Research Database

When marginal utility of consumption depends on leisure, investors will take this into account when allocating their wealth among different assets. This paper presents a multi-country general equilibrium model driven by productivity shocks, where labor-leisure and consumption are chosen endogenously. We use this framework to study the effect of leisure for optimal international diversification. We find that in the symmetric case the model’s ability to help explain home-bias depends crucially on the level of substitutability between consumption and leisure.

This article estimates the benefits of reducing U.S. inflation below its current level when the government simultaneously raises another distortionary tax. Other researchers have suggested that reducing inflation would have fairly large benefits—from 1 to 3 percent of gross domestic product. But that result depends on the unrealistic assumption that the government would replace inflation with a lump-sum tax, one which does not affect people's incentives. If, instead, inflation is replaced with an increase in the labor income tax, then the welfare gains that can be expected from reducing inflation below its current level are much smaller—from one-third to one-half of 1 percent of gross domestic product.