Another attempt to quantify the benefits of reducing inflation

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.Inflation (Finance)

Saving and Interest Rates in Japan:Why They Have Fallen and Why They Will Remain Low

Saving, Heterogeneity, general equilibrium

"The Welfare Enhancing Effects of a Selfish Government in the Presence of Uninsurable, Idiosyncratic Risk"

This paper poses the following question: Is it possible to improve welfare by increasing taxes and throwing away the revenues? This paper demonstrates that the answer to this question is "yes." We show that there may be welfare gains from taxing capital income even when the additional capital income tax revenues are wasted or consumed by a selfish government. Previous literature has assumed that government expenditures are exogenous or productive, or allowed for redistribution of tax revenue either via lump-sum transfers, unemployment compensation or other redistributive schemes. In our model a selfish government taxes capital above a given threshold and then consumes the proceeds. This raises the before-tax real return on capital and and thereby enhances the ability of agents to self-insure when they are long-term unemployed and have low savings. Since all agents have positive probability of finding themselves in that state there are cases where all agents prefer a selfish government to no government at all.

Banking in General Equilibrium with an Application to Japan

Japan has now experienced over a decade of slow growth and deflation. This period has also been associated with protracted problems in the banking sector. A wide range of measures have been tried in to restore health in the banking sector including recapitalization, the extension of 100% guarantees to all deposits, and central bank purchases of shares held by banks. It has also argued that ending deflation is an important ingredient in restoring banking sector health. This paper develops a general equilibrium of the banking sector. In our model the banking sector produces an intermediate good that is used to produce investment goods and a variable fraction of consumption goods. We then assess the implications of alternative policies designed to assist the banking sector in terms of their implications for welfare and the size and profitability of the banking sector.

The Welfare Enhancing Effects of a Selfish Government in the Presence of Uninsurable, Idiosyncratic Risk

This paper poses the following question: Is it possible to improve welfare by increasing taxes and throwing away the revenues? This paper demonstrates that the answer to this question is “yes.” We show that there may be welfare gains from taxing capital income even when the additional capital income tax revenues are wasted or consumed by a selfish government. Previous literature has assumed that government expenditures are exogenous or productive, or allowed for redistribution of tax revenue either via lump-sum transfers, unemployment compensation or other redistributive schemes. In our model a selfish government taxes capital above a given threshold and then consumes the proceeds. This raises the before-tax real return on capital and and thereby enhances the ability of agents to self-insure when they are long-term unemployed and have low savings. Since all agents have positive probability of finding themselves in that state there are cases where all agents prefer a selfish government to no government at all.capital income tax, selfish government, welfare improvement, redistribution

"Monetary Policy and Economic Activity in Japan and the United States"

A cornerstone of monetary policy making is that a looser monetary policy is associated with lower interest rates, higher growth of narrow monetary aggregates, higher output and higher inflation. These responses, which we collectively refer to as the liquidity effect hypothesis, are at odds with some of the leading theoretical models of money. This paper proposes and implements a quasi-Bayesian methodology that allows us to compare the liquidity effect hypothesis with two other hypotheses: the sticky price hypothesis and the inflation tax hypothesis. Our results indicate that there is evidence against the liquidity effect hypothesis in U.S. data, but that a skeptical Bayesian decision maker would still assign most posterior weight it. For Japan, in contrast, even a skeptic would end up favoring the sticky price hypothesis.

The Welfare Enhancing Effects of a Selfish Government in the Presence of Uninsuarable, Idiosyncratic Risk

This paper poses the following question: Is it possible to improve welfare by increasing taxes and throwing away the revenues? This paper demonstrates that the answer to this question is "yes." We show that there may be welfare gains from taxing capital income even when the additional capital income tax revenues are wasted or consumed by a selfish government. Previous literature has assumed that government expenditures are exogenous or productive, or allowed for redistribution of tax revenue either via lump-sum transfers, unemployment compensation or other redistributive schemes. In our model a selfish government taxes capital above a given threshold and then consumes the proceeds. This raises the before-tax real return on capital and and thereby enhances the ability of agents to self-insure when they are long-term unemployed and have low savings. Since all agents have positive probability of finding themselves in that state there are cases where all agents prefer a selfish government to no government at all.

Monetary Policy during Japan's Lost Decade

We develop a quantitative costly price adjustment model with capital formation for the Japanese Economy. The model respects the zero interest rate bound and is calibrated to reproduce the nominal and real facts from the 1990s. We use the model to investigate the properties of alternative monetary policies during this period. The setting of the long-run nominal interest rate in a Taylor rule is much more important for avoiding the zero bound than the setting of the reaction coefficients. A long-run interest rate target of 2.3 percent during the 1990s avoids the zero bound and enhances welfare.

"Aggregate Risk in Japanese Equity Markets"

In the past decade Japanese households have been buffeted by some big aggregate shocks. Economic growth has slowed, unemployment risk has risen, and asset prices have fallen to levels not seen since the early 1980's. These shocks have hit both households' financial and human capital. This paper develops a framework for identifying the sources of these shocks and a way to measure how household assessments of these risks vary over time. We consider the perspective of a forward-looking risk-averse household and derive expected returns and time-varying risk premia for each risk factor. We then construct times-series of historical expected risk premia using Japanese data on industry returns. An analysis of this data provides four main findings. First, prior to 1984 expected risk premia on identified goods market shocks, monetary policy and financial market risk are all important determinants of industry level expected returns. Second, starting in 1984 households perceive that the risk from financial shocks is increasing and demand higher risk premia to hold this risk. Third, between 1987 and 1990 risk premia on monetary policy are large and positive. Monetary policy is perceived to be adding to financial risk. Fourth, in 1990 as expected risk premia on financial risk shoot up, expected risk premia on monetary policy shocks turn negative for all industry returns. As stock prices collapse between 1990 and 1995, monetary policy shocks play an important role in hedging risk emanating from the financial sector.

"Pareto Optimal Pro-cyclical Research and Development"

We develop a perfectly competitive endogenous growth model in which R&D is the engine of growth. Our model generates pro-cyclical R&D investment and labor input as a pareto optimal response to technology shocks to the consumption and equipment good sectors. The model also reproduces a variety of facts from the U.S. economy. Growth in R&D capital accounts for 75 percent of the growth rate of GNP and the decline in the relative price of equipment investment. Investment in each sector is pro-cyclical. Our results suggest that equipment shocks may be less important than the previous literature has found. After accounting for the endogenous response of R&D, equipment sector shocks only account for a small fraction of the variance in the growth rate of GNP.