Boom & gloom in housing markets: the sequel

Housing

Optimal Fiscal Policy in Overlapping Generations Models

This paper provides, from a theoretical and quantitative point of view, an explanation of why taxes on capital returns are high (around 35%) by analyzing the optimal fiscal policy in an economy with intergenerational redistribution. For this purpose, the government is modeled explicitly and can choose (and commit to) an optimal tax policy in order to maximize society's welfare. In an infinitely lived economy with heterogeneous agents, the long run optimal capital tax is zero. If heterogeneity is due to the existence of overlapping generations, this result in general is no longer true. I provide sufficient conditions for zero capital and labor taxes, and show that a general class of preferences, commonly used on the macro and public finance literature, violate these conditions. For a version of the model, calibrated to the US economy, the main results are: first, if the government is restricted to a set of instruments, the observed fiscal policy cannot be disregarded as sub optimal and capital taxes are positive and quantitatively relevant. Second, if the government can use age specific taxes for each generation, then the age profile capital tax pattern implies subsidizing asset returns of the younger generations and taxing at higher rates the asset returns of the older ones.optimal taxation

Lending standards in mortgage markets

While the data seem to suggest that lenders did the right thing by tightening standards and increasing denials...the ongoing financial crisis suggests that they did not tighten them enough.Mortgages ; Bank loans

Optimal response to a transitory demographic shock in Social Security financing

The authors consider a transitory demographic shock that affects negatively the financing of retirement pensions-that is, workers either would have to pay more or retirees would receive less. In contrast to the existing literature, the authors endogenously determine optimal policies rather than explore the implications of exogenous parametric responses. Their approach identifies optimal strategies of the Social Security Administration to guarantee the financial sustainability of existing retirement pensions in a Pareto-improving way. Hence, no cohort will pay the cost of the demographic shock. The authors find that the optimal strategy is based on the following ingredients: elimination of compulsory retirement, a change in the structure of labor income taxation, and a temporary increase in the level of government debt.Social security ; Pensions

La financiacion del Sistema de Seguridad Social en Espana: Efectos dinamicos de una posible reforma

Este articulo analiza los efectos de dos posibles reformas en la financiacion del actual sistema de Seguridad Social en Espana, y cuantifica los efectos de dichas reformas sobre los principales agregados macroeconomicos. El tipo de reformas que se analizan son la sustitucion del actual regimen de financiacion de cotizaciones, por imposicion directa e indirecta, y los efectos de variaciones en plazo de calculo de las pensiones de jubilacion. Para este proposito se construye un modelo de equilibrio general de generaciones sucesivas con agentes heterogeneos, calibrado para obtener resultados cuantitativos para el caso espanol. Encontramos que el actual sistema de financiacion es susceptible de mejora en su eficiencia, medida en terminos de variacion equivalente en el consumo, si se sustituye total o parcialmente por un regimen de impuestos indirectos. Cambios en el periodo de calculo de la pension afectan fundamentalmente a las decisiones temporales de ahorro/desahorro de los agentes.agentes heterogeneos, equilibrio general dinamico, seguridad social

Optimal Fiscal Policy in Overlapping Generations Models

This paper analyzes the optimal fiscal policy in overlapping generation economies with production where agents live I periods. The primal approach is used to characterize the optimal taxes in steady state and along the transition path to some steady state. The basic idea is to transform the government problem of choosing the optimal taxes, into a simple programming problem of choosing allocations subject to some constraints. The key findings is that if the set of taxes is complete and the utility is homothetic and separable, then capital taxes are zero along the transition path to the steady state after two periods. This result is an equivalent version of Chamley (1986) with overlapping generations. With additional assumptions in the discount factor and endowment of efficiency units, it can be shown that non-separable utility functions satisfy the zero capital taxes result in steady state, but not during the transition path. This is due to the fact that from the government point of view, under this assumptions, the overlapping generation economy is equivalent to an infinitely lived economy.

Optimal fiscal policy in the design of Social Security reforms

The quantitative macroeconomics literature has documented that in the basic Overlapping Generations model a privatization of the social security system, going from a Pay-As-You-Go to a Fully Funded system, generates large long run welfare gains at the cost of substantial welfare losses for initial generations. We propose an alternative to previous literature. In this paper we maximize over the entire policy space, following the optimal fiscal policy approach, rather than comparing alternative policy paths one to one. That is, policies are chosen as part of the optimal design of a social security privatization in a Pareto improving way. The government decides endogenously how to finance the implicit social security liabilities and compensate the initial generations alive during the transition. In contrast with previous analysis the resulting allocation, by construction, lies on the constrained Pareto frontier. We find that the optimal design of reforms exhibits sizeable welfare gains, arising because of the reduction in labor supply distortions. In contrast, the welfare gains coming from the reduction of savings distortions are relatively small.Fiscal policy ; Social security

Generational policy and the macroeconomic measurement of tax incidence

In this paper we show that the generational accounting framework used in macroeconomics to measure tax incidence can, in some cases, yield inaccurate measurements of the tax burden across age cohorts. This result is very important for policy evaluation, because it shows that the selection of tax policies designed to change generational imbalances could be misleading. We illustrate this problem in the context of a Social Security reform where we show how fiscal policy can affect the intergenerational gap across cohorts without impacting the distribution of welfare. We provide a more accurate procedure that only measures changes in generational imbalances derived from policies with real effects.Fiscal policy ; Taxation

Optimal response to a transitory demographic shock in Social Security financing

We examine the optimal policy response to a transitory demographic shock that affects negatively the financing of retirement pensions. In contrast to existing literature, we endogenously determine optimal policies rather than exploring implications of exogenous parametric policies. Our approach identifies optimal strategies of the social security administration to guarantee the financial sustainability of existing retirement pensions in a Pareto improving way. Hence, no cohort will pay the cost of the demographic shock. We find that the optimal strategy is based in the following ingredients: elimination of compulsory retirement, a change in the structure of labor income taxation and a temporary increase in the level of government debt.Social security ; Pensions

Accounting for Changes in the Homeownership Rate

After 40 years of stability, the homeownership rate -- a target for housing policy -- has steadily increased since 1995. We attempt to understand this increase using a quantitative model to evaluate various suggested explanations. We find that the increase can be explained by mortgage-market innovations that have reduced initial downpayments