Collateral, Rationing, and Government Intervention in Credit Markets

This paper analyzes the effects of government intervention in credit markets when lenders use collateral, interest, and the probability of granting a loan as potential screening devices. Equilibria with and without rationing are examined. The principal theme is that credit policies operate through their effect on the incentive compatibility constraint, which inhibits high-risk borrowers from mimicking the behavior of low-risk borrowers. Any policy that loosens (tightens) the constraint raises (reduces) efficiency. Most government credit programs explicitly attempt to fund investors that cannot obtain private financing. In the model presented here, these subsidies increase the extent of rationing and reduce efficiency. In contrast, policies that subsidize the nonrationed borrowers, or all borrowers, are efficiency enhancing, and reduce the extent of rationing.

Russia's FLat-Tax: Myths and facts

Flat Tax, Russland, Russia

Perspectives on the Household Saving Rate

macroeconomics, household saving rate

Perspectives on the Budget Surplus

This paper provides alternative measures of federal budget surpluses over 10-year and long-term horizons. Official baseline budget forecasts are based on a series of statutory requirements that may be at variance with reasonable expectation. More plausible notions of current policy toward discretionary spending, taxes and retirement trust funds imply that surpluses over the next 10 years will be substantially smaller than the baseline forecasts indicate. Properly accounting for long-term imbalances in social security and the rest of the budget implies that, under plausible definitions of current policy, the federal government faces a long-term shortfall.

New Results on the Effects of Tax Policy on the International Location of Investment

We study the effects of tax laws on foreign direct investment (FDI) and direct investment abroad (DIA), distinguishing in each case between investment financed by retained earnings and investment financed by transfers from abroad. We find that tax policy, through its effect on the rate-of-return available in the U.S., has an important effect on the international location of investment. FDI in the U.S. is very sensitive to after-tax rates-of-return available here. U.S. direct investment abroad is also affected, although to a lesser extent. We use these estimates to examine the effects of the 1981-82 tax changes on the international location of investment. We estimate that the tax changes lowered annual DIA by $0.5 billion to$1.0 billion (2% to 4% of its 1980 value), and raised annual FDI by $2 billion to$4 billion (11% of 20% of its 1980 value). We also discuss the welfare effects of tax policy toward international investment. Our results suggest that the tax effects on the international location of investment are important. Tax policies, such as ACRS andthe ITC, which raise the after tax rate-of-return on new investment without losing revenue from previous investment, not only stimulate domestic fixed investment, but also attract additional investment from abroad. The additional investment supplements the domestic investment impact on productivity and raises corporate tax revenue. However, our results should be taken as preliminary estimates, not as definitive statements about the long-run impacts of tax policy.

Fiscal policy with high debt and low interest rates

Policymakers in the United States face a combination of high and rising federal debt and low current and projected interest rates on that debt. Rising future debt will reduce growth and impede efforts to enact new policy initiatives. Low interest rates reduce, but do not eliminate, these concerns. The federal fiscal outlook is unsustainable even with projected interest rates that remain below the growth rate for the next 30 years. Short-term policy responses should focus on investments that are preferably tax- financed rather than debt-financed. Most importantly, policymakers should enact a debt reduction plan that is gradually implemented over the medium- and long-term. This would avoid reducing aggregate demand significantly in the short-term and, if done well, could actually stimulate current consumption and production. It would stimulate growth in the long-term, provide fiscal insurance against higher interest rates or other adverse outcomes, give businesses and individuals clarity about future policy and time to adjust, and provide policymakers with assurance that they could consider new initiatives within a framework of sustainable fiscal policy

Fiscal policy with high debt and low interest rates

Policymakers in the United States face a combination of high and rising federal debt and low current and projected interest rates on that debt. Rising future debt will reduce growth and impede efforts to enact new policy initiatives. Low interest rates reduce, but do not eliminate, these concerns. The federal fiscal outlook is unsustainable even with projected interest rates that remain below the growth rate for the next 30 years. Short-term policy responses should focus on investments that are preferably tax- financed rather than debt-financed. Most importantly, policymakers should enact a debt reduction plan that is gradually implemented over the medium- and long-term. This would avoid reducing aggregate demand significantly in the short-term and, if done well, could actually stimulate current consumption and production. It would stimulate growth in the long-term, provide fiscal insurance against higher interest rates or other adverse outcomes, give businesses and individuals clarity about future policy and time to adjust, and provide policymakers with assurance that they could consider new initiatives within a framework of sustainable fiscal policy