social security liquidity constraints and pre retirement consumption one of the primary goals of the social security retirement program is the maintenance of consumption in old age in the past decade since the pioneering paper by feldstein 13 studies have examined the impact of the system on consumption over the entire life cycle and not just in old age empirical work has tested the impact on consumption of the individual wealth transfers accompanying the introduction of a pay as you go social security system extending this discussion of the impact of social security on pre retirement consumption hubbard 21 has shown in the context of lifetime uncertainty that even an actuarially fair fully funded social security system can raise lifetime consumption hence previous partial equilibrium estimates of the impact of social security on consumption drawn solely from consideration of the intergenerational wealth transfer at the introduction of the system are underestimates of the potential effect 2 an important assumption in the approaches cited above is that of perfect capital markets i e that individuals can borrow against prospective gains from participating in the social security system such an assumption is at variance with actual limitations on borrowing e g upward sloping interest rate schedules collateral requirements and quantity restrictions hayashi 18 found that approximately twenty percent of all consumption in the u s is accounted for by liquidity constrained consumers 3 flavin 16 found that the estimate of the marginal propensity to consume is affected dramatically by the inclusion of proxies for liquidity constraints suggesting that liquidity constraints are an important part of the observed excess sensitivity of consumption to current income since its inception in 1935 old age and survivors insurance oasi provided

capital taxation and accumulation in a life cycle growth model almost all of the serious economic work on savings decisions within the past decade has relied on some variant of the life cycle hypothesis in which savings arise out of individual choices of an optimum lifetime consumption path this paper reexamines the incidence and welfare consequences of capital income taxes within a realistic life cycle model the results suggest that the elimination of capital income taxation would have very substantial economic effects for example a complete shift to consumption taxation might raise steady state output by as much as 18 percent and consumption by 16 percent the long run welfare gain from such a shift would for plausible parameter values exceed 150 billion annually stated somewhat differently shifting to consumption taxation would raise the lifetime utility of the representative consumer by the equivalent of about six years income in the new steady state these estimates dwarf estimates of the static welfare cost of taxation and significantly exceed even extreme previous estimates of the dynamic loss this study departs from earlier analyses of the effects of taxes on capital income in several respects probably the most important difference between this treatment and most preceding ones lies in the assumptions about the interest elasticity of saving it is shown below that the common two period formulation of saving decisions yields quite misleading results a more realistic model of life cycle savings demonstrates that for a wide variety of plausible parameter values savings are very interest elastic this implies that shifting away from capital income taxation would significantly increase capital formation making possible long run increases in consumption many studies of the welfare effects of capital income taxation have ignored the general equilibrium effects of increased capital formation in an economy with life cycle savings there is no presumption that the undistorted growth path corresponds to any sort of social optimum as peter diamond has shown life cycle savings can lead to a steady state capital intensity either greater or less than the golden rule level more generally it is clear that there is no reason to believe that a life cycle economy will maximize any particular intertemporal social welfare function a fundamental tenet of welfare evaluation is that preexisting distortions must be considered in evaluating the consequences of tax changes the results presented in this paper take explicit account of the nonoptimal character of the no tax steady state this explains in large part why such a sizeable welfare effect of capital taxes is found in an economy far from the golden rule level of capital intensity there are substantial gains in steady state consumption achievable through increased capital formation section i of the paper examines the aggregate savings function in a continuous time life cycle framework the second section clarifies the differences between wage and consumption taxes an aggregate production function is added to complete the model in the third section the effects of changes in capital taxes on both steady state incidence and welfare are considered within a general equilibrium framework the final section of the paper discusses some implications of the results and suggests areas which appear to warrant further study assistant professor of economics massachusetts institute of technology and research analyst national bureau of economic research i am grateful to alan auerbach martin feldstein laurence kotlikoff to the participants in the nber workshop on business taxation and to the harvard public finance seminar for useful discussions james poterba and james buchal performed the numerical calculations

wealth accumulation over the life cycle and precautionary savings this article constructs and simulates a life cycle model of wealth accumulation and estimates the parameters of the utility function the rate of time preference and the coefficient of risk aversion by matching the simulated median wealth profiles with those observed in the panel study of income dynamics and in the survey of consumer finances the estimates imply a low degree of patience and a high degree of risk aversion the results are used to study the importance of precautionary savings in explaining wealth accumulation they imply that wealth accumulation is driven mostly by precautionary motives at the beginning of the life cycle whereas savings for retirement purposes become significant only closer to retirement

post hoc ergo propter once more an evaluation of does monetary policy matter in the spirit of james tobin christina and david romer s paper does monetary policy matter advocates the so called narrative approach to causal inference we demonstrate that this method will not sustain causal inference first it is impossible to distinguish monetary shocks from oil shocks as causes of recessions second a world in which the fed only announces intentions to act cannot be distinguished from one in which it in fact acts third the techniques of dynamic simulation used in the romers study are inappropriate and quantitatively misleading and finally their approach provides no basis for establishing causal asymmetry

international effects of tax reforms in an open economy with international capital flows there is an equivalence relation between income tax consumption tax international borrowing tax and an external interest earning tax this paper analyzes tax reform involving shifts between income and consumption taxes in this setting it is shown that the real effects of such revenue neutral tax reform depend critically on the country s current account position and the nature of the reform in particular whether the world interest rate rises or falls as a consequence of a budget deficit depends on the tax system in force the analysis provides a clear rationale for the international coordination of tax policies copyright 1989 by royal economic society

a model of the liquidity structure based on asset indivisibility abstract although the notion of a liquidity structure of asset yields is widely accepted there do not seem to be models of such a structure here the liquidity of an asset is taken to be its transaction velocity the amount traded per unit time divided by the stock assets are assumed to be indivisible and to differ in size trade using such assets is implied by pairwise matching and absence of double coincidence in produced goods it is shown that a sufficiently large asset has a lower velocity and a higher yield than a sufficiently small asset

social security and aggregate capital accumulation revisited dynamic simultaneous estimates in a wealth generation model this paper re examines feldstein s 1974 1982 results of the effect of social security on private capital accumulation in the context of a simultaneous equation model of capital accumulation the model incorporates dynamic feedback effects in capital accumulation and is estimated by fiml to incorporate theoretical restrictions that are tested against the data it is then simulated as a full dynamic model to analyze the long run effect of ssw on private capital accumulation the simulated effects are in the same direction as found by feldstein but are considerably weaker

the impact of tax deductible saving on dynamic efficiency abstract the simulations reported in this paper suggest that permitting unlimited tax deductivility for saving under a progressive personal income tax could have a more favourable impact on total personal saving and capital accumulation than even a switch to a progressive consumption tax

inflation capital taxation and housing the long run in a small open economy this paper deals with the consequences of inflation and capital income taxes for the accumulation of wealth in a small open economy with a housing sector particular attention is paid to the incentive and intergenerational redistribution effects stemming from the interaction of inflation and capital income taxation and to portfolio shifts between housing assets and other assets the authors find that the intergenerational distribution effects and the incentive effects on overall savings tend to offset and sometimes even to dominate several of the expected interasset substitution effects of a change in inflation and capital taxes

consumption path following a tax increase implications for the analysis of the welfare cost of taxation abstract the consumption path following a capital income tax increase is analyzed to demonstrate that short run increases in consumption dominate future declines in consumption for a considerable time it takes 25 years before a tax increase resutls in a loss of welfare

gradual tax reforms if you like it you can keep it abstract one of the key practical challenges facing by tax reforms are their short run welfare consequences in this paper i focus on a consumption based tax reform for which despite long run welfare gains it generates welfare for some groups such as retirees or the working poor falls during transition between steady states using a life cycle model with heterogeneous households i show how to devise a transition path from the current u s federal tax system to a consumption based tax system that improves the welfare of current as well as future generations in a nutshell all households alive at the time of the policy change can choose when they want to switch to the new tax system or whether they want to switch at all i find that implementing a tax reform with this feature improves the welfare of 95 of population in the short run compared to less than a quarter of population in the conventional case with no choice it takes about twenty years for half of the population to pay their taxes under the new tax code

the transition from payroll to consumption receipts with endogenous human capital abstract the transition from payroll to consumption receipts is simulated in a life cycle growth model featuring adult human capital as in other studies savings are higher under the consumption base however unlike those studies much of the additional savings here take human form human capital production increases for all cohorts in or yet to join the labor market as of the tax change the additional human capital production tends to dampen physical capital accumulation when compared with otherwise identical simulations which hold human capital constant the implications for intergenerational incidence are similar to that found in other examinations of the transition to a consumption base

the variable rate of growth effect in the life cycle saving model the rate of growth in real gnp g affects the aggregate saving rate positively in life cycle saving models this rate of growth effect is invariably estimated as the coefficient of g in the saving function we show that other determinants of the saving rate influence the rate of growth effect in other words the rate of growth effect is not constant specifically the real rate of return on financial assets and the population dependency ratio determine the timing of saving over the life cycle and hence alter the rate of growth effect the dependency ratio also has an effect on the saving rate which is independent of g because it together with the foreign saving rate determines the level of saving over the life cycle

float on a note abstract from 1863 1914 banks in the u s could issue notes subject to full collateral a tax on outstanding notes redemption of notes on demand and a clearing fee per issued note cleared through the treasury the system failed to satisfy a purported arbitrage condition the yield on collateral exceeded the tax rate plus the product of the clearing fee and the average clearing rate of notes the failure is explained by a model in which note issuers choose to issue notes only in trades that produce a low clearing rate high float but in which there are diminishing returns to additional note issue

welfare effects of capital income taxation under variable and fixed labor supply not every model of economic behavior can allow for variable labor supply when attention is focused on other economic issues the effect on welfare change measurement of assuming labor to be in fixed supply becomes important the traditional view is that allowing labor supply to be variable will reduce the measured benefits of replacing an interest income tax with a payroll or consumption tax owing to the introduction or increase in a static distortion between consumption and leisure however this view ignores two mechanisms by which variable labor supply may actually increase the benefits of relaxing the capital income tax first an interest income tax distorts the intertemporal path of leisure and thus of labor supply second as explained below the interest elasticity of savings may be augmented by changes in the intertemporal labor supply path eliminating the labor supply path distortion and increasing capital accumulation can provide benefits which may potentially exceed the disadvantages of increased static distortion this paper tests which effects dominate by simulation in a life cycle growth model previous papers have not addressed these issues feldstein 3 discusses welfare measurement in a two period model in which an individual supplies labor in the first period and consumes in both periods feldstein s partial equilibrium efficiency measure incorporates the elasticity of labor supply with respect to the interest rate but his single period of labor supply may be misleading summers 8 demonstrates that in multi period models interest rate changes may have a large effect upon the present value of lifetime resources human wealth and consequently consumption that finding when applied to frameworks allowing for leisure consumption implies that both the compensated and uncompensated elasticities of labor supply with respect to the interest rate may be markedly different for multi period than for one period labor supply models summers exploits a multi period life cycle growth model to measure numerically the steady state efficiency gains following an elimination of interest income taxation he assumes labor to be fixed in supply at each moment consequently changes in human wealth cannot affect the leisure profile and the benefits of eliminating intertemporal leisure distortions are not captured summers concludes that steady state consumption and welfare would increase

the later you pay the higher the k this paper shows the importance of the age path life cycle timing of any tax for the accumulation of capital in the economy income consumption and wage taxes differ in their age paths as well as their incentive effects this paper studies how the differing age path of each tax affects the capital accumulation of the economy in an empirically calibrated life cycle model we investigate lump sum age taxes and find in every case that the later the person pays tax the higher the k of the economy to analyze the life cycle timing effect of conventional transactions based taxes income consumption and wage we replace each tax with a lump sum age tax that has the identical age path of tax payments over the life cycle we find that the timing effect is quantitatively important and often causes the impact of a tax on capital accumulation to be very different from what would be predicted from the incentive effect

government transaction policy and gresham s law abstract a search theoretic model is used to study how legal restrictions may account for the fact that gresham s law sometimes holds but other times fails legal restrictions is modeled here as policies that government adopts in the transactions with private agents such as at what prices it accepts a currency in exchange for goods and at what ratios it conducts currency exchange a government policy sufficiently favorable to light coins can induce the existence of an equilibrium where both coins circulate and light coins are even accepted at a premium a policy favorable to heavy coins may increase their value to such an extent that they are hoarded from circulation when this equilibrium did not exist without interventions

secondary currency an empirical analysis abstract many cases exist of multiple currency usage throughout history as two leading examples secondary currencies were widespread during both the great depression in the united states and the 2002 recession in argentina what are the determinants of multiple currency usage and what is the effect on economic activity both issues are empirically addressed using individual level surveys collected by the authors in argentina during 2002 and 2003 the evidence supports the theoretically predicted determinants of secondary currency acceptability put forth in monetary theory in particular findings show that the acceptability of the secondary currency increases when the supply of national currency is low the relative transaction cost of the secondary currency is low and the individual trading technologies are less effective moreover the acceptability of the secondary currency has real effects on economic activity among those who use the secondary currency the monthly income gain is more than 15 of the average argentine s monthly income excluding trades of used goods this amounts to a 0 6 increase in gdp

assessing the dynamic efficiency gains of tax reform when human capital is endogenous this paper develops a life cycle growth model with endogenous human capital accumulation and variable leisure which is employed to simulate dynamic equal yield changes from an income tax to a consumption tax although endogenizing human capital investment decisions raises partial equilibrium estimates of the efficiency costs of capital income taxation general equilibrium welfare impacts of unanticipated tax changes are little affected by the inclusion of endogenous human capital this finding cannot be fully explained by the presence of general equilibrium adjustments in factor prices and can be attributed in part to the existence of transitional rigidities in capital stocks copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

taxes in a life cycle growth model with bequests and inheritances in a recent paper lawrence summers 1981 analyzes alternative taxes in a life cycle growth model this paper extends his analysis to include bequests and inheritances this inclusion is worth undertaking for several reasons first several recent empirical studies have suggested that bequests may account for an important share of the capital stock laurence kotlikoff and summers 1981 second it is important to explore whether the comparison of taxes is significantly affected when a bequest motive is introduced third the treatment of bequests under a consumption tax is controversial the endowment rationale calls for treating a bequest as taxable consumption by the deceased peter mieszkowski 1980 the real wage rationale calls for exempting bequests if such exemption raises the steady state capital intensity and real wage my 1980 article this paper confines itself to positive analysis of steady states transition paths and normative implications are explored elsewhere see my 1982 paper

search bargaining money and prices the goal of this paper is to extend existing search theoretic models of fiat money which until now have assumed that the price level is exogenous by explicitly incorporating bilateral bargaining this allows us to determine the price level endogenously and leads to additional insights concerning the role of money for example we find that monetary equilibria are generally inefficient in the sense that output and prices differ from the solution to a social planner s problem although the difference can become small as the discount rate or search friction vanishes we also find that there exist nonstationary inflationary equilibria

fiscal incidence in an overlapping generations model with a fixed asset abstract we analyze a model of overlapping generations with a fixed factor land malleable capital and labor we consider the dynamic effects of various fiscal policies including taxes on rent wages and creation of public debt on capital accumulation land prices and intergenerational welfare minimal assumptions uniqueness and stability imply that a land tax may initially raise land values but the upper bound is less than one half of the tax revenues assuming homothetic utility the ratio between the long run capital responses to a land tax and to a lump sum transfer of equivalent revenue from the young to the old depends solely on the share of labor

do positional goods inhibit saving evidence from a life cycle experiment abstract we investigate the effect of positional goods goods for which one s consumption relative to others matters on saving based on results from a life cycle consumption saving experiment in a group treatment we allow inter personal comparisons by assigning subjects to groups and displaying rankings based partly on consumption a baseline individual treatment is similar but without the additional information we find more under saving saving less than the optimal amount and lower money earnings for subjects in the group treatment both effects are economically relevant with magnitudes of roughly 6 7 of expected income and 7 8 of average earnings respectively additional analysis shows that the result is driven by those subjects who are not ranked in the top three in their group keeping up with the joneses and males in particular

coexistence of money and interest bearing securities abstract a random matching model with money is used to study the nominal yield on small denomination bearer safe discount securities issued by the government there is always one steady state with matured securities circulating at par and for some parameters another with them circulating at a discount in the former a necessary and sufficient condition for a positive nominal yield on not yet matured securities is exogenous discriminatory treatment of them by the government in the latter the post maturity discount on securities induces a deeper pre maturity discount even without such discriminatory treatment

dynamic efficiency in the gifts economy abstract in the standard analysis of overlapping generations economies with gifts from children to parents each generation takes the actions of other generations as given the resulting equilibrium is dynamically inefficient in reality however parents realize that children will respond to higher parental saving by reducing gifts for a broad class of gift economies this implicit tax on saving pushes the equilibrium to dynamic efficiency this result reestablishes the potential relevance of the gift model to the us economy renders moot an important part of the ricardian equivalence debate and provides a motivation for a type of social security system

currency exchange in a random search model this paper investigates foreign exchange trading a phenomenon that typically accompanies international trade a search theoretic general equilibrium approach is adopted to study a two country two currency model for some parameter values of the model there exist some pure strategy equilibria in which commodity currency trade is conducted primarily through local currency and in which there is active currency currency exchange the coexistence of valued foreign currency and its local non acceptability conforms largely with the country specific cash in advance constraint that is often assumed exogenously in international finance literature

eliminating interest taxation and tariffs the underpinnings for recent canadian policy blanchard s 1985 formulation of the overlapping generations model and the so cial welfare function advocated by calvo and obstfeld 1988 are used to analyse interest taxation and tariffs in a small open economy when the revenue lost from the elimination of these taxes is replaced by raising the tax on labour as in recent canadian experience a low social discount rate is required for the model to support lower interest income taxes while a high discount rate is needed to support the elimination of tariffs we illustrate the empirical importance of this simultaneous need for both a high and a low discount rate eliminer l imposition des revenus d interet et les droits de douane les soubassements de la politique canadienne re cente les auteurs utilisent la formulation blanchard du modele des generations qui se chevauchent et la fonction de bien etre social de calvo et obstfeld pour analyser les effets de l imposition des revenus d interet et des droits de douane dans une petite economie ouverte quand la perte de revenus attribuable a l elimination de ces taxes est comblee par un imp6t sur le travail comme ce fut le cas au canada il faut postuler un taux d escompte social bas pour qu on puisse endosser une politique de reduction de l imposition des revenus d interet alors qu il faut postuler un taux d escompte social eleve pour endosser une politique de reduction des droits de douane les auteurs montrent l importance empirique de cette necessite d avoir un taux d escompte a la fois bas et haut

toward a theory of international currency we use the framework of random matching games and develop a two country model of the world economy in which two national currencies compete and may be circulated as media of exchange there are multiple equilibria which differ in the areas of circulation of the two currencies in one equilibrium the two national currencies are circulated only locally in another one currency is circulated as an international currency there is also an equilibrium in which both currencies are accepted internationally we also find an equilibrium in which the two currencies are directly exchanged we first characterize the existence conditions of these equilibria in terms of the relative country size and the degree of economic integration and then use an evolutionary approach to equilibrium selection to explain the evolution of the international currency as the two economies become more integrated some welfare implications are also discussed for example a country can improve its national welfare by letting its own currency circulate internationally provided the domestic circulation is controlled for when the total supply is fixed however a resulting currency shortage may reduce the national welfare

the present value criterion and environmental taxation the suboptimality of first best decision rules this paper examines the links between environmental taxes and distortionary taxation in a dynamic model of climate change and economic growth under first best conditions labor and capital would remain untaxed and carbon dioxide emissions would be taxed at a rate equal to the present value marginal cost they impose on future society setting the discount rate equal to the marginal productivity of capital under secondbest conditions however this decision rule substantially understates optimal emissions taxes when the resulting revenues are used to provide targeted cuts in distortionary taxes conversely relatively low emissions taxes are economically justified given lump sum revenue recycling

immigration remittances and business cycles we use data on border enforcement and macroeconomic indicators from the united states and mexico to estimate a two country business cycle model of labor migration and remittances the model matches the cyclical dynamics of labor migration to the united states and documents how remittances to mexico serve an insurance role to smooth consumption across the border during expansions in the destination economy immigration increases with the expected stream of future wage gains but it is dampened by a sunk migration cost that reflects the intensity of border enforcement during recessions established migrants are deterred from returning to their country of origin which places an additional downward pressure on the wage of native unskilled workers thus migration barriers reduce the ability of the stock of immigrant labor to adjust during the cycle enhancing the volatility of unskilled wages and remittances we quantify the welfare implications of various immigration policies for the destination economy

tax reform and land using sectors in the u s economy a general equilibrium analysis a computable general equilibrium model of the u s economy is used to assess the effects of the tax reform act of 1986 on land using sectors forestry and three classes of agriculture the model s components include twelve production sectors six consumer groups a balanced budget government sector and a zero surplus foreign sector in relative terms tax reform reduces total value added output in land using sectors to a greater extent than other sectors in the economy experiments are also performed comparing partial and general equilibrium specifications of the economy and the impact of choice of input substitution elasticities

is college financial aid equitable and efficient nk reed based financial aid is often defended both on grounds of equity and efficiency equity because it provides equality of opportunity and efficiency because it encourages the formation of productive human capital james 1988 however need is now determined in a way that is both inequitable and inefficient an informal survey of my colleagues who do not study financial aid revealed no one who named the financial aid system as a substantial tax on savings however once this interpretation was suggested they quickly revealed their unanimous and disturbing impression that savings are summarily confiscated from parents upon their first child s matriculation at university though exaggerated this impression is not without foundation two families with identical earnings paths pay dramatically different amounts for college if one saves more than the other thus while the financial aid system may contribute to vertical equity since the poor get more aid than the rich its horizontal inequities are substantial moreover the federal rules for financial aid raise significant efficiency concerns 1 they might conceivably distort many household decisions including family size and the spacing of children however this paper will focus upon the most important incentive distorted by present policies the incentive to save because saving leads to receiving less financial aid a family s return to saving is substantially below the social return this may lead to families making inefficient intertemporal choices and correspondingly to an inefficient loss of capital formation

on money as a medium of exchange we analyze economies in which individuals specialize in consumption and production and meet randomly over time in a way that implies that trade must be bilateral and quid pro quo nash equilibria in trading strategies are characterized certain goods emerge endogenously as media of exchange or commodity money depending both on their intrinsic properties and on extrinsic beliefs there are also equilibria with genuine fiat currency circulating as the general medium of exchange we find that equilibria are not generally pareto optimal and that introducing fiat currency into a commodity money economy may unambiguously improve welfare velocity acceptability and liquidity are discussed

measuring the welfare costs of inflation in a life cycle model abstract in a neoclassical growth model with life cycle households in which money is held to satisfy a cash in advance constraint the optimal steady state inflation rate is absurdly high in excess of 20 lump sum age independent money injections twist and flatten the lifetime profile of utility making this profile look more like the one that would be chosen by a planner the cost of monetary finance of lump sum payments is the distortion introduced to the labor leisure choice

return on commodity money small change problems and fiat money we construct a search theoretic model of commodity money where a penny is an indivisible silver coin that can be either melted into a silver bar yielding a positive return or used as a medium of exchange in equilibria where the rate of return on silver is sufficiently high small change problems arise in the form of too much trade inefficiency because of a too high value of a penny and no trade inefficiency because of a shortage of coins in circulation in the fiat money system however trades are not affected at all by the rate of return on silver and the value of a penny is determined by its medium of exchange role without incurring the loss in efficiency due to small change problems

consumption and wage taxes when household size matters abstract standard life cycle models recommend consumption rather than wage taxes in order to limit the welfare losses incurred by taxation however as this note points out the superiority of consumption over wage taxes disappears if household size is considered

flat tax reform a quantitative exploration abstract this paper explores quantitatively the general equilibrium implications of a revenue neutral tax reform in which the current income and capital income tax structure in the u s is replaced by a flat tax as proposed by hall and rabushka 1995 the flat tax 2nd ed hoover the central aspects of such reform the impact of tax reform on capital accumulation and labor supply as well as its distributional consequences are analyzed in a dynamic general equilibrium model main results are that i the elimination of the actual taxation of capital income has an important and positive effect on capital accumulation ii mean labor hours are relatively constant across tax systems but aggregate labor in efficiency units increases iii in all circumstances analyzed the distributions of earnings income and especially wealth become more concentrated

macroeconomic effects of factor taxation with endogenous human capital evolution theory and evidence the distortionary effect of factor income taxation has been one of the central issues in public finance theory for example see feldstein 4 boadway 3 homma 6 summers 14 and judd 8 a tax on capital income in contrast to a tax on labor income has been claimed to create an intertemporal distortion that affects the future paths of macro aggregates adversely through the decumulation of physical capital hence it is generally concluded in the aforementioned literature that capital taxation is more distortionary in the long run than labor taxation in this paper we revisit this issue by constructing a dynamic general equilibrium model with infinitely lived perfectly foresighted agents unlike most of the existing literature we develop a growth model in which both physical and human capital are endogenously accumulated 2 within this framework a tax on labor generates a distortionary effect on both human capital evolution and future dynamic paths of output and consumption analogous to the case of capital taxation in contrast to results in previous work labor income taxation in our economy can be more distortionary than capital income taxation even in the long run many studies for years have focused on welfare comparison of factor taxes in most cases calibration or simulation exercises are performed and there has been no empirical research to con

a model of a currency shortage abstract until the mid 19th century shortages of currency were common moreover a frequent policy response was a prohibition on the export of coins we use a random matching model with indivisible money to explain a shortage and to judge the desirability of a prohibition on the export of coins the model although extreme in many regards represents better than earlier models a demand for outside money and the problems that arise when that money is indivisible it can also rationalize a prohibition on the export of money

decentralized international exchange traditional models of international trade take place within trading environments in which trade is coordinated by a walrasian auctioneer who instantly matches buyers and sellers in world markets this assertion seems inconsistent with evidence suggesting that trading arrangements seem to economize on transactions costs associated with international trade recognizing these insights we depart from standard models of international trade by incorporating the difficulties in the coordination of exchange within a two country random matching model of international trade we capture a motivation for trade through comparative advantage and interpret trade across economies to be associated with an agent s endogenous choice to participate in foreign markets although an individual may decide to search abroad to obtain additional gains from trade resulting from comparative advantage she is less likely to meet trading partners abroad as search frictions are higher in the foreign country than in the domestic market using this framework we show that international trade is associated with convergence in relative prices across countries we also show that the extent of market frictions in the foreign country affects relative prices the volume of international trade and welfare levels due to market participation externalities associated with international trade we show that a movement from autarky to free trade may actually lower welfare levels we conclude by examining the possible inefficiencies associated with international trade due to the decentralized nature of exchange and the policy implications of our model

optimal taxation in a growth model with public consumption and home production in a neoclassical growth model with public consumption we show the following pareto optimal tax rules the government should tax leisure and private consumption at the same rate and subsidize net investment at the same rate it taxes net capital income also it should tax capital income more heavily than labor income in an extension for home production the additional rule is to tax investment for home production at the same rate of the tax on private market consumption these tax and subsidy rates should be constant over time except the initial tax rate on capital income

money and prices a model of search and bargaining abstract this paper makes commodities divisible and incorporates bargaining into the search theoretic model of money to determine the purchasing power of money or price it is shown that two monetary equilibria always coexist where fiat money is universally accepted the two equilibria differ in price output welfare and the velocity of money sunspot monetary equilibria exist in which money is universally accepted in all states of the economy multiplicity has novel implications on the effectiveness of currency substitution and exchange market intervention journal of economic literature classification numbers c78 e40

wages youth employment and school enrollment recent evidence from increases in world oil prices we exploit variation in wage growth induced by increases in world oil prices to estimate the elasticity of young men s labor market participation and school enrollment with respect to after tax wages our main finding is that in the aggregate increased wages have a dual impact they tend to reduce at least temporarily young men s full time university enrollment rates but bring back into the labor market some young men who were neither enrolled in school nor employed contrary to previous research we find little evidence that young men with no high school diploma now leave school in response to increased wages

optimal taxation and optimal tax systems the theory of optimal taxation has for the pas two decades been the reigning normative approach of taxation this paper argues that in its current state optimal tax theory is incomplete as a guide to action concerning many critical issues in tax policy it is incomplete because it has not yet come to terms with taxation as a system of coercively collecting revenues from individuals who will tend to resist the coercive nature of collection taxes implies that the resource cost of implementing a tax system have been and will continue to be a critical determinant of appropriate tax policy the paper first presents the three cornerstone propositions of optimal tax theory and then it discusses the influence of these propositions on recent tax policy developments it concludes by sketching an alternative to optimal taxation called the theory of optimal tax systems which embraces the insights of optimal taxation but also considers the technology of raising taxes and the constraints placed upon tax policy by that technology the optimal tax systems perspective is shown to shed light on the choice of tax instruments the problem of tax evasion and the appropriate tax treatment of capital income this abstract was borrowed from another version of this item

tax policy regulated interest rates and saving abstract the paper evaluates tax policy options designed to reduce distortions to savings behavior that occur when administered interest rates are set beneath market equilibrium levels while the removal of controls on interest rates might be the best option political legal or institutional circumstances might well preclude this solution it suggests that consumption or sales taxes can be designed so that in the short term the rate of return to saving can be changed to approximate the market determined interest rate the main advantage of the measure is that it can provide a time to develop appropriate legal and institutional structures for financial deregulation and b an additional policy instrument that allows the burden of adjustment in a stabilization policy setting to be distributed over more than one instrument

long run implications of investment specific technological change an attempt is made to disentangle its effects from the more traditional hicksneutral form of technological progress the balanced growth path for the model is characterized and calibrated to u s national income and product account nipa data the quantitative analysis suggests that investment specific technological change accounts for the major part of growth jel e13 030 041 047

sweden s laffer curve taxation and the unobserved economy recent research on the unobserved economy suggests that the phenomenon has important implications for both macroeconomic policy and public finance attention is focused on the public finance implications by developing a simple macromodel from which it is possible to derive a laffer curve the model reveals that the shape and position of the laffer curve depend upon the strength of supply side effects the progressivity of the tax system and the size of the unobserved economy using alternative parameterizations of each of these effects it is possible to obtain rough empirical estimates of the laffer curve for sweden i introduction supply side economics the laffer curve and the unobserved economy are subjects which have captured the interest of economists in their effort to understand and design cures for the growing macroeconomic and public finance malaise which appears to be affecting many of the world s most developed economies high rates of unemployment and inflation combined with slower rates of real growth and ever widening government deficits have focused economists attention on the interrelated issues of macroeconomic stabilization and public finance policy the questions raised by the supply side laffer curve and unobserved economy literature focus on the effects of tax rates on economic performance and the ability of governments to sustain the ambitious social welfare programs established in the past decade while there is much controversy about what the laffer curve looks like and where various economies are on their curves it is generally accepted that the dependence of tax revenues on tax rates is too oversimplified in

savings and wealth in models with altruistic bequests during recent years much attention has been given to the role of bequests in explaining various aspects of economic behavior for example authors have studied the impact of bequests on physical wealth accumulation laurence kotlikoff and lawrence summers 1981 the interest elasticity of savings owen evans 1983 tax reform laurence seidman 1984 and the distribution of wealth alan blinder 1976a more recently economists have begun to distinguish between human and physical bequests gary becker and nigel tomes 1986 acknowledging the presence of bequest in human form is important in analyzing each of the issues mentioned above outlays on children affect the shape of the family s labor supply and expenditure profiles upon which the level of aggregate savings crucially depends if these outlays are interest sensitive substitutes for physical bequests they will also influence the interest elasticity of savings in the area of tax reform the neutrality of the consumption tax depends on the ability of the government to identify human capital bequests from general consumption raymond batina 1987 if this is not possible the portfolio choice of investment in human versus physical capital may be distorted at the margin finally the unequal transmission of wealth across generations may be explained by the lack of physical bequests and the inefficiently low levels of human bequests made by wealthconstrained households becker and tomes 1986 to distinguish clearly the behavior of constrained households from unconstrained households who make sizeable physical bequests both types of bequests must be recognized this paper introduces a model that makes explicit examination of these issues possible it extends lord s 1989 multiperiod model of life cycle savings and adult human capital investment by adding altruistically motivated human and physical bequests 2 the model is calibrated using microeconomic data on earnings time and goods expenditures on children s human capital and physical bequests we then use the model to examine the contribution of bequests to wealth accumulation and the level of savings this topic is the source of an important but yet unresolved debate between franco modigliani 1988 and kotlikoff 1988 kotlikoff maintains that u s wealth accumulation is primarily the consequence of bequests as opposed to life cycle savings for retirement one type of evidence cited by kotlikoff comes from simulation results demonstrating the failure of realistically calibrated life cycle models to generate sufficiently high saving rates and wealth income ratios alan auerbach and kotlikoff 1987 we show however that if a pure life cycle

introduction tax policy issues for the 1990s in recent years in the wake of fiscal crisis developing countries have increasingly begun to restructure their tax systems to seek higher revenues or to improve the revenue elasticity and buoyancy of the tax structure chhibber and khalilzadeh shirazi 1988 these reform movements have also aimed to eliminate the disincentive effects of onerous levels of taxation to reduce the economic inefficiencies induced by the distortionary taxation of assets and sectors to protect the poorest of the poor from the tax net and to provide partial relief from the unwelcome effects of inflation this introduction to the following articles on tax policy first gives an overview of tax reform in developing countries it then distills lessons for tax reform from past developing country experiences and reviews selected issues that are expected to dominate tax policy research and discussions in the 1990s the five other articles in this symposium provide an in depth review of applications of tax policy models in developing countries and analysis of tax policy toward foreign direct investment taxation of agricultural land and financial assets and the redistributive impacts of various taxes

a matching model with bounded holdings of indivisible money recent versions of pairwise random matching models of money with divisible and perishable goods are amended to allow individuals to hold more than one unit of an indivisible asset the asset resembles a fiat asset except that nominal holdings of it yield a small amount of utility there is a general upper bound on the number of units of the asset that individuals can hold a steady state with trade is shown to exist the model is applied to study numerically the effect on welfare of the degree to which the asset is divisible

the intertemporal allocation of expenditure on non durables services and durables this paper presents estimates of the parameters of a consumption function for u s quarterly seasonally unadjusted data on non durables services and durables the theoretical novelty in the approach we present is in the derivation of the consumption function from an underlying many goods allocation problem applying this model with an appropriate estimator to the data we find i the homogeneity restrictions suggested by theory are not rejected ii there is no evidence of excess sensitivity to income iii there is no evidence to suggest that agents cannot adjust their durable stocks as they would wish and iv the intertemporal substitution elasticity is not well determined

government debt in an overlapping generations model with bequests and gifts in 1974 robert barro argued that if individuals in successive generations were linked by bequests changes in the stock of government debt or in social security programs would have no effect on the steady state capital stock barro assumed that individuals held static expectations and that the size of the population was constant martin feldstein 1974 1977 had concluded that social security would reduce the capital labor ratio in models that did not admit a bequest motive and in his 1976 comment on barro argued that the introduction of government debt or social security into a perfect foresight dynamic growth model with bequests would still reduce the capital labor ratio barro replied that feldstein s criticisms were invalid if the steady state capital labor ratio were smaller than the golden rule level but would be correct if the opposite were true barro did suggest however that the latter possibility with overaccumulation of capital might be ruled out in his model as it was in miguel sidrauski 1967 but he was unable to demonstrate that the required behavior would be consistent with utility maximization by finite lived individuals 1976 p 345 although recent work by willem buiter 1979 jeffrey carmichael 1979 1982 truman bewley 1981 a b and others has helped to elucidate the nature of overlapping generations models with bequests and gifts and the issues in the barro feldstein debate they remain far from clear the purpose of this paper is to shed a little more light on the subject in what follows i contend that some of the authors cited above either have specified the individual s optimization problem in an asymmetric way or have failed to impose necessary conditions for a sensible optimization problem or both there is a natural specification of the barro model 1 that emphasizes the similarity between this model and optimal growth models see for example david cass 1965 peter diamond 1973 here in steady state equilibrium the aftertax interest rate r must equal the rate at which individuals discount the utility of their heirs p r p has become known as the modified golden rule and a meaningful individual optimization problem requires that p exceed n the natural growth rate of the economy my results confirm barro s hunch about his model in a barro model r must exceed n much of the barro feldstein 1976 interchange which assumed that r could have any relation to n is wrong headed barro and feldstein reach different conclusions about the effects of government debt and social security because they assume different individual utility functions also my results contrast sharply with those of buiter and carmichael for example carmichael concluded that with intergenerational transfers from parents to children bequests r must exceed n but with transfers in the opposite direction n must exceed r 1982 pp 205 06 indeed i believe that the buiter carmichael representation of the barro model is logically faulty see section ii in section i i outline an overlapping generations model with gifts and bequests and derive its steady state properties in the next section i discuss the shortand long run effects of introducing government debt into the model and contrast my results with those

crude substitution the cyclical dynamics of oil prices and the skill premium abstract at the business cycle frequency energy prices and the skill premium display a strong negative correlation this fact is robust to different de trending procedures identifying exogenous shocks to oil prices using the hoover perez 1994 post hoc ergo propter once more an evaluation of does monetary policy matter in the spirit of james tobin journal of monetary econonmics 34 47 73 dates shows that the skill premium falls in response to such a shock the estimation of the parameters of an aggregate technology that uses among other inputs energy and heterogeneous skills demonstrates that capital skill and capital energy complementarity are responsible for this correlation as energy prices rise the use of capital decreases and the demand for unskilled labor relative to skilled labor increases lowering the skill premium

liquidity a new monetarist perspective this essay surveys the new monetarist approach to liquidity work in this literature strives for empirical and policy relevance plus rigorous foundations questions include what is liquidity is money essential in achieving desirable outcomes which objects can or should serve in this capacity when can asset prices differ from fundamentals what are the functions of commitment and collateral in credit markets how does money interact with credit and intermediation what can and should monetary policy do the research summarized emphasizes the micro structure of frictional transactions and studies how institutions like monetary exchange credit arrangements or intermediation facilitate the exchange process

modeling small change a review article abstract in the big problem of small change sargent and velde apply a cash in advance model to the history of coinage and to contemporary thought about coinage they assert that their model accounts for puzzling observations involving the depreciation and disappearance of small coins i question its usefulness for that purpose and for other issues pertaining to coinage my main concern is that their model does not depict the problems usually associated with full bodied coinage systems problems that stem from the technological difficulties of having a full bodied coinage system in which money is portable divisible durable and recognizable

the employment and wage effects of oil price changes a sectoral analysis in this paper we use micro panel data to examine the effects of oil price changes on employment and real wages at the aggregate and industry levels we also measure differences in the employment and wage responses for workers differentiated on the basis of skill level we find that oil price increases result in a substantial decline in real wages for all workers but raise the relative wage of skilled workers the use of panel data econometric techniques to control for unobserved heterogeneity is essential to uncover this result which is completely hidden in ols estimates while the short run effect of an oil price increase on aggregate employment is negative the long run effect is in fact positive we find that changes in oil prices induce changes in employment shares and relative wages across industries however we find little evidence that oil price changes cause labor to consistently flow into those sectors with relative wage increases copyright 1996 by mit press

the consumption tax in the presence of altruistic cash and human capital bequests with endogenous fertility decisions abstract we provide an analysis of the consumption tax policy in the presence of cash bequests human capital investments in children and endogenous fertility decisions it is shown that the consumption tax is no longer neutral if the tax rate is constant over the taxpayer s life cycle labor supply is exogenous and the parent expects the offspring to pay the same tax rate if the number of children is chosen optimally by the parent neutrality breaks down because the shadow prices of both bequests and fertility are interlinked it is more expensive to produce a child the larger either bequest is and it is more expensive to make a bequest of either type to each child the larger the number of children produced several examples are provided where imposing the consumption tax induces an increase in the number of children produced and a decrease in net capital formation

trade using assets divisible at a cost abstract the consequences of costly divisibility of assets are studied using a model with the following features the demand for assets is generated from an overlapping generations model with a continuum of agents in each generation and with intrageneration trade intermediation ruled out there is a once for all supply of a stock of nonnegative dividend assets in a large size and there is a costly technology for dividing them into smaller sizes stationary equilibria are shown to exist in contrast with similar models with costless divisibility of assets competitive equilibria are not necessarily desirable there can be pareto ordered equilibria

uncertain parameter values and the choice among policy options abstract we use a tax policy example to show how debate on the value of an elasticity parameter translates into a debate about policy choices to construct this example suppose that the choice among four particular tax reform options is based on a single measure of efficiency gain for each reform we show how the size of this gain depends upon the elasticity of saving with respect to the net rate of return moreover within quite narrow and reasonable bounds for the elasticity parameter we find regions in which each of three different tax reforms turns out to dominate the others

supply side reforms and learning dynamics this paper studies the nature the magnitude and the length of the transition after a capital tax cut the transition is analysed with adaptive learning under which agents do not need to adjust instantaneously to the change as with rational expectations re impulse response analysis reveals that the transition with learning is asymmetrically sensitive to the nature of the exogenous technological shock at the time of the reform if the reform coincides with a negative shock the transition to the new steady state is slow whereas if it coincides with a positive shock it is approximately the same as the one predicted by re the results imply that cutting capital income taxes before or during a recession may not be an effective means for short run fiscal stimulus