular utilitarian social welfare function, the problem faced by a central planner can be broken down into two subproblems: a standard problem o f optimally allocating aggregate consumption over time and a problem of distributing aggregate consumption optimally at each moment among those alive. If it can use a sufficiently rich set of lump-sum taxes and transfers, the government can replicate the command optimum as a market equilibrium outcome. No issue of government debt is needed to achieve this decentralization. Copyright 1988 by The Econometric Society.
Calvo et al. (Tue,) studied this question.