Creator: Yang, Fang Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 635 Abstract:
Micro data over the life cycle shows two different patterns of consumption of housing and non-housing goods: the consumption profile of non-housing goods is hump-shaped while the consumption profile for housing first increases monotonically and then flattens out. These patterns hold true at each consumption quartile. This paper develops a quantitative, dynamic general equilibrium model of life cycle behavior, which generates consumption profiles consistent with the observed data. Borrowing constraints are essential in explaining the accumulation of housing assets early in life, while transaction costs are crucial in generating the slow downsizing of the housing assets later in life. The bequest motives play a role in determining total life time wealth, but not the housing profile.
Keyword: Life cycle, Consumption, Housing, and Distribution Subject (JEL): J14 - Economics of the Elderly; Economics of the Handicapped; Non-labor Market Discrimination, R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics: Housing Demand, and E21 - Macroeconomics: Consumption; Saving; Wealth
Creator: Heathcote, Jonathan, Storesletten, Kjetil, and Violante, Giovanni L. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 551 Abstract:
This paper studies optimal taxation of earnings when the degree of tax progressivity is allowed to vary with age. The setting is an overlapping-generations model that incorporates irreversible skill investment, flexible labor supply, ex-ante heterogeneity in the disutility of work and the cost of skill acquisition, partially insurable wage risk, and a life cycle productivity profile. An analytically tractable version of the model without intertemporal trade is used to characterize and quantify the salient trade-offs in tax design. The key results are that progressivity should be U-shaped in age and that the average marginal tax rate should be increasing and concave in age. These findings are confirmed in a version of the model with borrowing and saving that we solve numerically.
Keyword: Skill investment, Labor supply, Tax progressivity, Incomplete markets, Income distribution, and Life cycle Subject (JEL): J24 - Human Capital; Skills; Occupational Choice; Labor Productivity, J22 - Time Allocation and Labor Supply, H20 - Taxation, Subsidies, and Revenue: General, D30 - Distribution: General, E20 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy: General (includes Measurement and Data), and H40 - Publicly Provided Goods: General
Creator: Mehra, Rajnish, Piguillem, Facundo, and Prescott, Edward C. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 405 Abstract:
The difference between average borrowing and lending rates in the United States is over 2 percent. In spite of this large difference, there is over 1.7 times GNP in 2007 of intermediated borrowing and lending between households. In this paper a model is developed consistent with these facts. The only difference within an age cohort is preferences for bequests. Individuals with little or no bequest motive are lenders, while individuals with strong bequest motive are borrowers and owners of productive capital. Given no aggregate uncertainty, the return on equity is the same as the household borrowing rate. The government can borrow at the household lending rate, so there is a 2 percent equity premium in our world with no aggregate uncertainty. We examine the distribution and life cycle patterns of asset holding and consumption and find there is large dispersion in asset holdings and little in consumption.
This paper was subsequently published as Working Paper 685 under the title "Costly Financial Intermediation in Neoclassical Growth Theory."
Keyword: Bequests, Assets quantities, General equilibrium, Life cycle, and Asset returns Subject (JEL): E20 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy: General (includes Measurement and Data), E44 - Financial Markets and the Macroeconomy, and G10 - General Financial Markets: General (includes Measurement and Data)
Creator: Azariadis, Costas, Bullard, James, and Ohanian, Lee E. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 255 Abstract:
Autoregressions of quarterly or annual aggregate time series provide evidence of trend-reverting output growth and of short-term dynamic adjustment that appears to be governed by complex eigenvalues. This finding is at odds with the predictions of reasonably parameterized, convex one-sector growth models, most of which have positive real characteristic roots. We study a class of one-sector economies, overlapping generations with finite life spans of L greater than or equal to 3, in which aggregate saving depends nontrivially on the distribution of wealth among cohorts. If consumption goods are weak gross substitutes near the steady state price vector, we prove that the unique equilibrium of a life cycle exchange economy converges to the unique steady state via damped oscillations. We also conjecture that this form of trend reversion extends to production economies with a relatively flat factor-price frontier, and we test this conjecture in several plausible parameterizations of 55-period life cycle economies.
Keyword: Eigenvalues, Economies, Cyclical fluctuations, and Life cycle Subject (JEL): E30 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data)