Creator: Aiyagari, S. Rao Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 508 Abstract:
For a wide class of dynamic models, Chamley (1986) has shown that the optimal capital income tax rate is zero in the long run. Lucas (1990) has argued that for the U.S. economy there is a significant welfare gain from switching to this policy. We show that for the Bewley (1986) class of models with heterogeneous agents and incomplete markets (due to uninsured idiosyncratic shocks), and borrowing constraints the optimal tax rate on capital income is positive even in the long run. Quantitative analysis of a parametric version of such a model suggests that one cannot dismiss the possibility that the observed tax rates on capital and labor income for the U.S. economy are fairly close to being (long run) optimal. We also provide an existence proof for the dynamic Ramsey optimal tax problem in this environment.
Creator: Alonso, Irasema Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 510 Abstract:
We seem to observe different patterns of exchange at different times and in different places. The first goal of this paper is to develop a model of money as a medium of exchange which allows multiple transaction patterns. A dynamic version of Shubik’s trading post economy is used, and it is shown that this economy allows a role for fiat money, and that fiat money can coexist with barter in exchange. There are multiple decentralized equilibria, and one of these resembles the equilibrium of a cash-in-advance economy—indeed, the model can be viewed as a generalization of the cash-in-advance framework. The second goal of the paper is to show that the present model can help explain why inflation seems far more disruptive and costly than what is implied by empirical studies on the cash-in-advance model. The argument for this is based on misestimations due to the unobservability of the patterns of exchange, which are variable in this model.
Creator: Aiyagari, S. Rao and Wallace, Neil Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 516 Abstract:
An interpretation of government policy regarding what it accepts in transactions is embedded in a version of the Kiyotaki-Wright model of media of exchange. In an example with two goods and one fiat money, the policies consistent with fiat money being the unique medium of exchange are identified. These uniqueness policies have the government favoring fiat money in its transactions. Benefits and costs accompany any such policy. The benefit is that a worse nonmonetary equilibrium is eliminated; the cost is that a better monetary equilibrium is also eliminated.
Subject (JEL): E40 - Money and Interest Rates: General
Creator: Aiyagari, S. Rao and Eckstein, Zvi Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 525 Abstract:
This paper is motivated by observations concerning the size of the banking sector and the growth rate of the economy before and after successful stabilizations of high inflations. The facts suggest that the relative size of the banking sector increases during a period of accelerating inflation and decreases immediately following a successful monetary stabilization. Furthermore, the GDP growth rate is lower during the high inflation period than after stabilization. The goal of this paper is to develop a monetary growth model which is qualitatively consistent with these observations. The model we use is a variant of the Lucas and Stokey (1987) model of cash and credit goods. The main innovation in our model is that while cash goods and credit goods are perfect substitutes in consumption we posit different technologies for their production. We show that the model’s predictions on the impact of a permanent stabilization are consistent with the main real and monetary observations on high inflation countries.
Creator: Aiyagari, S. Rao and McGrattan, Ellen R. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 538 Abstract:
We describe a model for calculating the optimal quantity of debt and then apply it to the U.S. economy. The model consists of a large number of infinitely-lived households whose saving behavior is influenced by precautionary saving motives and borrowing constraints. This model incorporates a different role for government debt than the standard representative agent growth model and captures different trade-offs between the benefits and costs of varying its level. Government debt enhances the liquidity of households by providing additional assets for smoothing consumption (in addition to claims to capital) and effectively loosening borrowing constraints. By raising the interest rate, government debt makes assets less costly to hold and more effective in smoothing consumption. However, the implied taxes have wealth distribution, incentive, and insurance effects. Further, government debt crowds out capital (via higher interest rates) and lowers per capita consumption. Our quantitative analysis suggests that the crowding out effect is decisive for welfare. We also describe variations of the model which permit endogenous growth. It turns out that even with lump sum taxes and inelastic labor, government debt as well as government consumption have growth rate effects, thereby implying large welfare gains from reducing the level of debt.
Keyword: Government debt, Borrowing constraints, and Precautionary saving Subject (JEL): E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General and H60 - National Budget, Deficit, and Debt: General
Creator: Geweke, John Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 539 Abstract:
In the specification of linear regression models it is common to indicate a list of candidate variables from which a subset enters the model with nonzero coefficients. This paper interprets this specification as a mixed continuous-discrete prior distribution for coefficient values. It then utilizes a Gibbs sampler to construct posterior moments. It is shown how this method can incorporate sign constraints and provide posterior probabilities for all possible subsets of regressors. The methods are illustrated using some standard data sets.
Creator: Geweke, John Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 540 Abstract:
The reduced rank regression model arises repeatedly in theoretical and applied econometrics. To date the only general treatment of this model have been frequentist. This paper develops general methods for Bayesian inference with noninformative reference priors in this model, based on a Markov chain sampling algorithm, and procedures for obtaining predictive odds ratios for regression models with different ranks. These methods are used to obtain evidence on the number of factors in a capital asset pricing model.
Keyword: Factor model, Capital asset pricing model, and Predictive odds Subject (JEL): C11 - Bayesian Analysis: General and C15 - Statistical Simulation Methods: General
Creator: Boyd, John H. and Smith, Bruce D. (Bruce David), 1954-2002 Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 541 Abstract:
We produce a theoretical framework that helps explain the co-evolution of the real and financial sectors of an economy in the growth process, as described by Gurley and Shaw. According to them, self-financed capital investment first gives way to debt finance and later to the emergence of equity as an additional instrument for raising funds externally. As the economy develops further, the aggregate ratio of debt to equity will generally fall. We analyze that portion of their account concerning the evolution of equity markets. We show that in an important sense, debt equity are complementary sources for the financing of capital investments.