Research Database

A simple model of backed money without a store of value function is presented, discussed, and defended. The function of money in the model is to replace complex contingent contracts traded on a centralized exchange with simple trades in decentralized markets.

We revisit the question of how capital should be taxed, arguing that if governments are allowed to use the kinds of tax instruments widely used in practice, for preferences that are standard in the macroeconomic literature, the optimal approach is to never distort capital accumulation. We show that the results in the literature that lead to the presumption that capital ought to be taxed for some time arise because of the initial confiscation of wealth and because the tax system is restricted.

We present a model of vintage human capital. The economy exhibits exogenous deterministic technological change. Technology requires skills that are specific to the vintage. A stationary competitive equilibrium is defined and shown to exist and be unique, as well as Pareto optimal. The stationary equilibrium is characterized by an endogenous distribution of skilled workers across vintages. The distribution is shown to be single peaked and there is diffusion of technology in the sense that there is a lag between the time when a technology appears and the peak of its usage. An increase in the rate of exogenous technological change shifts the distribution of human capital to more recent vintages and increases the relative wage of the unskilled workers in each vintage.

This study examines the shape of an optimal income tax schedule in a monetary economy. In equilibrium, money’s role is to allocate resources across generations, while a tax-transfer scheme serves as a form of social insurance. It is found that the optimal real income tax with money can be progressive.

This paper studies a quantitative dynamic general equilibrium life-cycle model where parents and their children are linked by bequests, both voluntary and accidental, and by the transmission of earnings ability. This model is able to match very well the empirical observation that households with similar lifetime incomes hold very different amounts of wealth at retirement. Income heterogeneity and borrowing constraints are essential in generating the variation in retirement wealth among low lifetime income households, while the existence of intergenerational links is crucial in explaining the heterogeneity in retirement wealth among high lifetime income households.

Recently, several economies with interest rates close to zero have received large capital inflows while their central banks accumulated large foreign reserves. Concurrently, significant deviations from covered interest parity have appeared. We show that, with limited international arbitrage, a central bank's pursuit of an exchange rate policy at the ZLB can explain these facts. We provide a measure of the costs associated with this policy and show they can be sizable. Changes in external conditions that increase capital inflows are detrimental, even when they are beneficial away from the ZLB. Negative nominal rates and capital controls can reduce the costs.

A critical roadblock to modelling inventories of finished goods has been the claim that production and inventory decisions of a perfectly competitive firm are determined independently of each other. A basic goal of this study is to specify fundamental preferences of economic agents, technologies, constraints and market structures that are, in a rough way, capable of generating patterns of serial correlation and cross correlation between inventories and employment of factors of production that are consistent with those observed in the data. The claim is made that the time series for inventories, output and employment can be interpreted as emerging from a well specified dynamic, stochastic competitive equilibrium in which economic agents are assumed to form rational expectations about variables not included in their information sets. Inventories and employment will not be related in a direct way if and only if the price elasticity of demand for output is equal to infinity.

We investigate ex-ante efficient contracts in an environment in which implementation is costless. In this environment, standard debt contracts will typically not be optimal. Optimal contracts may involve defaults, even in states in which the borrower is fully able to repay. We then examine the welfare costs of arbitrarily restricting the set of feasible contracts to standard debt contracts. When model parameters are calibrated to realistic values, the welfare loss from exogenously imposing this restriction is extremely small. Thus, if the implementation costs are actually nontrivial (as seems likely), standard debt contracts will be (very close to) optimal.

We find that precautionary saving accounts for only a modest (less than 3 percentage point) increase in the aggregate saving rate, at least for moderate and empirically plausible parameter values. This finding is based on a quantitative analysis of a reasonably parameterized version of the standard growth model modified to include a large number of agents who receive uninsured idiosyncratic labor endowment shocks. In contrast to representative agent models, asset trading is quite important to individuals. The model can also account qualitatively for the positive skewness of wealth and income distributions, and significantly greater wealth inequality compared to income inequality.

This paper provides structural estimates of a dynamic model of schooling, work, and occupational choice decisions based on 11 years of observations on a sample of young men from the 1979 youth cohort of the National Longitudinal Surveys of Labor Market Experience (NLSY). The structural estimation framework that we adopt fully imposes the restrictions of the theory and permits an investigation of whether such a theoretically restricted model can succeed in quantitatively fitting the observed data patterns. We find that a suitably extended human capital investment model can in fact do an excellent job of fitting observed data on school attendance, work, occupational choices, and wages in the NLSY data on young men and also produces reasonable forecasts of future work decisions and wage patterns.