Optimal Allocation of Household Expenditures with Consumption Tax in DSGE Model

The In most developed countries the level of taxes rise steadily over the course of the tIntieth century: an increase from about 5%-10% of gross domestic product (GDP) at the turn of the century to 30% - 40% at the end is typical. Such significant increases raise serious questions about the effect taxation has upon economic. this paper looking to derive consumption allocation and price level with impose consumption tax in a small open-economy dynamic stochastic general equilibrium model. The new generation of dynamic stochastic general equilibrium (DSGE) models seems particularly suited for investigation of tax policy analysis. These models formalise the behaviour of economic agents on the basis of explicit micro-foundations allowing for a distinction betIen intrinsic dynamics and dynamics arising from rational expectations.This paper develop a standard open economy model, similar to Adolfson et al. (2005), Diferently from them, this study include in the model tax on the consumption of domestic and foreign goods. paper consider this taxation on houshold behavior. For this purpose, I describes households’ behavior with regard to consumption spending and utility maximization. This decision problem consists of two parts. First, a repersentative household decides about allocation of expenditures betIen domestic and foreign goods. It maximizes the total consumption subject to its expenditure constaint. Second, household tries to minimize the costs of buying the composite consumption good. and finally it maximize their lifetime utility depending on consumption, money holdings and leisure.