Indeterminancy and Sunspots with Constant Returns

We show that indeterminacy can easily arise in multi-sector models that have constant variable returns to scale and very small market imperfections. This is in sharp contrast to models that require increasing returns to generate indeterminacy, and which have been criticized on the basis of recent empirical estimates indicating that returns to scale are roughly constant, and that market imperfections are small. We also show that we can calibrate our constant returns model with sunspots, using standard parametrizations to produce a close match to the moments of aggregate consumption, investment, output and employment in U.S. data.Indeterminacy, multiple equilibria, sunspots

Optimal Migration: A World Perspective

We ask what level of migration would maximize world welfare. We find that skill-neutral policies are never optimal. An egalitarian welfare function induces a policy that entails moving mainly unskilled immigrants into the rich countries, whereas a welfare function skewed highly towards the rich countries induces an optimal policy that entails a brain-drain from the poor countries. For intermediate welfare functions that moderately favor the rich however, it is optimal to have no migration at all.

The distribution of wealth and redistributive policies

In this paper we study theoretically the dynamics of the distribution of wealth in an Overlapping Generation economy with bequest and various forms of redistributive taxation. We characterize the transitional dynamics of the wealth distribution and as well as the stationary distribution. We show that, in our economy, the stationary wealth distribution is a power law, a Pareto distribution in particular. Wealth is less concentrated (the Gini coefficient is lower) for both higher capital income taxes and estate taxes, but the marginal effect of capital income taxes is much stronger than the effect of estate taxes. Finally, we characterize optimal redistributive taxes with respect to an utilitarian social welfare measure. Social welfare is maximized short of minimal wealth inequality and with zero estate taxes.wealth distribution

Redistribution, taxes, and the median voter

We study a simple model of production, accumulation, and redistribution, where agents are heterogeneous in their initial wealth, and a sequence of redistributive tax rates is voted upon. Though the policy is infinite-dimensional, we prove that a median voter theorem holds if households have identical, Gorman aggregable preferences; furthermore, the tax policy preferred by the median voter has the “bang- bang” property.Taxation ; Wealth

Optimal Taxes Without Commitment.

In the problem of optimal taxation in an economy with two productive factors, labor and capital, the optimal solution when the government can commit to a sequence of tax rates, has the tax on capital tending to zero in the limit, with all the tax burden on labour. It is well known, however, that this solution is time inconsistent; so if the commitment power is not perfect, this second best tax plan will not be suitable. We model explicitly the tradeoff between the cost of revising the tax plan, and the benefit of the revision.FISCAL POLICY;CAPITAL;TAXES;TAXATION

A NEW CLASS OF SOLUTIONS TO DYNAMIC PROGRAMMING PROBLEMS ARISING IN GROWTH THEORY AND APPLICATIONS TO DYNAMIC GAMES

stochastic processes ; growth models ; risk aversion ; game theory

Indeterminacy, Aggregate Demand, and the Real Business Cycle

We show that under indeterminacy aggregate demand shocks are able to explain not only aspects of actual °uctuations that standard RBC models predict fairly well, but also aspects of actual °uctuations that standard RBC models cannot explain, such as the hump-shaped, trend reverting impulse responses to transitory shocks found in US output (Cogley and Nason, AER, 1995); the large forecastable movements and comovements of output, consumption and hours (Rotemberg and Woodford, AER, 1996); and the fact that consumption appears to lead output and investment over the business cycle. Indeterminacy arises in our model due to capacity utilization and mild increasing returns to scale.

The Political Economy of Redistribution under Democracy

We ask what redistributions of income and assets are feasible in a democracy, given the initial assets and their distribution. The question is motivated by the possibility that if redistribution is insufficient for the poor or excessive for the rich, they may turn against democracy. In turn, if no redistribution simultaneously satisfies the poor and the wealthy, democracy cannot be sustained. Hence, the corollary question concerns the conditions under which democracy is sustainable. Since decisions to save are endogenous, we solve explicitly for the current growth rates given any time path of future tax rates. We find that the optimal path of redistribution chosen by the median voter under the constraint of rebellion by the poor or the wealthy consists of redistributing as much as possible as soon as possible. However, this path is time inconsistent unless voters punish governments that deviate from their promises. Democracies survive in wealthy societies, with a lower average capital stock when they are more equal.Sustainable Democracy, Optimal Taxes

Moderate inflation and the deflation-depression link

In a recent paper, Atkeson and Kehoe (2004) demonstrated the lack of a robust empirical relationship between inflation and growth for a cross-section of countries with 19th and 20th century data, concluding that the historical evidence only provides weak support for the contention that deflation episodes are harmful to economic growth. In this paper, we revisit this relationship by allowing for inflation and growth to have a nonlinear specification dependent on inflation levels. In particular, we allow for the possibility that high inflation is negatively correlated with growth, while a positive relationship exists over the range of negative-to-moderate inflation. Our results confirm a positive relationship between inflation and growth at moderate inflation levels, and support the contention that the relationship between inflation and growth is non-linear over the entire sample range.Inflation (Finance)