Creator: Baxter, Marianne, 1956- Series: Nonlinear rational expectations modeling group Abstract:
This paper develops a new method for approximating dynamic competitive equilibria in economies in which competitive equilibrium is not necessarily Pareto optimal. The method involves finding approximate equilibrium policy functions by iterating on the stochastic Euler equations which characterize the economy's equilibrium. Two applications are presented: the stochastic growth model of Brock and Mirman (1971) modified to allow distortionary taxation, and a model of inflation and capital accumulation based on Stockman (1981). The computational speed and accuracy of this approach suggests that it may be a feasible method for studying suboptimal economies with large state spaces.
Subject (JEL): C61 - Mathematical methods and programming - Optimization techniques ; Programming models ; Dynamic analysis, E51 - Monetary policy, central banking, and the supply of money and credit - Money supply ; Credit ; Money multipliers, and C63 - Mathematical methods and programming - Computational techniques ; Simulation modeling
Creator: Krusell, Per., Quadrini, Vincenzo., and Ríos-Rull, José-Víctor. Series: Lucas expectations anniversary conference Abstract:
We use political-equilibrium theory and the neoclassical growth model to compare the quantitative properties of different tax systems. We first explore whether societies which can only use consumption taxes fare better than societies which can only use income taxes. We find that if government outlays are used mainly for redistribution through transfers, then the answer is no, contradicting conventional wisdom in public finance. The reason for this is that when taxes are endogenous, and voted on by a selfish constituency, the distortionary effects of taxation are taken into account in choosing the level of taxation. Hence, political equilibria have the property that taxes which are relatively distortionary will be relatively low. These results are overturned if the government outlays are used only for the providing of public goods, implying that less distortionary taxes give better outcomes. We also investigate the properties of a tax systems in which both consumption and income taxes are used and voted on simultaneously. Since the ability to use more tax instruments allows redistribution with less distortions, the total amount of transfers tends to be higher here than in one-tax systems. Typically, tax systems tend to be self-perpetuating in the sense that changes of the tax system result in a reduction in the welfare of the median voter.
Keyword: Tax, Consumption tax, Tax system, Income tax, and Taxes Subject (JEL): H25 - Taxation, subsidies and revenue - Business taxes and subsidies, E62 - Macroeconomic policy, macroeconomic aspects of public finance, and general outlook - Fiscal policy, and H24 - Taxation, subsidies and revenue - Personal income and other nonbusiness taxes and subsidies
Creator: Alvarez, Fernando, 1964- and Jermann, Urban J. Series: Endogenous incompleteness Abstract:
We study the asset pricing implications of a multi-agent endowment economy where agents can default on debt. We build on the environment studied by Kocherlakota (1995) and Kehoe and Levine (1993). We present an equilibrium concept for an economy with complete markets and with endogenous solvency constraints. These solvency constraints prevent default, but at the cost of reduced risk sharing. We show that versions of the classical welfare theorems hold for this equilibrium definition. We characterize the pricing kernel, and compare it to the one for economies without participation constraints: interest rates are lower and risk premia depend on the covariance of the idiosyncratic and aggregate shocks.
Keyword: Equilibrium, Default, Solvency constraints, Risk, Shocks, and Assets Subject (JEL): G12 - General financial markets - Asset pricing ; Trading volume ; Bond interest rates and D50 - General equilibrium and disequilibrium - General
Creator: Altug, Sumru. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Dept.) Number: 366 Description:
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Keyword: Idiosyncratic risk, Assymetric information , Transaction cost, Private information, Borrowing constraint, Lending, and Market friction Subject (JEL): D82 - Information, knowledge, and uncertainty - Asymmetric and private information and D52 - General equilibrium and disequilibrium - Incomplete markets
Creator: Chari, V. V., Kehoe, Patrick J., and McGrattan, Ellen R. Series: Joint committee on business and financial analysis Abstract:
This paper proposes a simple method for guiding researchers in developing quantitative models of economic fluctuations. We show that a large class of models, including models with various frictions, are equivalent to a prototype growth model with time varying wedges that, at least on face value, look like time-varying productivity, labor taxes, and capital income taxes. We label the time varying wedges as efficiency wedges, labor wedges, and investment wedges. We use data to measure these wedges and then feed them back into the prototype growth model. We then assess the fraction of fluctuations accounted for by these wedges during the great depressions of the 1930s in the United States, Germany, and Canada. We find that the efficiency and labor wedges in combination account for essentially all of the declines and subsequent recoveries. Investment wedge plays at best a minor role.
Keyword: Business cycle, Cycle, Economic fluctuations, Fluctuation, and Growth Subject (JEL): O41 - One, Two, and Multisector Growth Models, O47 - Economic growth and aggregate productivity - Measurement of economic growth ; Aggregate productivity ; Cross-country output convergence, and E32 - Prices, business fluctuations, and cycles - Business fluctuations ; Cycles
Creator: Wallace, Neil. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Dept.) Number: 24 Abstract:
In "Liquidity Preference as Behavior Towards Risk," Tobin suggests that risk aversion and expected utility maximization can provide a rigorous foundation for an equilibrium demand for money. In Tobin's model, money plays a risk reducing role in individual portfolios. This note considers whether a general equilibrium stochastic model can produce equilibrium yield distributions that allow money to play that role if money does not appear directly as an argument in the utility or production functions of the economy. The model examined, a stochastic production variant of Samuelson's model of overlapping generations, cannot produce such yield distributions.
Keyword: Monetary economy, Stochastic, and Risk aversion Subject (JEL): C51 - Econometric modeling - Model construction and estimation, G11 - General financial markets - Portfolio choice ; Investment decisions, and E41 - Money and interest rates - Demand for money