Optimal monetary policy and the sacrifice ratio

Monetary policy - United States ; Econometric models

Average Marginal Tax Rates U.S. Household Interest and Dividend Income 1954-80

This paper carefully outlines a method for the calculation of average marginal tax rates. The method is applied to Statistics of Income data for dividend and interest income earned by U.S. households from 1954 to 1980. To illustrate the effects these data can have inempirical work, the tax rates are used in comparing the sample moments of before and after-tax real yields on financial assets.

Technology and growth: an overview

Technology ; Economic development

An Optimising Model for Monetary Policy Analysis: Can Habit Formation Help?

In earlier work (Fuhrer 1997a), I document what I view as the failure of standard models of representative consumer and firm behaviour to replicate the dynamics that we observe in the aggregate data. In essence, these models fail because they imply that both inflation and real variables must ‘jump’ in response to monetary policy (and other) shocks, in contrast to identified VAR evidence that shows a gradual, ‘hump shaped’ response. This paper discusses a rigorous empirical standard for monetary policy models. The motivation for this discussion is that, if one wishes to conduct welfare analysis, one must be reasonably confident that the model provides a good approximation to underlying consumer and firm behaviour over the monetary policy horizon, i.e. in the short run. The paper examines a specific alternative to the standard consumption model in which consumers’ utility depends in part on current consumption relative to past consumption. This formulation of habit formation allows one to nest habit formation, life-cycle consumption, and Campbell and Mankiw’s ‘rule of thumb’ consumers within a more general model. The empirical tests developed in the paper show that one can reject the hypothesis of no habit formation with tremendous confidence. This result suggests that models that are unable to produce a hump-shaped response will be strongly rejected empirically.consumer behaviour; habit formation; monetary policy

Risky Habits: On Risk Sharing, Habit Formation, and the Interpretation of International Consumption Correlations

Standard international economic models with life cycle/permanent income consumption behavior predict that international portfolio diversification leads to high bilateral consumption correlations. Thus international consumption correlations have been empirically estimated as a test of international portfolio diversification and risk sharing. In this paper we investigate the international consumption correlations generated by a more general model which incorporates habit formation in consumption. We show that, in the presence of common interest rate movements, habit formation itself can generate positive international consumption correlations even in the absence of any international risk sharing. Empirical evidence presented in this paper suggests habit formation characterizes consumption behavior among most of the G-7 countries. Thus, the extent of international portfolio diversification may be even lower than that suggested by previous research which studied international consumption correlations.