a note on discount rate policy and the variability of discount window borrowing abstract the purpose of this note is to evaluate the appropriate discount rate policy rules consistent with minimization of the variability of borrowing at the federal reserve discount window in the context of goodfriend s 1983 model of the bank borrowing decision it is demonstrated that either a penalty rate or a subsidy rate policy will produce minimized variability of borrowing so long as the subsidy rate adjusts point for point to changes in the value of the federal funds rate these policy rules are compatible with a policy procedure designed to target borrowed or non borrowed reserves if the fed does not adhere to one of these specific rules minimization of borrowing variability requires an open market procedure in which the fed pegs the federal funds rate

a note on interest on required reserves as an instrument of monetary control abstract the purpose of this paper is to evaluate the potential role of interest on required reserves as a monetary control instrument it is found that an increase in the interest rate paid on reserves held at the federal reserve has counteracting effects on the variability of the money stock hence there is an optimal setting for the interest rate on required reserves that theoretically may include or lie anywhere between the extreme cases of no interest payment and the payment of interest at the maximum feasible level

why has u s inflation become harder to forecast we examine whether the u s rate of price inflation has become harder to forecast and to the extent that it has what changes in the inflation process have made it so the main finding is that the univariate inflation process is well described by an unobserved component trend cycle model with stochastic volatility or equivalently an integrated moving average process with time varying parameters this model explains a variety of recent univariate inflation forecasting puzzles and begins to explain some multivariate inflation forecasting puzzles as well

simplified formulae for optimal linear income taxation the optimal income tax problem is simplified considerably if attention is confined to a linear tax schedule where there is a general lump sum subsidy or tax combined with a constant marginal tax rate following mirrlees 1971 this simplified problem was examined in a number of papers by e g sheshinski 1972 itsumi 1974 romer 1976 dixit sandmo 1977 and helpman sadka 1978 alternative expressions for the optimal linear income tax rate are derived in this paper our approach seems to lead to formulae which are quite readily interpretable i e the equity efficiency conflict emerges very clearly

real time density forecasts from bayesian vector autoregressions with stochastic volatility central banks and other forecasters are increasingly interested in various aspects of density forecasts however recent sharp changes in macroeconomic volatility including the great moderation and the more recent sharp rise in volatility associated with increased variation in energy prices and the deep global recession pose significant challenges to density forecasting accordingly this paper examines with real time data density forecasts of u s gdp growth unemployment inflation and the federal funds rate from bayesian vector autoregression bvar models with stochastic volatility the results indicate that adding stochastic volatility to bvars materially improves the real time accuracy of density forecasts this article has supplementary material online

modelling inflation volatility this paper discusses estimation of us inflation volatility using time varying parameter models in particular whether it should be modelled as a stationary or random walk stochastic process specifying inflation volatility as an unbounded process as implied by the random walk conflicts with priors beliefs yet a stationary process cannot capture the low frequency behaviour commonly observed in estimates of volatility we therefore propose an alternative model with a change point process in the volatility that allows for switches between stationary models to capture changes in the level and dynamics over the past 40 years to accommodate the stationarity restriction we develop a new representation that is equivalent to our model but is computationally more efficient all models produce effectively identical estimates of volatility but the change point model provides more information on the level and persistence of volatility and the probabilities of changes for example we find a few well defined switches in the volatility process and interestingly these switches line up well with economic slowdowns or changes of the federal reserve chair moreover a decomposition of inflation shocks into permanent and transitory components shows that a spike in volatility in the late 2000s was entirely on the transitory side and characterized by a rise above its long run mean level during a period of higher persistence

are professional macroeconomic forecasters able to do better than forecasting trends this paper investigates whether survey forecasters are able to make more accurate forecasts than simply supposing that the future values of the variable will move monotonically to the long run expectation we consider the forecasts individually and the consensus forecasts consensus survey forecasts are able to do so to varying degrees depending on the variable but this ability is largely limited to forecasts of the current quarter

how should capital be taxed this survey discusses how capital should be taxed in advanced economies we review the theoretical optimal tax literature survey empirical studies on the distribution of capital and the distortion

commercial bank refinancing and economic stability an analysis of european features abstract this paper investigates the effect of two types of central bank advances viz lombarding and rediscounting on the economy we conclude that the root of the distinction is the differential collateralization of these two forms of advances the results suggest that while both methods of refinancing reduce interest rate movement rediscounting dampens the impact of base money and real sector disturbances debt equity shifts have greater price effects with rediscounting than with lombarding the paper also investigates the effects of a pegged rate pricing policy it is shown that a pegged rate policy is an intermediary between fixed and market rate regimes

a micro model of the federal funds market this paper demonstrates that valuable insights into the determination of federal funds rates can be gained through modeling the micro decisions of market participants fed fund demand functions are derived for different bank valuation functions and several implications are discussed specifically it is i possible to rationalize the observation that large banks are net purchasers and small banks net sellers of fed funds ii to explain the positive spread of fed funds rates over other short term money market rates and iii to link the size of this spread to the federal reserve s underlying monetary policy strategy

a general equilibrium money and banking paradigm in this paper we propose and analyze a new paradigm for monetary analysis that is considerably richer than the standard money multiplier models found in the literature a general equilibrium approach to financial assets is developed that leads directly to a multiplier system that transcends the traditional dependence on demand deposits and is easily amenable to exposition and manipulation the model incorporates financial innovation and regulatory changes easily and allows for the general equilibrium effects of the variation in financial ratios that result from induced movements in income interest rates or prices the current analysis differs from traditional multiplier presentations in two distinct ways first the traditional approach to monetary expansion and multiplier analysis relies upon the ratios of various financial assets to demand deposits over the last decade decreased financial regulation and subsequent innovation have substantially changed the nature of depository institution liabilities and their substitutability with demand deposits this has led to the reduction in emphasis on demand deposits per se and an increasing dependence upon transaction accounts other than demand deposits thrift institutions now accounts automatic transfer accounts and overdrafts money market mutual funds and overnight repurchase agreements have made the dependence on demand deposits as a basis for multiplier analysis somewhat obsolete and artificial the model developed here can accommodate any number of transaction assets by specifying general asset demand ratios relative to total household wealth the second and more fundamental way in which our model differs from existing ones is the way in which it weds general equilibrium considerations with simple multiplier analysis the traditional approach to multipliers is to assume that any ratio between two financial assets vying for a role in the aggregate wealth portfolio is exogenous and invariant to other variables in today s economy this seems rather inappropriate any regulatory or asset preference change will result in changes in the endogenous variables in the economy which will further impact financial demands the exogeneity of asset preferences and reserve ratios is no

evaluating real time var forecasts with an informative democratic prior this paper proposes bayesian forecasting in a vector autoregression using a democratic prior this prior is chosen to match the predictions of survey respondents in particular the unconditional mean for each series in the vector autoregression is centered around long horizon survey forecasts heavy shrinkage toward the democratic prior is found to give good real time predictions of a range of macroeconomic variables as these survey projections are good at quickly capturing endpoint shifts

measuring inflation expectations uncertainty using high frequency data inflation expectations play a key role in determining future economic outcomes the associated uncertainty provides a direct gauge of how well anchored the inflation expectations are we construct a model based measure of inflation expectations uncertainty by augmenting a standard unobserved components model of inflation with information from noisy and possibly biased measures of inflation expectations obtained from financial markets this new model based measure of inflation expectations uncertainty is more accurately estimated and can provide valuable information for policymakers using u s data we find significant changes in inflation expectations uncertainty during the great recession

estate taxation with intended and accidental bequests abstract in this paper we examine the properties of the optimal estate tax in the presence of a complete set of tax instruments available to the social planner we allow for both types of bequest motives namely altruistic and accidental we examine the case for estate taxation which seems to be the strongest but not impeccable with accidental bequests in general the estate tax is highly sensitive to the relative importance of the two bequest motives

why do forecasters disagree lessons from the term structure of cross sectional dispersion abstract key sources of disagreement among economic forecasters are identified by using data on cross sectional dispersion in forecasters long and short run predictions of macroeconomic variables dispersion among forecasters is highest at long horizons where private information is of limited value and lower at short forecast horizons moreover differences in views persist through time such differences in opinion cannot be explained by differences in information sets our results indicate they stem from heterogeneity in priors or models differences in opinion move countercyclically with heterogeneity being strongest during recessions where forecasters appear to place greater weight on their prior beliefs

supplanting the minnesota prior forecasting macroeconomic time series using real business cycle model priors abstract although general equilibrium models are in wide use in the theoretical macroeconomic literature their empirical relevance is uncertain we develop procedures for using dynamic general equilibrium models to aid in analyzing the observed time series relationships among macroeconomic variables our strategy is based on that developed by doan litterman and sims 1984 who constructed a procedure for improving time series forecasts by shrinking vector autoregression coefficient estimates toward a prior view that vector time series are well described as collections of independent random walks in our case the prior is derived from a fully specified general equilibrium model we demonstrate that like the atheoretical random walk priors real business cycle model priors can aid in forecasting

uncertainty and optimal social security systems this paper examines the annuity aspect of social security within the framework of an overlapping generations model the duration of life is assumed to be uncertain under a fully funded system demand for social security is determined by each generation so as to maximize expected lifetime utility taking into account the welfare of future generations under a pay as you go system with intergenerational transfers demand for retirement benefits by the working population takes into account taxes paid by descendants it is shown that the two modes of finance are equivalent in terms of all real aggregates effects of changes in expected lifetime and in the birth rate are analyzed starting at the optimal level a compulsory balanced increase in social security taxes and benefits is shown to increase short run savings

diagnosis murder the death of state death taxes since 1976 more than 30 states have eliminated their death taxes and many others have reduced them this unexplored case of interstate tax competition presents a unique opportunity to develop a new more satisfying definition of competitor based on historical elderly migration patterns using data from 1967 onward we outline the recent history of state death tax competition and present a spatial econometric analysis interstate tax competition is evident and grows stronger when using migration based definitions of competitors the article concludes with still more evidence of interstate tax competition the recent movement by states to effectively revive their death taxes jel h7 d7 i introduction the federal estate tax has received wide attention especially because its elimination has been a centerpiece of president george w bush s tax proposals 1 largely overlooked however is the quiet revolution that has been taking place at the state level since 1976 31 of the 48 contiguous states have repealed their death or estate inheritance and gift eig taxes instead relying only on the pick up tax whereby states capture a portion of the federal estate tax liability but do not increase the overall liability of the estate 2 of the remaining 12 states that still have eig taxes 2 have enacted legislation that will eliminate them by 2005 and others are considering doing so beyond the outright elimination of eig taxes many states have also acted to reduce them in a variety of ways such as exempting certain beneficiaries such as the spouse this trend is noteworthy for several reasons foremost it appears to us a prime example of intense interstate tax competition due to the growing size and political influence of the elderly population there is additional political pressure because states may worry that high eig taxes will drive the high income elderly to move to bordering states or retirement havens the stakes may be substantial for example longino and crown 1989 estimate that florida had a net gain of 5 billion in income from the elderly migrants it received between 1985 and 1990 and sastry 1992 73 estimates that one new job is created for every 2 5 elderly migrants it receives state eig tax competition also provides us with a unique opportunity to explore alternative definitions of competitor states beyond simple geography because the movements of the tax base the elderly are fairly easy to track via historical migration data yet no research to our knowledge has explored interstate eig tax competition furthermore these widespread changes in state eig taxes provide substantial cross sectional and time series variation that has been mostly overlooked by researchers interested in the behavioral effects of estate taxes 3 state eig tax policy is also still in flux current and proposed changes in the federal estate tax have substantial revenue consequences for states effectively eliminating eig tax revenues for those that rely solely on the pick up tax how will the states react to this change at present several states have enacted or are considering legislation that would effectively decouple their eig taxes from the federal estate tax and so would preserve the revenue source indeed as the federal estate tax is slowly eliminated eig taxes in states that continue to use them may be the only remaining taxes on bequests yet little is known about them our research seeks to fill this void using state level data from 1967 to the present we first describe the brief history and geographical pattern of these widespread reductions in state eig taxes to our knowledge ours is the first research to document in a systematic way this phenomenon we begin with a chronology of the states that eliminated completely their eig taxes thereby choosing to rely instead only on the pick up tax however there are many other ways that the states may reduce their eig taxes such as increasing exemptions or reducing tax rates

asset returns discount rate changes and market efficiency the primary purpose of this paper is to reconcile the previous findings of discount rate endogeneity with the presence of discount rate announcement effects in securities markets the crux of this reconciliation is the distinction between technical discount rate changes that are endogenous and nontechnical changes which contain some informative policy implications in essence we attempt to separate expected discount rate changes from unexpected changes or equivalently the expected component of discount rate changes from the unexpected component if markets are efficient the former should have no announcement effects while the latter may be associated with an announcement effect accordingly the focus of the empirical analysis is on the interaction between discount rate exogeneity the specific monetary policy regime and accouncement effects in addition we examine whether the behavior of these markets in the postannouncement period is consistent with the rapid price adjustment implied by market efficiency

non linear taxation of bequests equal sharing rules and the tradeoff between intra and inter family inequalities this paper studies the design of the tax and regulatory regime applied to bequests bequests are observable while parent s wealth and children s earning abilities are not parents know their children s earning abilities parents are altruistic their utility depends on their children s utilities but weights may differ between children the optimal tax schedule strikes a balance between the often conflicting incentive and corrective effects when parents attach identical weights to their children an estate taxation is sufficient equal sharing rules appear to be appropriate only in extreme cases such as in presence of the so called cinderella effect

income taxation with intergenerational mobility can higher inequality lead to less progression abstract we introduce the notion of social mobility into an optimal income tax model this is done by allowing earning abilities to be partly innate and partly acquired through investments in human capital education the implications for the optimal re distributive policy are studied

the distribution of wealth and welfare in the presence of incomplete annuity markets this paper examines the implications of the absence of complete annuity markets on the distribution of wealth and welfare of agents whose saving decisions are obtained under uncertainty regarding the length of their life the absence of annuities is shown to yield a unique nondegenerate intragenerational distribution of wealth which is fully characterized this characterization is then used to evaluate the pareto desirability of an annuity system alternative welfare criteria that can be used when the proposed change has differential impacts on the initial state of subsequent generations are considered

accidental bequests a curse for the rich and a boon for the poor when accidental bequests signal otherwise unobservable individual characteristics such as productivity and longevity the population should be partitioned into two groups those who do not receive an inheritance and those who do the first tagged group receives a mirrlees second best tax schedule the second group when its type is fully revealed faces a first best tax schedule receiving an inheritance makes high ability types worse off and low ability types better off high ability individuals face a bequest tax of more than 100 percent while low ability types face a bequest tax that can be smaller as well as larger than 100 percent and it might even be negative

bank regulation and monetary policy the depository institutions deregulation and monetary control act 1980 and the garn st germain depository institutions act 1982 are the two most significant pieces of bank legislation since the 193os their significance stems from the fact that they have sought to roll back a number of the regulations and restrictions imposed on bank activity and competition in the 1933 80 period among the important provisions of these acts are a gradual elimination of regulation q ceilings on time and savings deposits by march 1986 the amelioration of state imposed usury ceilings on loans the nationwide provision of interest bearing transaction type accounts negotiable order of withdrawal now and super now accounts permission for thritts to expand into bank like products such as commercial and industrial loans consumer loans and credit cards and the development of new types of savings accounts such as mmdas l in addition to legislative deregulation we have also witnessed homemade deregulation as banks have sought to exploit often with great success loopholes in the bank holding

the role of intergenerational transfers in aggregate capital accumulation this paper uses historical u s data to directly estimate the contribution of intergenerational transfers to aggregate capital accumulation the evidence presented indicates that intergenerational transfers account for the vast majority of aggregate u s capital formation only a negligible fraction of actual capital accumulation can be traced to life cycle or hump savings a major difference between this study and previous investigations of this issue is the use of more accurate longitudinal age earnings and age consumption profiles these profiles are simply too flat to generate substantial life cycle savings this paper suggests the importance of and need for substantially greater research and data collection on intergenerational transfers life cycle models of savings that emphasize savings for retirement as the dominant form of capital accumulation should give way to models that illuminate the determinants of intergenerational transfers

optimal taxation of bequests in a model with initial wealth we formulate an optimal taxation model where parents leave bequests to their descendants for altruistic reasons in contrast to the standard model individuals differ not only in earning abilities but also in initial inherited wealth in this model a redistributive motive for an inheritance tax which is equivalent to a uniform tax on all expenditures arises given that initial wealth increases with earning abilities the introduction of the inheritance tax either increases intertemporal social welfare or has an ambiguous effect depending on whether the external effect related to altruism is accounted for in the social objective

forecasting with medium and large bayesian vars this paper is motivated by the recent interest in the use of bayesian vars for forecasting even in cases where the number of dependent variables is large in such cases factor methods have been traditionally used but recent work using a particular prior suggests that bayesian var methods can forecast better in this paper we consider a range of alternative priors which have been used with small vars discuss the issues which arise when they are used with medium and large vars and examine their forecast performance using a us macroeconomic dataset containing 168 variables we find that bayesian vars do tend to forecast better than factor methods and provide an extensive comparison of the strengths and weaknesses of various approaches typically we find that the simple minnesota prior forecasts well in medium and large vars which makes this prior attractive relative to computationally more demanding alternatives our empirical results show the importance of using forecast metrics based on the entire predictive density instead of relying solely on those based on point forecasts

optimal taxes and the structure of preferences if optimal tax theory is to be the basis for calculating tax rates a close understanding is required of the relationship between the structure of preferences and the configuration of optimal tax rates otherwise hypotheses chosen by the econometrician for practical convenience may completely determine the results independently of measurement this paper explores the relationship between various types of separability particularly weak and implicit separability and optimal tax rates in the various models discussed in the literature the use of distance functions and the antonelli matrix provides a significant unification of previously disparate results in the final analysis optimal tax theory should be the basis for actual calculation of tax rates although recently there have been great advances in theoretical results and in our understanding of their meaning we are still some way from a working knowledge of whether uniform commodity taxes are in practice optimal or if not which commodities should be discriminated against present theoretical formulae do not yield clear cut results except in special cases and it has recently become clear that optimal rates depend crucially on the detailed structure of consumer preferences for example atkinson and stiglitz 3 show that with an optimal nonlinear income tax discriminatory commodity taxes are only necessary to the extent that individual commodities are not weakly separable from leisure more recently deaton 6 has shown that a similar result holds for what is perhaps the most interesting of the standard models that where there are many consumers and only a linear income tax and proportional commodity taxes are allowed in this case separability between goods and leisure together with linear engel curves for goods removes the need for differential commodity taxation in consequence nothing can be learned about commodity taxes from consumer demand studies in which commodity demands are explained conditionally on total expenditure and commodity prices and which assume linear engel curves all such studies require separability from leisure as a maintained hypothesis and so are consistent with uniform commodity taxation these results suggest that the prospects for meaningful empirical calculations of tax rates are bleak econometricians estimating commodity demand and labor supply equations make generous use of separability assumptions to enable estimation at all in consequence it is likely that empirically calculated tax rates based on econometric estimates of parameters will be determined in structure not by the measurements actually made but by arbitrary untested and even unconscious hypotheses chosen by the econometrician for practical convenience to remedy this situation and as a prelude to fruitful empirical work it is necessary to have a more explicit understanding of how preference structure affects optimal tax rates such is the object of this paper three different

shifting endpoints in the term structure of interest rates abstract this paper links the term structure to perceptions of monetary policy long horizon forecasts of short rates required by no arbitrage term structure models are heavily influenced by the endpoints or limiting conditional forecasts of the short rate process common assumptions that the short rate is mean reverting or contains a unit root are shown to generate unrealistic yield predictions failures occur because these assumptions inadequately account for historical shifts in market perceptions of the policy target for inflation this paper links endpoint shifts to agent learning about shifts in long term policy goals shifting endpoints in short rate processes significantly improve yield predictions

controlling monetary aggregates the discount window this paper argues that current discount window policy coupled with non borrowed reserve targeting of the federal reserve makes the quantity of high powered money endogenous examination of the advisability of this procedure in a stochastic environment is conducted using a general equilibrium financial model it is concluded that the current policy reduces the destabilizing effects of shifts between various depository financial assets but increases the effect of other asset portfolio shifts and aggregate supply disturbances these results are consistent with the work of poole inasmuch as the current debate over discount policy is a repackaging of the debate over interest rate or aggregates control for monetary policy

a new model of inflation trend inflation and long run inflation expectations a knowledge of the level of trend inflation is key to many current policy decisions and several methods of estimating trend inflation exist this paper adds to the growing literature which uses survey based long run forecasts of inflation to estimate trend inflation we develop a bivariate model of inflation and long run forecasts of inflation which allows for the estimation of the link between trend inflation and the long run forecast thus our model allows for the possibilities that long run forecasts taken from surveys can be equated with trend inflation that the two are completely unrelated or anything in between by including stochastic volatility and time variation in coefficients it extends existing methods in empirically important ways we use our model with a variety of inflation measures and survey based forecasts for several countries we find that long run forecasts can provide substantial help in refining estimates and fitting and forecasting inflation the same evidence indicates it is less helpful to simply equate trend inflation with the long run forecasts

efficiency and ownership structure the case of poland we examine the effects of foreign entry on productive efficiency during the polish investment liberalisation the performance of foreign acquisitions is compared to foreign firms entering the marke

reserve requirements and economic stability reserve requirements have become a common institutional feature of our monetary systems they are widely held to be indispensable for zfficient control of the financial sector of the economy yet relatively little analysis has been directed at the question of what constitutes an optimal level and structure of reserve requirements in the traditional literature the major exceptions concetn some discussions of the extreme values of 100 percent or zero requirements especially the former see e g 1 5 6 7 10 for a zero required reserve proposal see 3 in recent years some newer studies dealing with these issues have appeared see e g 8 9 11 12 15 in all of these studies the focus is almost exclusively on money stock control generally speaking their results support the 100 percent reserves idea though such a scheme is usually seen as infeasible for political or institutional reasons leading to recommendations to set requirements as high as possible against deposits included in the money stock subject to whatever constraints of this nature are perceived the underlying idea of course is that this minimizes the influence of private sector disturbances on the money stock by lowering the money multiplier and making it equal to one in the extreme case of a 100 percent requirement reserve requirements are comparable to a tax on a particular economic activity namely the production of deposit accounts as such they have efficiency effects similar to those of a tax on other types of activities although this has always been

competitive interest payments on bank deposits and the long run demand for money reply this paper tests two assumptions made in previous demand for money studies the first assumption concerns the role assigned to the interest rate in the demand for money function common practice identifies the rate of interest with the opportunity cost of holding money in section i this formulation is shown to blur an important distinction between the price of money and the price of money substitutes and to implicitly assume that the relevant price variable is the difference between these two distinct prices a second assumption is that the current ban on interest payments on demand deposits is fully effective in section ii i operationally define these price variables and estimate perfectly competitive interest payments on commercial bank deposits this is done by crudely measuring commercial bank marginal costs and assuming that all excess profit is passed on to depositors in indirect ways section iii presents estimates of a more complete longrun demand for money relationship which explicitly includes an own price and a cross price as separate influences and assumes that the prohibition of the payment of interest on deposits is totally ineffective although no firm conclusion is reached concerning the proper functional specification of the demand function the results significantly improve upon previous demand for money estimates which assumed that the interest payment prohibition is totally effective in section iv the results are summarized and implications of the analysis for monetary theory are presented my competitive demand for money formulation leads to a reinterpretation of the existing evidence on what is generally referred to as the interest elasticity of demand for money this estimate is shown to be significantly biased downward it also implies that the demand for and supply of money are more interdependent than is usually assumed

the trading decision and market clearing under transaction price uncertainty this paper models an individual s trading decision given 1 his her demand function to hold shares of an asset 2 his her expectation on what the market clearing price will be and 3 the design of the market which determines how orders will be translated into trades the particular market design we consider is the batched trading periodic call regime assuming investors are distributed according to their propensities to hold shares we model the aggregation of orders to obtain market clearing values of price and volume and to show the way in which with trading friction these solutions differ from pareto efficient values the importance of this analysis for various issues concerning market design is noted when markets are not frictionless and transaction prices are uncertain the act of trading requires analysis this paper models an individual s trading decision in secondary financial asset markets in so doing we study the order flow as an endogenous part of the system we show how given an underlying demand curve the trader will choose an optimal price quantity order to transmit to the market and we model the aggregation of orders to obtain market clearing values for price and volume these models are used to show the way in which the prices and trading volume established on the market will in general differ from their pareto efficient values much of the microstructure literature that studies the behavior of transaction prices in a nonfrictionless market has assumed that orders are generated by some exogenously given stochastic process this has been true for instance in the

bequests taxation and the distribution of wealth in a general equilibrium model this paper examines the role of bequests and of taxation on bequests for the distribution of wealth we investigate a model with overlapping generations and heterogenous households where parents derive utility directly from their bequests we obtain all results analytically using the coefficient of variation as the measure of inequality bequests per se diminish the inequality of wealth since they raise private savings and hence average wealth holdings more than the variance of wealth from a policy perspective taxing bequests and redistributing government revenue lump sum among the young generation further decreases wealth inequality

precautionary saving and accidental bequests this paper presents a simple general equilibrium model of precautionary saving and accidental bequests this model is used to analyze the implications of individual lifetime uncertainty for aggregate consumption and capital accumulation a precautionary demand for saving arises because an individual consumer does not know in advance the date at which he will die and he wants to avoid low levels of consumption in the event that he lives longer than expected an implication of this precautionary saving is that when death does occur the consumer is generally holding some wealth which is then passed on to his heirs in the form of an accidental bequest even if all consumers have the same ex ante mortality probabilities there will be some intracohort variation in the date of death consequently there will be a nondegenerate distribution of bequests left by consumers in a cohort this nondegenerate distribution of bequests left by one generation induces variation in the distributions of wealth consumption and bequests of subsequent generations the importance of bequests in aggregate saving has been established by laurence kotlikoff and lawrence summers 1981 who reported that 80 percent of u s household wealth is inherited wealth one interpretation of this finding is that the simple life cycle model without bequest motives is an inadequate description of saving behavior in the united states but the model i present demonstrates that accidental bequests by selfish consumers can account for a potentially sizeable fraction of aggregate wealth although some part of bequests especially by the wealthy undoubtedly results from an explicit bequest motive accidental bequests also play a role in the intergenerational transfer of wealth as well as in the intragenerational variation in wealth in order to focus on the role of accidental bequests i purposely exclude a bequest motive from the specification of the utility function the effects of lifetime uncertainty on individual consumption behavior were first examined formally in a seminal paper by menachem yaari 1965 yaari s model provided the basic framework for virtually all subsequent work on uncertain lifetimes including well known papers by nils hakansson 1969 stanley fischer 1973 robert barro and james friedman 1977 david levhari and leonard mirman 1977 and kotlikoff and avia spivak 1981 however all of these papers focused on the consumption decision of an individual and ignored the effect of accidental bequests on the behavior of the recipients of these accidental bequests 2 as will be shown at various points in this paper changes in the economic environment can have effects on aggregate behavior which differ sharply from the effects on individual behavior because of the endogenous adjustment of bequests the effects of department of economics harvard university cambridge ma 02138 this paper is a revised version of bequests and social security with uncertain lifetimes nber working paper no 1372 june 1984 i thank olivier blanchard john burbidge christopher cavanagh robert clower stanley fischer benjamin friedman elhanan helpman mervyn king nobuhiro kiyotaki laurence kotlikoff robert mcdonald james pesando julio rotemberg lawrence summers lars svensson mark watson and jeffrey wolcowitz for valuable conversations and correspondence i also thank the participants in seminars at boston university columbia university cornell university federal reserve board harvard university university of iowa mit university of minnesota university of montreal national bureau of economic research north carolina state university the wharton school and yale university and two anonymous referees for their helpful comments i also thank the national science foundation for financial support 1 in the presence of perfect annuity and life insurance markets there may or may not be bequests depending on the presence or absence of a bequest motive but there would be no accidental bequests 2 kotlikoff and spivak focus on the role of the family in providing an incomplete annuities market but stop short of a full scale overlapping generations model in which the distribution of bequests is determined endogenously

optimal taxation of capital income in general equilibrium with infinite lives this paper analyzes the optimal tax on capital income in general equilibrium models of the second best agents have infinite lives and utility functions which are extensions from the koopmans form the population is heterogeneous the important property of the models is the equality between the social and the private discount rates in the long run i find that the optimal tax rate is zero in the long run for a special case of additively separable utility functions i then determine the tax rates along the dynamic path and conditions that are sufficient for the local stability of the steady state

priors from general equilibrium models for vars abstract this paper uses a simple new keynesian dynamic stochastic general equilibrium model as a prior for a vector autoregression shows that the resulting model is competitive with standard benchmarks in terms of forecasting and can be used for policy analysis jel classification c11 c32 c53 key words bayesian analysis dsge models forecasting vector autoregressions 1 introduction dynamic stochastic general equilibrium dsge models are popular nowadays in macroeconomics they are taught in virtually every economics ph d program and represent a predominant share of publications in the field yet when it comes to policy making these models are scarcely used at least from a quantitative point of view the main quantitative workhorse for policy making at the federal reserve system is frb us a macro econometric model built in the cowles foundation tradition a style of macroeconomics that is no longer taught in many ph d programs 1 in their decision process fed policy makers rely heavily on forecasting they want to know the expected path of inflation in the next few quarters and by how much a 50 basis point increase in the federal funds rate would affect that path frb us offers answers to these questions answers that many macroeconomists would regard with suspicion given both the lucas 1976 critique and the fact that in general the restrictions imposed by cowles foundation models are at odds with dynamic general equilibrium macroeconomics sims 1980 general equilibrium models on the other hand have a hard time providing alternative answers the fact that these models are perceived to do badly in terms of forecasting as they are scarcely parameterized is perhaps one of the reasons why they are not at the forefront of policy making while progress is being made in the development of dsge models that deliver acceptable forecasts e g smets and wouters 2003 this paper proposes an approach that combines a stylized general equilibrium model with a vector autoregression var to obtain a specification that both forecasts well and is usable for policy analysis specifically the approach involves using prior information coming from a dsge model in the estimation of a vector autoregression loosely speaking this prior can be thought of as the result of the following exercise i simulate time series data from the dsge model ii fit a var to these data in practice we replace the sample moments of the simulated data by population moments computed from the dsge model solution since the dsge model depends on unknown structural parameters we use a hierarchical prior in our analysis by placing a distribution on the dsge model parameters a tightness parameter controls the weight of the dsge model prior relative to the weight of the actual sample markov chain monte carlo methods are used to generate draws from the joint posterior distribution of the var and dsge model parameters the paper shows that the approach makes even a fairly stylized new keynesian dsge model competitive with standard benchmarks in terms of forecasting real output growth inflation and the nominal interest rate the three variables that are of most interest to policy makers 2 up to this point our procedure borrows from the work of dejong ingram and whiteman 1993 and ingram and whiteman 1994 who are the first to use priors from dsge models for vars ingram and whiteman showed that prior information from the bare bones stochastic growth model of king plosser and rebelo 1988 is helpful in forecasting real economic activity such as output consumption investment and hours worked in addition to documenting the forecasting performance of a trivariate var with a prior derived from a monetary dsge model this paper makes two contributions that significantly extend the earlier work first we show formally how posterior inference for the var parameters can be translated into posterior inference for dsge model parameters

monetary instruments and policy rules in a rational expectations environment abstract this paper explores the implications of rational expectations and the aggregate supply theory advanced by lucas 1973 and barro 1976 for analysis of optimal monetary policy under uncertainty along the lines of poole 1970 returning to a topic initially treated by sargent and wallace 1975 not surprisingly these two classical concepts alter both the menu of feasible policy choice and the desirability of certain policy actions in our setup unlike that of sargent and wallace 1975 the systematic component of monetary policy is a relevant determinant of the magnitude of business fluctuations that arise from shocks to the system central bank behavior both the selection of monetary instruments and the framing of overall policy response to economic conditions can work to diminish or increase the magnitude of business fluctuations however the activist policies stressed by the present discussion bear little if any relationship to the policy options rationalized by the conventional analysis of monetary policy under uncertainty in particular in contrast to poole s analysis money supply responses to the nominal interest rate are not important determinants of real economic activity rather the central bank should focus on policies that make movements in the general price level readily identifiable by economic agents

forecasting with bayesian vector autoregressions estimated using professional forecasts summary we propose a bayesian shrinkage approach for vector autoregressions vars that uses short term survey forecasts as an additional source of information about model parameters in particular we augment the vector of dependent variables by their survey nowcasts and claim that each variable modelled in the var and its nowcast are likely to depend in a similar way on the lagged dependent variables in an application to macroeconomic data we find that the forecasts obtained from a var fitted by our new shrinkage approach typically yield smaller mean squared forecast errors than the forecasts obtained from a range of benchmark methods copyright 2015 john wiley sons ltd

bank reserves and financial stability a stochastic financial model is developed which derives the reserve levels on financial assets which minimize price level fluctuations it is shown that these levels of reserves are a function of the structure of unanticipated shocks to asset demands and are in general quite different from the levels which minimize the fluctuations of either the nominal or real value of these assets application of the model to currency and demand deposits in the u s a suggest that the price stabilizing reserve ratio on demand deposits is approximately one half of the 12 currently mandated by the monetary control act of 1980 required reserves on deposits at financial institutions have two major economic aspects first reserves may be regarded as a tax on bank liabilities if the rate of return on reserves measured either explicitly or implicitly is less than the market rate of interest secondly reserves may be considered an important monetary instrument for controlling the value of monetary aggregates and ultimately such variables as prices interest rates and income 1 unfortunately there appears to be little agreement among economists either as to the optimal level of reserves or to the criteria for setting such reserves in order to achieve macroeconomic stability friedman 3 had formerly advocated 100 percent reserves on both time and demand deposits but recently 4 has claimed that uniformity of reserves on transactions balances is far more important than the level at which they are imposed 2 at the other end of the spectrum carson 1 has advocated abolishing required reserves on all deposits while poole and lieberman 11 have urged elimination of reserves on time deposits only if m1 is accepted as the money stock definition this paper develops a macroeconomic model where it is demonstrated that the levels of reserves which minimize the fluctuations of such ultimate economic variables as prices are in general quite different from those which stabilize various monetary aggregates these reserve levels which minimize price level fluctuations are determined primarily from the covariance structure of unanticipated disturbances influencing financial assets empirical estimation of asset disturbances for the united states suggests that these stabilizing levels of reserves on demand deposit are lower than those scheduled to prevail under the monetary control act of 1980

deregulation and oligopolistic rivalry in bank deposit markets abstract this paper provides a partial equilibrium analysis of a deregulated market for bank deposits in which banks behave oligopolistically but entry and exit are freely permitted it is demonstrated that the effects of variations in market interest rates reserve requirements and bank cost and demand conditions upon the market quantity of bank deposit money are fundamentally altered if the degree of bank rivalry adjusts endogenously hence banking deregulation may produce significant changes in the relationships between these variables and the stock of deposit money

bequest motives a comparison of sweden and the united states this paper reviews four well known theoretical models of private bequest behavior notes their differing implications for public policy and discusses a way of empirically dis criminating among them then it implements the test with micro data from sweden lls and the u s psid the so called altruistic or dynastic model which among the four models has perhaps the most wide ranging implications for policy receives some support the sign pattern is as the model predicts while the magnitude is much smaller than the altruistic theory implies there is evidence of a potential complication due to a dependence of children s education on parents financial status in the case of the u s 2001 elsevier science b v all rights reserved

money and banking in a cash in advance economy this paper studies banking and financial innovations in a stochasti c general equilibrium model assuming the existence of two distinct types of goods cash goods which can only be purchased by cash and check goods which can also be purchased by checks drawn against interest bearing bank accounts the authors analyze the effects of changes in the payment s structure i e the share of check goods reserve requirements on banks and changes in the supply of reserves the authors find e g that an increased share of check goods and a decrease of the bank reserve ratio in general both lead to a decrease in the variance of the price level copyright 1988 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association