OPTIMAL FISCAL POLICY IN A BUSINESS CYCLE MODEL: ALTERNATIVE IDENTIFICATIONS OF THE OPTIMAL EXPOST CAPITAL INCOME TAX RATES

This paper deals with the indeterminacy of optimal fiscal policy treated by Zhu (1992) and Chari, Christiano and Kehoe (1994). These authors identify the optimal fiscal policy restricting the debt return to be uncontingent to the state of nature. In this paper we use other kind of restrictions in order to identify the optimal fiscal policy. Using the solution method proposed by Sims (1998), we can select an equilibrium by enforcing a stable path for the bonds allocation, to identify all the fiscal policy variables contingent to the state of nature. We also use a decomposition of the expectational terms that allow us to obtain the ex-ante capital income tax rate in order to be compared with the ex-post (contingent) tax rate. We can demonstrate that the risk aversion changes the relationship between the expectational errors of the private agents and the sources of fluctuations. The numerical simulation provides some different results: the optimal tax rate on capital incom e is constant, instead of the very volatile tax rate obtained by Chari, Christiano and Kehoe (1994). This property remains unaltered when we use alternative restrictions (exogenous debt path and exogenous expectational errors) to identify the contingent optimal fiscal policy.

The Evolution of Exchange

Stochastic stability is applied to the problem of exchange. We analyze the stochastic stability of two dynamic trading processes in a simple housing market. In both models traders meet in pairs at random and exchange their houses when trade is mutually beneficial, but occasionally they make mistakes. The models differ in the probability of mistakes. When all mistakes are equally likely, the set of stochastically stable allocations contains the set of efficient allocations. When more serious mistakes are less likely, the stochastically stable states are those allocations, always efficient, with the lowest envy-level.stochastic stability, exchange, housing problem, efficiency, envy.

Dynamic Recontracting processes with Multiple Indivisible Goods

We consider multiple-type housing markets. To capture the dynamic aspect of trade in such markets, we study a dynamic recontracting process similar to the one introduced by Serrano and Volij (2005). First, we analyze the set of recurrent classes of this process as a (non-empty) solution concept. We show that each core allocation always constitutes a singleton recurrent class and provide examples of non-singleton recurrent classes consisting of blocking-cycles of individually rational allocations. For multiple-type housing markets stochastic stability never serves as a selection device among recurrent classes. Next, we propose a method to compute the limit invariant distribution of the dynamic recontracting process. The limit invariant distribution exploits the interplay of coalitional stability and accessibility that determines a probability distribution over final allocations. We provide various examples to demonstrate how the limit invariant distribution discriminates among stochastically stable allocations: surprisingly, some core allocations are less likely to be final allocations of the dynamic process than cycles composed of non-core allocations.microeconomics ;

Dynamic recontracting processes with multiple indivisible goods

We consider multiple-type housing markets. To capture the dynamic aspect of trade in such markets, we study a dynamic recontracting process similar to the one introduced by Serrano and Volij (2005). First, we analyze the set of recurrent classes of this process as a (non-empty) solution concept. We show that each core allocation always constitutes a singleton recurrent class and provide examples of non-singleton recurrent classes consisting of blocking-cycles of individually rational allocations. For multiple-type housing markets stochastic stability never serves as a selection device among recurrent classes.Next, we propose a method to compute the limit invariant distribution of the dynamic recontracting process. The limit invariant distribution exploits the interplay of coalitional stability and accessibility that determines a probability distribution over final allocations. We provide various examples to demonstrate how the limit invariant distribution discriminates among stochastically stable allocations: surprisingly, some core allocations are less likely to be final allocations of the dynamic process than cycles composed of non-core allocations.core, indivisible goods, limit invariant distribution, stochastic stability