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Creator: Chari, V. V., Christiano, Lawrence J., and Kehoe, Patrick J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 158 Abstract:
We find conditions for the Friedman rule to be optimal in three standard models of money. These conditions are homotheticity and separability assumptions on preferences similar to those in the public finance literature on optimal uniform commodity taxation. We show that there is no connection between our results and the result in the standard public finance literature that intermediate goods should not be taxed.
Palavra-chave: Inflation tax, Optimal monetary policy, and Ramsey policy Sujeito: E52 - Monetary Policy, E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination, and E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
Creator: Chari, V. V., Christiano, Lawrence J., and Kehoe, Patrick J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 160 Abstract:
This paper develops the quantitative implications of optimal fiscal policy in a business cycle model. In a stationary equilibrium the ex ante tax rate on capital income is approximately zero. There is an equivalence class of ex post capital income tax rates and bond policies that support a given allocation. Within this class the optimal ex post capital tax rates can range from being close to i.i.d. to being close to a random walk. The tax rate on labor income fluctuates very little and inherits the persistence properties of the exogenous shocks and thus there is no presumption that optimal labor tax rates follow a random walk. The welfare gains from smoothing labor tax rates and making ex ante capital income tax rates zero are small and most of the welfare gains come from an initial period of high taxation on capital income.
Creator: Chari, V. V. and Cole, Harold Linh, 1957- Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 163 Abstract:
We develop a model of a representative democracy in which a legislature makes collective decisions about local public goods expenditures and how they are financed. In our model of the political process legislators defer to spending requests of individual representatives, particularly committee chairmen, who tend to promote spending requests that benefit their own districts. Because legislators do not fully internalize the tax consequences of their individual spending proposals, there is a free rider problem, and as a result spending is excessively high. This leads legislators to prefer a higher level of debt to restrain excessive future spending.
Creator: Chari, V. V., Kehoe, Patrick J., and McGrattan, Ellen R. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 204 Abstract:
We ask what fraction of the variation in incomes across countries can be accounted for by investment distortions. In our neoclassical growth model the relative price of investment to consumption is a good measure of the distortions. Using data on relative prices we estimate a stochastic process for distortions and compare the resulting variance of incomes in the model to that in the data. We find that the variation of incomes in the model is roughly 4/5 of the variability of incomes in the data. Our model does well in accounting for 6 key regularities on income and investment in the data.
The paper itself is followed by three appendices: Appendix 1 describing the log-likelihood function, Appendix 2 describing the construction of labor share of income associated with the production of consumption and investment goods, and the Data Appendix.
Sujeito: O11 - Macroeconomic Analyses of Economic Development, H20 - Taxation, Subsidies, and Revenue: General, O10 - Economic Development: General, and O57 - Comparative Studies of Countries
Creator: Chari, V. V., Kehoe, Patrick J., and McGrattan, Ellen R. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 217 Abstract:
We construct a quantitative equilibrium model with price setting and use it to ask whether with staggered price setting monetary shocks can generate business cycle fluctuations. These fluctuations include persistent output fluctuations along with the other defining features of business cycles, like volatile investment and smooth consumption. We assume that prices are exogenously sticky for a short period of time. Persistent output fluctuations require endogenous price stickiness in the sense that firms choose not to change prices very much when they can do so. We find that for a wide range of parameter values the amount of endogenous stickiness is small. As a result, we find that in a standard quantitative business cycle model staggered price setting, by itself, does not generate business cycle fluctuations.
Palavra-chave: Monetary business cycles, Staggered price-setting, and Endogenous price stickiness
Creator: Chari, V. V., Kehoe, Patrick J., and McGrattan, Ellen R. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 223 Abstract:
The conventional wisdom is that monetary shocks interact with sticky goods prices to generate the observed volatility and persistence in real exchange rates. We investigate this conventional wisdom in a quantitative model with sticky prices. We find that with preferences as in the real business cycle literature, irrespective of the length of price stickiness, the model necessarily produces only a fraction of the volatility in exchange rates seen in the data. With preferences which are separable in leisure, the model can produce the observed volatility in exchange rates. We also show that long stickiness is necessary to generate the observed persistence. In addition, we show that making asset markets incomplete does not measurably increase either the volatility or persistence of real exchange rates.
Creator: Chari, V. V. and Kehoe, Patrick J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 228 Abstract:
Recent empirical work on financial crises documents that crises tend to occur when macroeconomic fundamentals are weak, but that even after conditioning on an exhaustive list of fundamentals, a sizable random component to crises and associated capital flows remains. We develop a model of herd behavior consistent with these observations. Informational frictions together with standard debt default problems lead to volatile capital flows resembling hot money and financial crises. We show that repaying debt during difficult times identifies a government as financially resilient, enhances its reputation and stabilizes capital flows. Bailing out governments deprives resilient countries of this opportunity.
Creator: Chari, V. V. and Kehoe, Patrick J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 251 Abstract:
We provide an introduction to optimal fiscal and monetary policy using the primal approach to optimal taxation. We use this approach to address how fiscal and monetary policy should be set over the long run and over the business cycle. We find four substantive lessons for policymaking: Capital income taxes should be high initially and then roughly zero; tax rates on labor and consumption should be roughly constant; state-contingent taxes on assets should be used to provide insurance against adverse shocks; and monetary policy should be conducted so as to keep nominal interest rates close to zero. We begin optimal taxation in a static context. We then develop a general framework to analyze optimal fiscal policy. Finally, we analyze optimal monetary policy in three commonly used models of money: a cash-credit economy, a money-in-the-utility-function economy, and a shopping-time economy.
Palavra-chave: Capital income taxation, Primal approach, Tax smoothing, Ramsey problems, and Friedman rule Sujeito: E52 - Monetary Policy, E62 - Fiscal Policy, E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General, E50 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General, H21 - Taxation and Subsidies: Efficiency; Optimal Taxation, and H30 - Fiscal Policies and Behavior of Economic Agents: General