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Creator: Conesa, Juan Carlos and Kehoe, Timothy Jerome, 1953 Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 550 Abstract: In the early 1970s, hours worked per workingage person in Spain were higher than in the United States. Starting in 1975, however, hours worked in Spain fell by 40 percent. We find that 80 percent of the decline in hours worked can be accounted for by the evolution of taxes in an otherwise standard neoclassical growth model. Although taxes play a crucial role, we cannot argue that taxes drive all of the movements in hours worked. In particular, the model underpredicts the large decrease in hours in 1975–1986 and the large increase in hours in 1994–2007. The lack of productivity growth in Spain during 1994–2015 has little impact on the model’s prediction for hours worked.
Keyword: Distortionary taxes, Total factor productivity, Hours worked, and Dynamic general equilibrium Subject (JEL): C68  Computable General Equilibrium Models, E24  Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity, E13  General Aggregative Models: Neoclassical, and H31  Fiscal Policies and Behavior of Economic Agents: Household 

Creator: Mulligan, Casey B. Series: Great depressions of the twentieth century Abstract: I prove some theorems for competitive equilibria in the presence of distortionary taxes and other restraints of trade, and use those theorems to motivate an algorithm for (exactly) computing and empirically evaluating competitive equilibria in dynamic economies. Although its economics is relatively sophisticated, the algorithm is so computationally economical that it can be implemented with a few lines in a spreadsheet. Although a competitive equilibrium models interactions between all sectors, all consumer types, and all time periods, I show how my algorithm permits separate empirical evaluation of these pieces of the model and hence is practical even when very little data is available. For similar reasons, these evaluations are not particularly sensitive to how data is partitioned into "trends" and "cycles." I then compute a real business cycle model with distortionary taxes that fits aggregate U.S. time series for the period 192950 and conclude that, if it is to explain aggregate behavior during the period, government policy must have heavily taxed labor income during the Great Depression and lightly taxed it during the war. In other words, the challenge for the competitive equilibrium approach is not so much why output might change over time, but why the marginal product of labor and the marginal value of leisure diverged so much and why that wedge persisted so long. In this sense, explaining aggregate behavior during the period has been reduced to a public finance question  were actual government policies distorting behavior in the same direction and magnitude as government policies in the model?
Keyword: Depressions, Taxes, World War 2, and Competitive equilibrium models Subject (JEL): H30  Fiscal Policies and Behavior of Economic Agents: General, E32  Business Fluctuations; Cycles, and C68  Computable General Equilibrium Models 
Creator: Aiyagari, S. Rao and Peled, Dan Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 197 Abstract: It is often argued that with a positively skewed income distribution (median less than mean) majority voting would result in higher tax rates than maximizing average welfare and, hence, lower aggregate savings. We reexamine this view in a capital accumulation model, in which distorting redistributive taxes provide insurance against idiosyncratic shocks and income distributions evolve endogenously. We find small differences of either sign between the tax rates set by a majority voting and a utilitarian government, for reasonable parametric specifications, despite the fact that model simulations produce positively skewed distributions of total income across agents.
Keyword: Proportional taxes, Utilitarian government, and Sequential majority voting Subject (JEL): C68  Computable General Equilibrium Models, E62  Fiscal Policy, and H23  Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies 
Creator: Mercenier, Jean and Schmitt, Nicolas Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 188 Abstract: We argue that the rationalization gains often predicted by static applied general equilibrium models with imperfect competition and scale economies are artificially boosted by an unrealistic treatment of fixed costs. We introduce sunk costs into one such model calibrated with realworld data. We show how this changes the oligopoly game in a way significant enough to affect, both qualitatively and quantitatively, the outcome of a trade liberalization exercise.
Keyword: Market structure, Applied general equilibrium, Sunk costs, and Trade liberalization Subject (JEL): D58  Computable and Other Applied General Equilibrium Models, C68  Computable General Equilibrium Models, F17  Trade: Forecasting and Simulation, and F12  Models of Trade with Imperfect Competition and Scale Economies; Fragmentation 
Creator: Christiano, Lawrence J. and Fisher, Jonas D. M. (Jonas Daniel Maurice), 1965 Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 171 Abstract: We describe several methods for approximating the solution to a model in which inequality constraints occasionally bind, and we compare their performance. We apply the methods to a particular model economy which satisfies two criteria: It is similar to the type of model used in actual research applications, and it is sufficiently simple that we can compute what we presume is virtually the exact solution. We have two results. First, all the algorithms are reasonably accurate. Second, on the basis of speed, accuracy and convenience of implementation, one algorithm dominates the rest. We show how to implement this algorithm in a general multidimensional setting, and discuss the likelihood that the results based on our example economy generalize.
Keyword: Occasionally binding constraints, Parameterized expectations, Collocation, and Chebyshev interpolation Subject (JEL): C68  Computable General Equilibrium Models, C60  Mathematical Methods; Programming Models; Mathematical and Simulation Modeling: General, and C63  Computational Techniques; Simulation Modeling 
Creator: McGrattan, Ellen R. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 164 Abstract: Since it is the dominant paradigm of the business cycle and growth literatures, the stochastic growth model has been used to test the performance of alternative numerical methods. This paper applies the finite element method to this example. I show that the method is easy to apply and, for examples such as the stochastic growth method, gives accurate solutions within a second or two on a desktop computer. I also show how inequality constraints can be handled by redefining the optimization problem with penalty functions.
Keyword: Growth model and Finite element method Subject (JEL): C68  Computable General Equilibrium Models and C63  Computational Techniques; Simulation Modeling 

Creator: Stutzer, Michael J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 300 Keyword: Risk, Infinite hyperreal number, Equilibrium analysis, Hyperinfinite probability theory, and Uncertainty Subject (JEL): D81  Criteria for DecisionMaking under Risk and Uncertainty and C68  Computable General Equilibrium Models