learning your earning are labor income shocks really very persistent in this paper we examine the risk situation facing individuals in the labor market the current consensus in the literature is that the labor income process has a large random walk component we argue two points first the estimates of persistence from income data appear to be upward biased due to the omission of heterogeneity in income pro les across the population that would be implied for example by a human capital model with heterogeneity when we allow for dierences in pro les the estimated persistence falls from 0 99 to about 0 8 moreover the main evidence against pro le heterogeneity in the existing literature that the autocorrelations of income changes are small and typically negative is also replicated by the pro le heterogeneity model we estimate casting doubt on the previous interpretation of this evidence second we embed this process in a life cycle model to examine how it alters individuals consumption saving decision we assume that as seems plausible individuals do not know their pro les exactly at the beginning of life but learn in a bayesian way with successive income observations we nd that learning is very slow and aects consumption decision throughout the life cycle the model generates substantial rise in consumption inequality over the life cycle which matches empirical observations deaton and paxson 1994 moreover the shape of the age inequality pro le is non concave as in the data but unlike in a model with very persistent shocks finally the consumption pro les of college graduates are steeper than those of high school graduates in the model consistent with the data because they face a wider dispersion of and hence uncertainty about income growth rates overall this evidence indicates that income shocks may be signi cantly less persistent than what is currently assumed

taxing capital not a bad idea after all we quantitatively characterize the optimal capital and labor income tax in an overlapping generations model with idiosyncratic uninsurable income shocks and permanent productivity difierences of households the optimal capital income tax rate is signiflcantly positive at 36 percent the optimal progressive labor income tax is roughly a at tax of 23 percent with a deduction of 7 200 relative to average household income of 42 000 the high optimal capital income tax is mainly driven by the life cycle structure of the model whereas the optimal progressivity of the labor income tax is attributable to the insurance and redistribution role of the tax system jel e62 h21 h24

optimal progressive labor income taxation and education subsidies when education decisions and intergenerational transfers are endogenous abstract we quantitatively characterize the optimal mix of progressive income taxes and education subsidies in a model with endogenous human capital formation borrowing constraints income risk and incomplete financial markets in addition to the distortions of labor supply progressive taxes weaken the incentives to acquire education the latter distortion can potentially be mitigated by an education subsidy we find that the welfare maximizing fiscal policy is indeed characterized by a substantially progressive labor income tax code and a positive subsidy for college education both the degree of tax progressivity and the education subsidy are larger than in the current us status quo

inflation and reputation in many macroeconomic models with rational expectations optimal policy is time inconsistent and therefore announced policy may not be credible this paper models the government s credibility explicitly using kreps and wilson s analysis time consistent optimal government policy emerges as a sequential equilibrium in a repeated game this policy is at least as good as the inconsistent optimal policy and dominates the consistent policy when reputational effects are ignored thus the analysis resolves the problem of specifying a credible optimal policy in such models the results show why attempts to disinflate may lead to recession even with perfectly flexible prices this abstract was borrowed from another version of this item

wage indexation and discretionary monetary policy since the early 1970 s both academic researchers and policymakers have devoted considerable attention to the macroeconomic effects of wage indexation however these two groups have focused on different effects starting with jo anna gray 1976 and stanley fischer 1977a formal models emphasize the role of indexation in stabilizing or destabilizing output in contrast informal policy discussions usually focus on the allegation that indexation is inflationary e g arthur okun 1971 mario simonsen 1983 eliana cardoso and rudiger dornbusch 1987 to reduce this gap this paper presents a model of the effects of indexation on inflation and asks whether indexation raises economic welfare when these effects are taken into account until recently it was difficult to formalize the argument that indexation is inflationary because economists lacked models of the sources of inflation this paper applies the insight of robert barro and david gordon 1983a that with discretionary policy the employment gains from surprise inflation tempt the monetary authority to create positive trend inflation as stressed by fischer and lawrence summers 1989 policies that reduce the costs of inflation such as indexation cause barro gordon policymakers to choose higher inflation indeed inflation can rise so much that welfare falls despite greater protection against inflation this effect is appealing because it captures the common argument that indexation weakens policymakers will to fight inflation 1 this is not the end of the story however because wage indexation has a second effect it reduces the employment effects of surprise inflation that is unlike most policies to reduce the costs of inflation such as indexation of interest rates wage indexation steepens the phillips curve in the barrogordon model a steeper phillips curve reduces the temptation to inflate and hence reduces equilibrium inflation since indexation has one inflationary effect lower costs of inflation and one anti inflationary effect a steeper phillips curve the net effect appears ambiguous even if the net effect on inflation is determined the welfare effect may remain unclear if inflation rises the welfare loss might or might not be outweighed by the lower cost of a given amount of inflation 2 these ambiguities cannot be resolved with the barro gordon model alone because the phillips curve and the effect of inflation on welfare are ad hoc it is plausible that indexation affects these relations but the relative strengths of the effects are unclear resolving the ambiguities requires a more structural model in which the effects of indexation are derived rather than assumed this paper studies such a model specifically we use a model of staggered wagesetting based on gray 1976 fischer 1977a b and john taylor 1980 the degree of indexation is an explicit parameter and so we can derive its net effects on inflation and welfare section i of this paper presents our basic model and derives equilibrium inflation in

optimal taxation merging micro and macro approaches efficient provision of social insurance and efficient redistributionofresourcesamongindividualsaresomeofthemostimportantandchallenging questions in macroeconomics and public finance a seminal contribution of mirrlees 1971 is the starting point for the modern approach to answering these questions a trade off between efficiency and insurance or equity is inherent to this approach and is a key determinant of the optimal policy in this paper we argue that the large body of research that follows mirrlees approach has been developing in two quite separate directions referred to in this paper as the micro and macro approaches we argue that merging the two directions

positive and normative judgments implicit in u s tax policy and the costs of unequal growth and recessions calculating the welfare implications of changes to economic policy or shocks requires economists to decide on a normative criterion one approach is to elicit the relevant moral criteria from real world policy choices converting a normative decision into a positive inference as in the recent surge of inverse optimum research we find that capitalizing on the potential of this approach is not as straightforward as we might hope we perform the inverse optimum inference on u s tax policy from 1979 through 2010 and argue that the results either undermine the normative relevance of the approach or challenge conventional assumptions upon which economists routinely rely when performing welfare evaluations

discretionary inflation in a general equilibrium model this paper extends the barro and gordon 1983 model to a general equilibrium framework in which the costs and benefits to surprise inflation reflect the preferences technology and market structure of the economy the benefit of such an approach is that we can relate the underlying features of the economy to the size of the inflation bias in particular it can be shown that an increase in the source of the monetary authority s incentive to inflate does not necessarily result in a worsened inflation bias due to offsetting changes in the cost of inflation furthermore changes in the real interest rate affect the monetary authority s incentives and hence the discretionary level of inflation lastly we can show that an increase in the labor share of national income worsens the inflation bias the model also indicates the importance of a nominal rigidity lack of policy precommitment and a distortion for optimal monetary policy to be characterized by a level of discretionary inflation that exceeds the friedman 1969 rule

designing optimal disability insurance a case for asset testing we analyze an implementation of an optimal disability insurance system as a competitive equilibrium with taxes an optimum is implemented by an asset tested disability system in which a disability transfer is paid only if an agent has assets below a specified maximum the logic behind this result is that an agent who plans to falsely claim disability a finds doing so unattractive if he does not adjust his savings and b cannot collect disability insurance if he does adjust his savings in the desired direction upward for a calibrated economy we find that welfare gains from asset testing are significant

using elasticities to derive optimal income tax rates this paper derives optimal income tax formulas using compensated and uncompensated elasticities of earnings with respect to tax rates a simple formula for the high income optimal tax rate is obtained as a function of these elasticities and the thickness of the top tail of the income distribution in the general non linear income tax problem this method using elasticities shows precisely how the different economic effects come into play and which are the key relevant parameters in the optimal income tax formulas of mirrlees the optimal non linear tax rate formulas are expressed in terms of elasticities and the shape of the income distribution these formulas are implemented numerically using empirical earning distributions and a range of realistic elasticity parameters

how important are idiosyncratic shocks evidence from labor supply the notion that individuals face idiosyncratic labor market uncertainty is a common one government programs such as unemployment insurance and social security are motivated by such an idea economic theory ranging from labor supply to savings behavior to asset pricing often presupposes that such risks are important a number of papers however have questioned this orthodoxy sumru altug and robert a miller 1990 for instance are unable to reject a set of factor structure restrictions implied by complete markets john h cochrane 1991 and barbara j mace 1991 find evidence of consumption insurance although not against all types of risks robert m townsend 1994 documents evidence of risk sharing in indian villages michael p keane and kenneth i wolpin 1997 argue that 90 percent of the labor market uncertainty faced by a group of males is resolved by age 16 other studies have suggested the opposite papers by joseph g altonji et al 1991 orazio attanasio and steven j davis 1996 and attanasio and guglielmo weber 1992 as well as some evidence in cochrane 1991 and mace 1991 suggest that risk sharing is far from complete in particular for low frequency shocks angus deaton and christina paxson 1994 show that inequality in labor earnings total income and consumption increases with age they suggest that this is difficult to reconcile with standard models of complete consumption insurance in storesletten et al 2000 we ask similar questions using a general equilibrium life cycle model we conclude that increasing inequality with age consumption inequality in particular is difficult to explain in the absence of uninsured idiosyncratic shocks received throughout the working years we argue that between 40 percent and 50 percent of an individual s lifetime uncertainty remains unresolved prior to entering the workforce this paper further examines the implications of increasing inequality with age we begin by asking if a very different model one which features full risk sharing can account for the data the idea which deaton and paxson 1994 attribute to steven davis is that increasing income and consumption inequality can arise in a perfect insurance setting if i dispersion in labor productivity increases with age and ii preferences are nonseparable between leisure and consumption if this is true an efficient allocation may feature increasing consumption dispersion because higher productivity workers will supply relatively more labor and be compensated with more consumption we develop a specific model and find that for plausible parameter values this is exactly what happens what also happens however is that such an allocation features increasing inequality in hours worked using data from the panel study on income dynamics psid we show that inequality in hours worked is roughly constant across age this casts doubt on the full risksharing model and strengthens the argument in favor of uninsurable idiosyncratic risk the remainder of our paper provides a more general discussion of the evidence on inequality and age and how this suggests an important role for idiosyncratic labor market shocks

the surprising power of age dependent taxes this paper provides a new empirically driven application of the dynamic mirrleesian framework by studying a feasible and potentially powerful tax reform age dependent labour income taxation i show analytically how age dependence improves policy on both the intratemporal and intertemporal margins i use detailed numerical simulations calibrated with data from the u s panel study of income dynamics to generate robust policy implications age dependence 1 lowers marginal taxes on average and especially on high income young workers and 2 lowers average taxes on all young workers relative to older workers when private saving and borrowing are restricted finally i calculate and characterize the welfare gains from age dependence despite its simplicity age dependence generates a welfare gain equal to between 0 6 and 1 5 of aggregate annual consumption and it captures more than 60 of the gain from reform to the dynamic optimal policy the gains are due to substantial increases in both efficiency and equity when age dependence is restricted to be pareto improving the welfare gain is nearly as large

demographic differences in cyclical employment variation demographic differences in patterns of employment variation over the business cycle are examined in this paper three primary conclusions emerge first both participation and unemployment must be considered in any analysis of cyclical changes in the labor market second young people bear a disproportionate share of cyclical employment variation third failure to consider participation has led to undue pessimism about the effect of aggregate demand policy on high unemployment groups if participation did not surge reduction in overall unemployment to its 1969 level would reduce the unemployment of almost all demographic groups to very low levels

how well does the u s social insurance system provide social insurance we analyze the insurance provided by the u s social security and income tax system within a model in which agents receive idiosyncratic wage rate shocks that are privately observed we consider two reforms a piecemeal reform that optimally chooses the social security benefit function and a radical reform that eliminates the entire social insurance system and replaces it with an optimal tax on lifetime earnings the radical reform outperforms the piecemeal reform and achieves nearly all of the maximum possible welfare gain when wages differ permanently over the lifetime when wage shocks match properties in u s data the piecemeal reform outperforms the radical reform

rational expectations and policy credibility following a change in regime we examine the dynamic path of an economy after a change in regime when neither the policy to be followed nor the reactions of the public are known the model is an application of kreps and wilson s reputation model to barro and gordon s macroeconomic policy game equilibrium is defined to be the dynamically consistent solution to a game between the government and the private sector it involves mixed strategies and bayesian learning by both sides until the uncertainty about government and public behaviour is resolved the absence of complete credibility of government policy and intransigence of private sector wage demands increase the output loss of disinflation the analysis also sheds light on the strategic nature of economic policymaking and the role of information in macroeconomics

optimal taxation in life cycle economies abstract we use a very standard life cycle growth model in which individuals have a labor leisure choice in each period of their lives to prove that an optimizing government will almost always find it optimal to tax or subsidize interest income the intuition for our result is straightforward in a life cycle model the individual s optimal consumption work plan is almost never constant and an optimizing government almost always taxes consumption goods and labor earnings at different rates over an individual s lifetime one way to achieve this goal is to use capital and labor income taxes that vary with age if tax rates cannot be conditioned on age a nonzero tax on capital income is also optimal as it can imperfectly mimic age conditioned consumption and labor income tax rates journal of economic literature classification numbers e62 h21

insurance and taxation over the life cycle we consider a dynamic mirrlees economy in a life cycle context and study the optimal insurance arrangement individual productivity evolves as a markov process and is private information we use a first order approach in discrete and continuous time and obtain novel theoretical and numerical results our main contribution is a formula describing the dynamics for the labour income tax rate when productivity is an ar 1 our formula resembles an ar 1 with a trend where i the auto regressive coefficient equals that of productivity ii the trend term equals the covariance productivity with consumption growth divided by the frisch elasticity of labour and iii the innovations in the tax rate are the negative of consumption growth the last property implies a form of short run regressivity our simulations illustrate these results and deliver some novel insights the average labour tax rises from 0 to 37 over 40 years whereas the average tax on savings falls from 12 to 0 at retirement we compare the second best solution to simple history independent tax systems calibrated to mimic these average tax rates we find that age dependent taxes capture a sizable fraction of the welfare gains in this way our theoretical results provide insights into simple tax systems copyright 2013 oxford university press

two views of inequality over the life cycle data on the life cycle profiles of inequality in wages earnings hours worked and consumption contain precious information for answering questions about the ability of households to insure labor market risk and about the sources of this risk this paper demonstrates that the choice of whether to control for cohort effects or for time effects has a drastic impact on the estimated age profiles for inequality and thus on the answers to those questions it also shows that time effects are required to account of the observed trends in inequality in 30 years of u s data whereas there is no evidence that cohort effects have been important jel c13 d31 d91 j22 j31

sticky prices as coordination failure this paper links the coordination failure and menu cost approaches to the microeconomic foundations of keynesian macroeconomics if a firm s desired price is increasing in others prices then the gain from price adjustment after a nominal shock is greater if others adjust this strategic complementarity leads to multiple equilibria in the degree of rigidity welfare may be much higher in the equilibria with less rigidity thus nominal rigidity arises from a failure to coordinate price changes jel e12 e30 keynesian macroeconomics waned in the 1970 s because economists grew disenchanted with its weak microeconomic foundations the central difficulty was that keynesian models were based on ad hoc rigidities in nominal wages and prices the 1980 s produced two approaches to reviving keynesian theory the menu cost literature n gregory mankiw 1985 george akerlof and janet yellen 1985 seeks to provide rigorous explanations for nominal rigidities these papers argue that small frictions in price setting are enough to produce large nominal rigidities in contrast the coordination failure literature russell cooper and andrew john 1988 abandons nominal rigidities and seeks alternative foundations for keynesian models the central idea is that many economic activities such as production e g john bryant 1983 trade e g peter diamond 1982 and investment e g nobuhiro kiyotaki 1988 exhibit synergism or strategic complementarity one agent s optimal level of activity depends positively on others activity strategic complementarity can lead to multiple equilibria with high activity equilibria superior to low activity equilibria thus an economy may be stuck in an underemployment equilibrium even though a superior equilibrium exists models with nominal rigidities and models with coordination failures are often presented as competing paradigms 1 this paper shows that this view is incorrect we take a step toward unifying the foundations of keynesian economics by showing that the two sets of ideas are highly complementary nominal rigidity arises from a failure to coordinate price changes this failure has the essential features of coordination failures in previous models flexibility in one firm s price increases the incentives for other firms to make their prices flexible this strategic complementarity leads to multiple equilibria in the degree of nominal rigidity equilibria with less rigidity more active price adjustment are often pareto superior to equilibria with more rigidity these results contribute to our understanding both of coordination failure and of nominal rigidity the range of keynesian phenomena explained by coordination failures is greatly expanded previous coordination failure models contain only real variables and thus ascribe no role to monetary policy or other determinants of nominal spending our results suggest that coordination failure is at the root of inefficient nonneutralities of money theories of nominal rigidities gain new empirical and policy im

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

education and optimal dynamic taxation the role of income contingent student loans we study the optimal design of integrated education finance and tax systems the distribution of wages is endogenously determined by the costly education decisions of heterogeneous individuals before labor market entry consistent with empirical evidence this human capital investment decision is risky we find that an integrated education and tax system in which the government provides education loans to young individuals coupled with income contingent repayment can always be designed in a pareto optimal way we present a simple empirically driven application of the framework to us data in which individuals make a college entry decision we find the optimal repayment schemes for college loans can be well approximated by a schedule that is linearly increasing in income up to a threshold and constant afterwards so although the full optimum could lead to complicated non linear schedules in theory very simple instruments can replicate it fairly well the welfare gains from income contingent repayment are significant

capital taxation quantitative explorations of the inverse euler equation economies with private information provide a rationale for capital taxation in this paper we ask what the welfare gains from following this prescription are we develop a method to answer this question in standard general equilibrium models with idiosyncratic uncertainty and incomplete markets we find that general equilibrium forces are important and greatly reduce the welfare gains once these effects are taken into account the gains are relatively small in our benchmark calibration these results do not imply that dynamic aspects of social insurance design are unimportant but they do suggest that capital taxation may play a modest role

politicians taxes and debt the standard analysis of the efficient management of income taxes and debt assumes a benevolent government and ignores potential distortions arising from rent seeking politicians this paper departs from this framework by assuming that a rent seeking politician chooses policies if the politician chooses extractive policies citizens throw him out of power we analyse the efficient sustainable equilibrium unlike in the standard economy temporary economic shocks generate volatile and persistent changes in taxes along the equilibrium path this serves to optimally limit rent seeking by the politician and to optimally generate support for the politician from the citizens taxes resembling those of the benevolent government are very costly since the government over saves and resources are wasted on rents political distortions thus cause the complete debt market to behave as if it were incomplete however in contrast to an incomplete market economy in the long run taxes do not converge to zero and under some conditions they resemble taxes under a benevolent government

insurance and opportunities a welfare analysis of labor market risk abstract using a model with constant relative risk aversion preferences endogenous labor supply and partial insurance against idiosyncratic wage risk this paper provides an analytical characterization of three welfare effects a the welfare effect of a rise in wage dispersion b the welfare gain from completing markets and c the welfare effect from eliminating risk the analysis reveals an important trade off for these welfare calculations on the one hand higher wage uncertainty increases the cost associated with missing insurance markets on the other hand greater wage dispersion presents opportunities to raise aggregate productivity by concentrating market work among more productive workers welfare effects can be expressed in terms of the underlying parameters defining preferences and wage risk or alternatively in terms of changes in observable second moments of the joint distribution over individual wages consumption and hours

optimal fiscal and monetary policy in an economy without capital abstract this paper is concerned with the structure and time consistency of optimal fiscal and monetary policy in an economy without capital in a dynamic context optimal taxation means distributing tax distortions over time in a welfare maximizing way for a barter economy our main finding is that with debt commitments of sufficiently rich maturity structure an optimal policy if one exists is time consistent in a monetary economy the idea of optimal taxation must be broadened to include an inflation tax and we find that time consistency does not carry over an optimal inflation tax requires commitment by rules in a sense that has no counterpart in the dynamic theory of ordinary excise taxes the reason time consistency fails in a monetary economy is that nominal assets should from a welfare maximizing point of view always be taxed away via an immediate inflation in a kind of capital levy this emerges as a new possibility when money is introduced into an economy without capital

the output inflation trade off when prices are costly to change the output inflation trade off is investigated in a rational expectations equilibrium economy in which costly price setting makes it inefficient for agents to vary their prices at every instant it is shown that sticky prices are not some exogenous source of output fluctuation but result from the monetary policy process an economy with slow and counterinflationary money growth exhibits staggered changes in sticky prices as assumed in some new keynesian analyses an economy with fast money growth and a high degree of monetary accommodation exhibits either flexible prices or bunched frequently changing sticky prices

determining the motives for a positive optimal tax on capital previous literature demonstrates that in a computational life cycle model the optimal tax on capital is positive and large given the computational complexities of these overlapping generations models it is helpful to to determine the relative importance of the economic factors driving this result i highlight the impact of changing two common assumptions in a benchmark model that generates a large optimal tax on capital similar to the model in conesa et al 2009 first the utility function is altered such that it implies an agent s frisch labor supply elasticity is constant as opposed to increasing over his lifetime second the government is allowed to tax accidental bequests at a separate rate from ordinary capital income the main nding of this paper is that these two changes cause the optimal tax on capital to drop by almost half furthermore i nd that the welfare costs of adopting the high optimal tax on capital from the benchmark model in the model with the altered assumptions which calls for a lower tax on capital are equivalent to 0 35 percent of total lifetime consumption quantifying the impact of these assumptions in the benchmark model is important because the rst has limited empirical evidence and the second although included for tractability confounds a motive for taxing capital with a motive for taxing accidental bequests jel e62 h21

expectation traps and discretion abstract we develop a dynamic model with optimizing private agents and a benevolent optimizing monetary authority that cannot commit to future policies we characterize the set of sustainable equilibria and discuss the implications for institutional reform we show that there are equilibria in which the monetary authority pursues inflationary policies because that is what private agents expect we call such equilibria expectation traps alternative institutional arrangements for the conduct of monetary policy which impose limited forms of commitment on the policymaker can eliminate expectation traps journal of economic literatureclassification numbers e31 e42 e50 e51 e58

on the optimality of age dependent taxes and the progressive u s tax system abstract in life cycle economies where an individual s optimal consumption work plan is almost never constant the optimal marginal tax rates on capital and labor income vary with age conversely the progressivity imbedded in the u s tax code implies that marginal tax rates vary with age because tax rates vary with earnings and earnings vary with age using numerical simulations this paper shows that if the tax authority is prevented from conditioning tax rates on age some degree of progressivity is desirable as progressive taxation better imitates optimal age dependent taxes than an optimal age independent tax system this role for progressive taxation emanates from efficiency reasons and does not rely on any insurance nor re distribution arguments

optimal income transfer programs intensive versus extensive labor supply responses this paper analyzes optimal income transfers for low incomes labor supply responses are modeled along the intensive margin intensity of work on the job and along the extensive margin participation into the labor force when behavioral responses are concentrated along the intensive margin the optimal transfer program is a classical negative income tax program with a substantial guaranteed income support and a large phasing out tax rate however when behavioral responses are concentrated along the extensive margin the optimal transfer program is similar to the earned income tax credit with negative marginal tax rates at low income levels and a small guaranteed income carefully calibrated numerical simulations are provided

age dependent taxes with endogenous human capital formation we assess the gains attained by the introduction of age dependent labor income taxes in an overlapping generations economy where individuals live a meaningful life cycle and endogenously accumulate human capital the model is sufficiently rich to isolate the role of general equilibrium effects credit market imperfections and different forms of human capital accumulation the large welfare gains we obtain cannot be attained without age dependence nor can they be attained with age dependent taxes if progressivity of labor income taxes and capital income tax rates are not suitably adjusted to profit from the complementarity of these instruments

monopolistic competition and the effects of aggregate demand how important is monopolistic competition to an understanding of the effects of aggregate demand on output we ask the question at three levels can monopolistic competition by itself explain why aggregate demand movements affect output can it together with other imperfections generate effects of aggregate demand in a way that perfect competition cannot if so can it give an accurate account of the response of the economy to aggregate demand movements the answers are no yes and yes

growth in the labor force attachment of married women accounting for changes in the 1970s the sustained and marked increase in the labor force participation of married women characterized by some as a subtle revolution has been widely documented 22 increased labor force attachment has been manifested by adult women in all age groups up to age 65 and the most dramatic increases have been manifested by women in their mid 20s to mid 30s particularly white married women using data from the national longitudinal surveys of work experience nls this paper examines the growth between the late 1960s and late 1970s in labor force participation and hours worked among white married women aged 30 to 34 our purpose is to determine to what extent this growth can be attributed to changes in characteristics of women in this age range and to what extent important behavioral changes have occurred the data and methods of analysis are described in section ii while empirical estimates of the determinants of married women s work activity are presented in section iii analysis of the importance of the past decade s changes in these determinants characteristics in accounting for the observed growth in labor supply is provided in section iv concluding observations along with some speculation concerning the future course of married women s labor force attachment are in section v

dynamic optimal taxation with private information we study dynamic optimal taxation in a class of economies with private information optimal allocations in these environments are complicated and history dependent yet we show that they can be implemented as competitive equilibria in market economies supplemented with simple tax systems the market structure in these economies is similar to that in bewley 1986 agents supply labour and trade risk free claims to future consumption subject to a budget constraint and a debt limit optimal taxes are conditioned only on two observable characteristics an agent s accumulated stock of claims or wealth and her current labour income we show that optimal taxes are generally non linear and non separable in these variables and relate the structure of marginal wealth and income taxation to the properties of agent preferences this paper studies optimal taxation in a class of dynamic economies with private information we consider an environment in which agents preferences are defined over consumption and labour and each agent receives a privately observed sequence of i i d preference shocks incentivecompatibility constraints stemming from private information imply that socially optimal or constrained efficient allocations in this environment are complicated and history dependent yet we show that they can be implemented as competitive equilibria in market economies supplemented with simple tax systems the market structure in these economies is identical to that in bewley 1986 huggett 1993 or aiyagari 1994 agents can trade current consumption for claims to future consumption subject to a budget constraint and a borrowing limit these claims have a non contingent pre tax return crucially taxes are conditioned upon only two observable characteristics of an agent current wealth given by the agent s accumulated stock of claims and current labour income they do not depend on any other aspect of an agent s past history most models of dynamic optimal taxation follow the ramsey approach in which the set of fiscal instruments available to the government is exogenously specified 1 linear labour and capital income taxes are typically included in this set while lump sum taxes are ruled out the exclusion of the latter is justified by appealing to incentive or administrative constraints but these are not explicitly modelled these exogenous restrictions on fiscal instruments represent frictions that the government seeks to ameliorate through its optimal choice of tax rates the approach we adopt in this paper builds on the optimal taxation literature initiated by mirrlees 1971 mirrlees assumes that agents receive privately observed shocks to their

optimal indirect and capital taxation we consider an environment in which agents skills are private information and follow arbitrary stochastic processes we prove that it is typically pareto optimal for an individual s marginal benefit of investing in capital to exceed his marginal cost of doing so this wedge is consistent with a positive tax on capital income we also prove that it is pareto optimal for the marginal rate of substitution between any two consumption goods to equal the marginal rate of transformation this lack of a wedge is consistent with uniform taxation of consumption goods within a period

monetary policy and policy credibility theories and evidence within the past decade there has been a significant shift in attitude by many western industrialized countries toward the objectives and conduct of national economic policy the events of the 1970s accelerating inflation and stagnant economic growth motivated the view that inflation had created its own stubborn self sustaining momentum that either was not amendable to the influences of conventional macroeconomic policy or else would yield to such influences only at unacceptable costs this led to the development of a program aimed at reestablishing control over prices while minimizing any adverse consequences of anti inflationary policies on output and employment seen as a new monetary experiment the essential ingredients included prudent financial management abstinence from discretionary intervention commitment to intermediate targets and above all prior announcement of these policies evidence of this program and its effects can be found oni the continents of europe north america and latin america and provide further important lessons in anti inflationary management this paper is a survey of recent theoretical developments in monetary policy which among other issues attempt to explain one rationale for this program and the likely consequences thereof to the extent that the new program of monetary and fiscal reform was deliberately made public and impressed upon citizens as an overriding commitment of governments in advance of its execution reflects a prevailing opinion that economic policies are more effective if they are credible to private economic agents this view emphasized forcefully by william fellner 1976 1979 may be seen as being mainly due to the assimilation of the rational expectations hypothesis

residential location housing demand and labour supply decisions of one and two earner households the case of bogota colombia this paper is concerned with the simultaneous determination of housing consumption residential location and the labour supply decisions of one earner and two earner households the model is applied to the city of bogota colombia it finds that housing consumption and location as well as labour supply decisions vary across gender and household type the paper suggests that married women who work in the labour market have the burden of a long journey to work and a probable heavy share of household responsibilities their well being is further eroded by lower wages and compensatingly long hours of work

the effects of health wealth and wages on labour supply and retirement behaviour this paper estimates a life cycle model of labour supply retirement and savings behaviour in which future health status and wages are uncertain individuals face a fixed cost of work and cannot borrow against future labour pension or social security income the method of simulated moments is used to match the life cycle profiles of labour force participation hours worked and assets that are estimated from the data to those that are generated by the model the model establishes that the tax structure of the social security system and pensions are key determinants of the high observed job exit rates at ages 62 and 65 removing the tax wedge embedded in the social security earnings test for individuals aged 65 and older would delay job exit by almost one year by contrast social security benefit levels health and borrowing constraints are less important determinants of job exit at older ages for example reducing social security benefits by 20 would cause workers to delay exit from the labour force by only three months

optimal taxation and human capital policies over the life cycle this paper derives optimal income tax and human capital policies in a life cycle model with risky human capital the government faces asymmetric information regarding agents ability its evolution and labor supply when the wage elasticity with respect to ability is increasing in human capital the optimal subsidy involves less than full deductibility of human capital expenses on the tax base and falls with age income contingent loans or a deferred deductibility scheme can implement the optimum numerical results suggest that full deductibility of expenses is close to optimal and that simple linear age dependent policies perform very well

sex differences in urban commuting patterns this paper takes a new look both theoretical and empirical at the general question of what determines the pattern of urban workers commuting journeys and at the specific question of how women workers commuting journeys differ from those of men commuting journey length for urban workers has proved difficult to model because it stands at the intersection of urban and labor economic theories concerning the spatial location patterns of jobs and housing urban economists view workers as having fixed job locations at the center of the city and being compensated for longer commuting journeys by lower housing prices in the suburbs labor economists in contrast tend

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

what is new keynesian economics this research was supported by the national science foundation i am grateful to george williams for help with the data and to steven allen laurence ball olivier j blanchard timothy bresnahan charles calomiris dennis carlton robert chirinko russell cooper stanley fischer herschel grossman r glenn hubbard david laidler john leahy assar lindbeck n gregory mankiw david romer julio rotemberg dennis snower john taylor andrew weiss and two anonymous referees for comments on one or more earlier drafts i am also indebted to michael parkin and edmund s phelps for helping to establish the etymology of the phrase new keynesian

small menu costs and large business cycles a macroeconomic model of monopoly i introduction the conflict between modern neoclassical and traditional keynesian theories of the business cycle centers upon the pricing mechanism in neoclassical models prices are fully flexible they represent the continuous optimization of economic agents and the continuous intersection of supply and demand in keynesian models prices are often assumed to be sticky they do not necessarily equilibrate all markets at all times one of the reasons for the resurgence of the equilibrium approach to macroeconomics has been the absence of a theoretical underpinning for this keynesian price stickiness this note shows that sticky prices can be both privately efficient and socially inefficient the business cycle results from the suboptimal adjustment of prices in response to a demand shock to the extent that policy can stabilize aggregate demand it can mitigate the social loss due to this suboptimal adjustment in some keynesian models prices are simply exogenously fixed 2 in others agents must set their prices in advance of the transaction date the act of altering a posted price is certainly costly these costs include such items as printing new catalogs and informing salesmen of the new price yet these menu costs are small and therefore generally perceived as providing only a weak foundation for these fixed price models however this inference is flawed small menu costs can cause large welfare losses the claim that price adjustment costs are small does not rebut the claim that they are central to understanding economic fluctuations

on inflation and output with costly price changes a simple unifying result this paper determines the real effects of credible disinflation when price setting is staggered the results are surprising a fairly quick disinflation causes a boom this finding suggests that nominal price rigidity alone does not explain why disinflation is costly in actual economies this abstract was borrowed from another version of this item

labor supply and housing demand for one and two earner households the jointness of labor and housing decisions is explicitly modelled in a consumer demand framework behavior of seven demographic groups differentiated by marital status employment status and the presence of children is estimated from a micro data set results indicate that 1 decisions regarding work hours and housing consumption are interdependent choices and 2 responses to market signals differ significantly by demographic group results are likely to be superior to single equation studies or studies based on aggregate data

new macroeconomics and credibility analysis this paper gives a general view of the new macroeconomics the new keynesian macroeconomics the real business cycle models and the analysis of credibility of monetary policy an outline of the chief technical features that distinguish the new keynesian and the real business cycle formulations is provided highlighting the specific characteristics that have been reconciled by the recent literature on credibility analysis the point to be illustrated is that the combination of new keynesian market failures and the new classical general equilibrium approach to macroeconomics leads to better microeconomic foundation for the credibility analyses of monetary policy that follow the barro gordon notion of inflation bias of discretionary monetary policy

optimal fiscal policy with redistribution i study the optimal taxation oflabor and capital in a dynamic economy subject to government expenditure and technology shocks unlike representative agent ramsey models workers are heterogenous and lump sum taxation is not ruled out i consider two tax scenarios a linear taxation with a lump sum intercept and b nonlinear mirrleesian taxation when taxes are linear i derive a partial equivalence result with ramsey settings that provides a reinterpretation of such analyses i find conditions for perfect tax smoothing oflabor income taxes and zero capital taxation implications that contrast with ramsey are derived for public debt management for the nature of the time inconsistency problem and for the viability of replicating complete markets without state contingent bonds shifts in the distribution of skills provide a novel source for variations in tax rates for the nonlinear tax scenario i show that taxation based on income averages is optimal

time series growth in the female labor force in this paper we investigate the reasons for the growth in the female labor force in america during the twentieth century in our research we study the longer term trends since 1900 and conduct a more intensive examination of developments after the second world war on the basis of our work we conclude that rising real wages accounted for 60 of the total growth in the female labor force half of this wage effect in expanding labor supply was the fertility reducing consequence of a higher female wage

risky human capital and deferred capital income taxation abstract we study the structure of optimal wedges and capital taxes in a dynamic mirrlees economy with endogenous distribution of skills human capital is a private stochastic state variable that drives the skill process of each individual building on the findings of the labor literature we construct a tractable life cycle model of human capital evolution with risky investment and stochastic depreciation in this setting we demonstrate the optimality of a a human capital premium i e an excess return on human capital relative to physical capital b a large intertemporal wedge early in the life cycle and c a non zero intratemporal wedge even at the top of the skill distribution at all dates except the last date in the life cycle the main implication for the structure of optimal linear capital taxes is the necessity of deferred taxation of physical capital the average marginal tax rate on physical capital held in every period is zero in present value however expected capital tax payments do not equal zero in every period necessarily agents face negative expected capital tax payments early in the life cycle and positive expected capital tax payments late in the life cycle

why women work closer to home this paper analyzes the extent to which differences in labor force status in household composition and in household roles account for sex differences in workplace residence separation modelling work trip length as the outcome of the choice of household residential and individual job locations equilibrium work trip length is estimated empirically as a function of labor market housing and household characteristics for male and female employees in seven different household categories data from the 1976 panel survey of income dynamics are used the study concludes that while sex differences in job tenure work hours and wages are in themselves sufficient to fully account for observed sex differences in workplace residence separation sex differences in household roles i e responses to spouses characteristics are of even greater importance in influencing women to work closer to home

real business cycles in this paper we demonstrate how certain very ordinary economic principles lead maximizing individuals to choose consumption production plans that display many of the characteristics commonly associated with business cycles our explanation is entirely consistent with i rational expectations ii complete current information iii stable preferences iv no technological change v no long lived commodities vi no frictions or adjustment costs vii no government viii no money and ix no serial dependence in the stochastic elements of the environment we also provide a completely worked out example of the type of artificial economy we have in mind the time series properties of the example exhibit some major features of observed business cycles although this type of model may not be capable of explaining all of the regularities in actual business cycles we believe that it provides a useful well defined benchmark for assessing the relative importance of factors e g monetary disturbances

simulating fundamental tax reform in the united states this paper uses a new large scale dynamic life cycle simulation model to compare the welfare and macroeconomic effects of transitions to five fundamental alternatives to the u s federal income tax including a proportional consumption tax and a flat tax the model incorporates intragenerational heterogeneity and a detailed specification of alternative tax systems simulation results project significant long run increases in output for some reforms for other reforms namely those that seek to insulate the poor and initial older generations from adverse welfare changes long run output gains are modest

credibility of policy announcements the output and inflation costs of disinflationary policies abstract the paper analyses the credibility problem related to policy announcements specifically the incentives related to announcements of disinflationary policies are considered and conditions are given for credible and non credible announcements moreover the implications for output and inflation of a non credible disinflationary policy are analysed