supply side interventions and redistribution we evaluate the eect on welfare of shifting the burden of capi tal income taxes to labor taxes in a dynamic equilibrium model with heterogeneous agents and constant tax rates we calibrate and simu late the economy we nd that lowering capital taxes has two eects i it increases e ciency in terms of aggregate production and ii it redistributes wealth in favor of those agents with a low wage wealth ratio when the parameters of the model are calibrated to match the distribution of income in terms of the wage wealth ratio the redis tributive eect dominates and agents with a high wage wealth ratio would experience a large loss in utility if capital income taxes were eliminated

consumer demand and the life cycle allocation of household expenditures the purpose of this paper is to estimate the parameters of household preferences that determine the allocation of goods within the period and over the life cycle using micro data in doing so the authors are able to identify important effects of demographics labor market status and other household characteristics on the intertemporal allocation of expenditure they test the validity of the life cycle model using excess sensitivity tests and find that controlling for demographics and labor market status variables can largely explain the excess sensitivity of consumption to anticipated changes in income

u s treasury bill forward and futures prices for the period 1976 87 forward rates on u s t bills averaged more than 30 basis points above the comparable futures market rates since risk is common to both rates i argue that this difference can be explained by the substitutability of different maturity t bills for money consistent with this hypothesis i find that this difference depends positively on interest rates and the spread between the federal funds and 3 month t bill rates and negatively on the ratio of short term governments to broadly defined money also significant shifts occurred in the relationship in october 1979 and august 1982 coinciding with changes in federal reserve operating procedures copyright 1994 by ohio state university press

the effects of inflation on real interest rates one of the most obvious facts of recent monetary history is that high inflation is associated with high nominal interest rates this association has been interpreted by many as supporting a superneutrality hypothesis that an increase in inflation will not affect real interest rates in the long run however the bulk of the evidence contradicts superneutrality beginning with irving fisher 1896 1930 most empirical investigations have found that fully anticipated inflation has less than a unit effect on nominal interest rates and thus reduces real interest rates even in the longest of runs this has been shown under the assumption that expectations are formed rationally douglas pearce 1979 that they take the form of an arbitrary distributed lag on past inflation rates fisher 1930 william gibson 1970 or that they are accurately represented by the livingstone expectations data pearce kajal lahiri 1976 lawrence summers 1983 attempted to measure the long run effect without an explicit theory of expectations regressing long swings in various nominal interest rates against long swings in inflation over various subintervals from 1860 to 1979 he found coefficients consistently less than unity for the post world war ii era as a whole the coefficients were in the range of 0 5 to 0 75 with standard deviations of 0 08 to 0 33 a few studies have found coefficients close to unity william yohe and denis karnosky 1969 martin feldstein and otto eckstein 1970 gibson 1972 lucas but as several authors have observed thomas sargent 1976 robert shiller 1980 john wood 1981 summers these findings are limited to a particular period of u s history approximately 1953 71 furthermore even a unitcoefficient would contradict superneutrality of the after tax real interest rate which would require a coefficient substantially greater than unity even taking into account the other inflation distortions in the tax system summers calculated that the coefficient ought to lie in the range of 1 3 to 1 5 far higher than observed these empirical findings pose a challenge to traditional monetary theory much of which implies that superneutrality should hold at least approximately for example the model of miguel sidrauski 1967 implies that the real interest rate should equal the marginal product of capital which in the long run should equal the representative household s marginal rate of time preference if this rate of time preference is a constant then in particular it will be independent of the rate of inflation if it is positively related to the household s wealth or utility then inflation can reduce the marginal product of capital somewhat through what are commonly called mundell tobin effects that is higher inflation can reduce the demand for real balances which reduces real wealth which lowers the rate of time preference and leads to further capital accumulation 2 but this real balance effect on saving is commonly recognized to be too small to make department of economics social science centre university of western ontario london canada n6a 5c2 we are grateful to charles adams norman cameron john chilton jacob frenkel david laidler ben mccallum baldev raj brad reid jack weldon john whalley ron winrck and two anonymous referees for helpful discussions and comments on earlier drafts all errors are attributable to transaction costs robert lucas 1980 finds empirical support for the hypothesis which he calls one of the central implications of the quantity theory of money it has also been adopted by a wide range of more eclectic economists as evidenced by its endorsement in two of the most popular macroeconomics textbooks rudiger dornbusch and stanley fischer 1981 pp 454 58 robert j gordon 1978 pp 289 91 2these implications of variable time preference can be drawn almost immediately from the work of hirofumi uzawa 1968 a graphical analysis is presented by david laidler 1969b who focuses on the logically equivalent question of the effects of paying interest on money

federal reserve operating procedures a survey and evaluation of the historical record since october 1979 comment william poole has produced another thoughtful and thought provoking paper two major conclusions emerge from his work first the instability of growth in m1b since october 1979 can be attributed largely to a reluctance by the federal reserve to permit wide enough swings in the federal funds rate second to correct this problem and to promote greater stability in financial markets and the economy the fed ought to replace lagged with contemporaneous reserve accounting and reform the discount window they should then begin to hit a nonborrowed base or reserves target that grows at a steady rate i will organize my comments around these two conclusions i will not comment directly on the other excellent paper in this session by ralph c bryant i will refer to some of bryant s empirical work though in my discussion of the poole paper poole attributes the continued extensive volatility of m1b growth since october 1979 to efforts by the federal reserve to smooth interest rates he concedes that the fed really has let go the federal funds rate to a very considerable extent but he believes that variability in m1b growth over tonger periods is due primarily to the important role accorded interest rates in federal reserve policy making italics mine he cites four reasons for believing that the post october 1979 targeting procedures qualitatively are not very different from the federal funds targeting procedure followed earlier of the four the most interesting and empirically verifiable is that in nearly one third of the weeks since october 1979 the federal funds rate has averaged within 100 basis points of either the bottom or the top of the widened target range during these weeks the constraint on the funds rate might have prevented the fed from hitting its nonborrowed reserves target poole in fact accepts this view uncritically

subsidies to new energy sources do they add to energy stocks energy production subsidies are paradoxically shown to be likely to increase u s dependence on imported oil standard studies of net energy yields are shown to be seriously biased upward for two reasons first many omit indirect energy inputs which our input output calculation shows probably causes large errors second those studies all omit the energy opportunity costs of nonenergy inputs e g the fuel substituted elsewhere for the labor used to produce energy we prove that absent externalities any fuel output subsidy which causes an otherwise unprofitable expansion must yield an incremental fuel output smaller than the increment in energy input plus the energy opportunity costs of other inputs

optimal fiscal policy in a business cycle model this paper develops the quantitative implications of optimal fiscal policy in a business cycle model in a stationary equilibrium the ex ante tax rate on capital income is approximately zero there is an equivalence class of ex post capital income tax rates and bond policies that support a given allocation within this class the optimal ex post capital tax rates can range from close to independently and identically distributed to close to a random walk the tax rate on labor income fluctuates very little and inherits the persistence properties of the exogenous shocks thus there is no presumption that optimal labor tax rates follow a random walk most of the welfare gains realized by switching from a tax system like that of the united states to the ramsey system come from an initial period of high taxation on capital income

redistributive taxation in a simple perfect foresight model abstract we investigate the redistributive potential of capital taxation in an intertemporal maximizing model of capital formation first even unanticipated redistributive capital taxation is severely limited in its effectiveness since it depresses wages second under any convergent redistributive tax policy which maximizes a paretian social objective the capital income tax will converge to zero independent of the factor supply elasticities these results are independent of workers holdings of capital

dynamic optimal taxation in small open economies abstract this paper examines the effects of perfect capital mobility on the determination of optimal capital taxation it shows that capital movements do not change dramatically the optimal tax path studied for the closed economy in addition the paper provides a counterexample to the standard belief that the worldwide system is the optimal regime of taxation finally it shows that the rate of taxation of the rest of the world is not fundamental to determine the optimal decision of a small economy

barriers to energy end use efficiency abstract recent findings indicate that some alternative energy promote equity efficiency and self reliance and are both economical and sustainable the asian development bank therefore initiated a case study to formulate energy strategies which could contribute to the solution of both local and global energy problems the study focuses on technical and economic details of energy end uses in india the conclusions some of which are surprising are supported by data from several studies the study recommends a shift to least cost electricity planning improving the available database for and information availability about energy rationalizing energy pricing and related fiscal policies and achieving energy efficiency by judicious investment in and support of energy forms which will be both sustainable and affordable in the long run

is the friedman rule optimal when money is an intermediate good in contrast to the recent literature on the optimal inflation tax we show that in models where money reduces transactions costs it is optimal to set the inflation tax to zero when seigniorage is replaced by revenue from distortionary taxes the main reasons for this result are that the variable costs of supplying real balances are negligible and the inflation tax is a unit tax we also show that the intermediate good optimal taxation rules in the public finance literature cannot be directly applied both when money is costless and when it requires resources to be produced

conditional time varying interest rate risk premium evidence from the treasury bill futures market existing studies of the term structure of interest rates often use spot treasury rates to represent default free interest rates however part of the premium in treasury rates is compensation for the risk that short sellers may default since treasury bill futures are default free they provide cleaner data to estimate the interest rate risk premium the mean excess return in defaultfree treasury bill futures is zero this suggests that the interest rate risk premium could be economically negligible we find that although the mean unconditional premium is zero futures returns contain economically and statistically significant time varying conditional interest rate risk premiums the conditional premium depends significantly positively on its own conditional variance and its conditional covariance with the equity premium the conditional premium is large in the volatile 1979 82 period but small afterwards

optimal subsidies to new energy sources abstract this paper broadens previous discussion on the conditions for subsidizing new energy sources several arguments for and against subsidizing new energy sources such as solar energy and synthetic fuels are reviewed and critiqued emphasis is given to vintage subsidies to conventional energy sources net energy analysis and a variety of production externalities a theorem for determining optimal subsidies to new energy sources is developed based on a general theorem proposed by baumol and bradford 2 finally two equity issues are also considered

production subsidies and redistribution abstract who gains from stimulating output we explore a dynamic model with production subsidies where the population is heterogeneous in one dimension wealth there are two channels through which production subsidies redistribute resources across the population first poorer agents gain from a rise in wages since to the extent there is an operative wealth effect in labor supply they work harder second because a current output boost will raise consumption today relative to the future thus lowering real interest rates poor agents gain in relative terms since their income is based less on interest income we examine optimal redistribution from the perspective of an arbitrary consumer in the population we show that if this consumer has commitment at time zero to set all present and future subsidy rates and for a class of preferences that admits aggregation in wealth then output stimulation and hence redistribution will only occur at time zero after that subsidies are zero a byproduct of our analysis of this environment is a median voter theorem with direct voting over subsidy sequences at time zero the sequence preferred by the median wealth consumer is the unique outcome we also study lack of commitment since interest rate manipulation is associated with time inconsistency we analyze this case formally by looking at the markov perfect time consistent equilibrium in a game between successive identical decision makers e g the median agent here subsidies persist they are constant over time and are more distortionary than under commitment moreover whereas under commitment asset inequality changes initially in favor of the consumer who decides on policy it does not under lack of commitment

is there a majority to support a capital tax cut abstract a capital income tax cut must in general be financed by increasing other taxes and thus will have redistributive effects this paper studies analytically the redistribution implied by a capital income tax cut in the ramsey cass koopmans neoclassical growth model when agents differ in wealth and human capital and markets are frictionless a few parameters affect the efficiency costs and redistributive benefits of capital taxation and determine the set of agents who are in favor of a capital income tax cut for plausible parameter values a majority would lose from the tax cut i e high capital taxes may be politically sustainable

on the efficiency and equity trade off abstract the concept of policy measures that create a potential pareto improvement has dominated normative economics the use of this concept in welfare economics relies on the availability of discriminatory lump sum transfers in such a way that the implementation of the efficient policy measure leads to a pareto movement in the economy however most studies of efficient policies preclude by assumption the existence of lump sum taxation this paper proposes in economies amenable to gorman aggregation one simple methodology to rank alternative allocations in terms of their distributional implications in a world with no lump sum transfers this methodology is simple because it is independent of the distribution of characteristics in the economy then for a specific policy measure it can be easily identified whether it implies an equity efficiency trade off the method is illustrated by analyzing the effects on inequality of the elimination of capital taxation the reduction of the inflation tax and the liberalization of capital movements in a small open economy

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

the relation between forward prices and futures prices abstract this paper consolidates the results of some recent work on the relation between forward prices and futures prices it develops a number of propositions characterizing the two prices these propositions contain several testable implications about the difference between forward and futures prices many of the propositions show that equilibrium forward and futures prices are equal to the values of particular assets even though they are not in themselves asset prices the paper then illustrates these results in the context of two valuation models and discusses the effects of taxes and other institutional factors

taxation and income distribution dynamics in a neoclassical growth model we examine how changes in tax policies affect the dynamics of the distributions of wealth and income in a ramsey model in which agents differ in their initial capital endowment the endogeneity of the labor supply plays a crucial role in determining inequality as tax changes that affect hours of work will affect the distribution of wealth and income reinforcing or offsetting the direct redistributive impact of taxes our results indicate that tax policies that reduce the labor supply are associated with lower output but also with a more equal distribution of after tax income we illustrate these effects by examining the impact of recent tax changes observed in the us and in european economies

consumption taxes and redistribution this study considers replacing the current us tax system with only aflat tax con sumption tax showing in contrast to the literature that such a reform leads to a decline in inequality and increase in welfare for the welfare poor the results are obtained from a simple model that identifies the main channels through which the reform affects the economy it is shown also that these novel results depend on the distribution of wealth and earnings and that they hold for the relevant

net energy analysis in a ramsey hotelling growth model this article presents a dynamic growth model with energy as an input in the production function the available stock of energy resources is ordered by a quality parameter based on energy accounting the energy return on energy invested eroi in our knowledge this is the first paper where eroi fits in a neoclassical growth model with individual utility maximization and market equilibrium establishing the economic use of net energy analysis on a firmer theoretical ground all necessary concepts to link neoclassical economics and eroi are discussed before their use in the model and a comparative static analysis of the steady states of a simplified version of the model is presented

some classes of functions that preserve the inequality and welfare orderings of income distributions abstract we identify in the paper those classes of functions that preserve the ranking of distributions according to three welfare criteria introduced recently by a f shorrocks economica 50 1983 3 17 we prove that a necessary and sufficient condition for a function to preserve the generalized lorenz ordering of distributions is that it be increasing and concave requiring welfare improvements to be compatible with more equality we obtain linear resp affine functions when emphasis is placed on relative resp absolute income differentials

toward enhancement of the contribution of theory to environmental policy theory can be helpful to policy makers by pointing out surprising relationships unlikely to be recognized by unaided common sense by noting significant exeptions to principles widely accepted and by offering generalizations of its own the paper argues that theorists may not have done enough of the first two and may have overstressed the last giving insufficient warnings of pitfalls examples of each of the three are provided the first is illustrated by a theorem which shows that any new energy source such as gasohol which is supplied only because of a subsidy prospectively uses up more energy than it creates the important exception application is illustrated by showing that subsidies which reward reduced emissions by the firm tend to increase pollution by the industry finally the paper discusses inadvertent bias in the empirical evidence reasserting the superior performance of fiscal incentives for reduced environmental damage as compared to direct controls thus casting doubt on the allegedly universal superiority of incentives