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

skewed wealth distributions theory and empirics invariably across a cross section of countries and time periods wealth distributions are skewed to the right displaying thick upper tails that is large and slowly declining top wealth shares in this survey we categorize the theoretical studies on the distribution of wealth in terms of the underlying economic mechanism generating skewness and thick tails further we show how these mechanisms can be micro founded by the consumption saving decisions of rational agents in speci c economic and demographic environments finally we map the large empirical work on the wealth distribution to its theoretical underpinning

pricing risk in economies with heterogeneous agents and incomplete markets habit formation has been proposed as a possible solution to the equity premium puzzle this paper extends the class of models that support the habits explanation in order to account for heterogeneity in earnings wealth habits and consumption i find that habit formation does indeed increase the equity premium however contrary to earlier results the habit hypothesis does not imply a price for risk as largeas the one measured in the data there are three reasons for this first households in a habits economy modify their consumption savings decision second they modify their portfolio choice these two changes in behavior diminish the consumption fluctuations faced by households third the composition of the set of agents pricing risk in the economy changes so that relatively better self insured households end up pricing risk jel d52 g12 e21 c68

earnings instability and earnings inequality of males in the united states 1967 1991 although much research has focused on recent increases in annual earnings inequality in the united states the increases could have come from either of two sources the distribution of lifetime earnings could have become more unequal or the receipt of lifetime earnings could have become more unstable based on an analysis of the 1968 92 panel study of income dynamics we find that lifetime earnings inequality increased during the early 1980s and that earnings instability increased during the 1970s we also examine how these trends are related to changes in the distribution of wages and hours and the returns to education

wealth distribution with random discount factors abstract to explain the pareto tail behavior empirically observed in wealth distributions the quantitative macro literature has occasionally assumed that agents have random discount factors this paper formally proves that the stationary wealth distribution in a simple huggett model with random discounting has power law tails and characterizes the pareto exponents analytically i find that in general there is no clear relationship between the return on wealth and inequality and that the pareto exponent is highly sensitive to the persistence of the discount factor process i also provide a practical guidance for how to characterize the pareto exponents in richer models

equilibrium in securities markets with heterogeneous investors and unspanned income risk abstract in a finite time horizon incomplete market continuous time setting with dividends and investor incomes governed by arithmetic brownian motions we derive closed form solutions for the equilibrium risk free rate and stock price for an economy with finitely many heterogeneous cara investors and unspanned income risk in equilibrium the sharpe ratio is the same as in an otherwise identical complete market economy whereas the risk free rate is lower and consequently the stock price is higher the reduction in the risk free rate is highest when the more risk averse investors face the largest unspanned income risk

earnings inequality and mobility in the united states evidence from social security data since 1937 this paper uses social security administration longitudinal earnings micro data since 1937 to analyze the evolution of inequality and mobility in the united states annual earnings inequality is u shaped decreasing sharply up to 1953 and increasing steadily afterward short term earnings mobility measures are stable over the full period except for a temporary surge during world war ii virtually all of the increase in the variance in annual log earnings since 1970 is due to increase in the variance of permanent earnings as opposed to transitory earnings mobility at the top of the earnings distribution is stable and has not mitigated the dramatic increase in annual earnings concentration since the 1970s long term mobility among all workers has increased since the 1950s but has slightly declined among men the decrease in the gender earnings gap and the resulting substantial increase in upward mobility over a lifetime for women are the driving force behind the increase in long term mobility among all workers

the evolution of wealth inequality over half a century the role of taxes transfers and technology over the last 50 years the u s tax system went through a striking transformation that reduced the effective tax rates for top income groups and raised transfers to seniors this paper investigates the macroeconomic repercussions of this change in policy particularly for the distributions of income wealth and consumption changes in taxes and transfers account for nearly half of the rise in wealth concentration nonetheless their impact on the distributions of income and consumption has been minor due to changes in equilibrium prices and the offsetting effects of tax cuts and transfers on the dispersion of consumption results highlight the role of increasing wage dispersion during this period as the main driver of trends in inequality

the rise and decline of general laws of capitalism economists have long been drawn to the ambitious quest of discovering the general laws of capitalism david ricardo for example predicted that capital accumulation would terminate in economic stagnation and inequality as a greater and greater share of national income accrued to landowners karl marx followed him by forecasting the inevitable immiseration of the proletariat thomas piketty s 2014 tome capital in the twenty first century emulates marx in his title his style of exposition and his critique of the capitalist system piketty is after general laws that will demystify our modern economy and elucidate the inherent problems of the system and point to solutions but the quest for general laws of capitalism is misguided because it ignores the key forces shaping how an economy functions the endogenous evolution of technology and of the institutions and the political equilibrium that influence not only technology but also how markets function and how the gains from various different economic arrangements are distributed despite his erudition ambition and creativity marx was led astray because of his disregard of these forces the same is true of piketty s sweeping account of inequality in capitalist economies in the next section we review marx s conceptualization of capitalism and some of his general laws we then turn to piketty s approach to capitalism and his general laws we will point to various problems in piketty s interpretation of the economic relationships underpinning inequality but the most important shortcoming is that

capital is back wealth income ratios in rich countries 1700 2010 how do aggregate wealth to income ratios evolve in the long run and why we address this question using 1970 2010 national balance sheets recently compiled in the top eight developed economies for the united states united kingdom germany and france we are able to extend our analysis as far back as 1700 we find in every country a gradual rise of wealth income ratios in recent decades from about 200 300 in 1970 to 400 600 in 2010 in effect today s ratios appear to be returning to the high values observed in europe in the eighteenth and nineteenth centuries 600 700 this can be explained by a long run asset price recovery itself driven by changes in capital policies since the world wars and by the slowdown of productivity and population growth in line with the s g harrod domar solow formula that is for a given net saving

u s tax policy and health insurance demand can a regressive policy improve welfare abstract the u s tax policy on health insurance is regressive because it subsidizes only those offered group insurance through their employers who also tend to have a relatively high income moreover the subsidy takes the form of deductions from the progressive income tax system giving high income earners a larger subsidy to understand the effect of the policy we construct a dynamic general equilibrium model with heterogenous agents and an endogenous demand for health insurance a complete removal of the subsidy may lead to a partial collapse of the group insurance market reduce the insurance coverage and deteriorate welfare there is however room for improving the coverage and welfare by extending a refundable credit to the individual insurance market

malaysia a success story stuck in the middle this study examines the malaysia development record in the context of widespread concerns that the country and others like it may encounter major difficulties in graduating to the ranks of high income economies it stresses the country s rapid socioeconomic development built on openness reasonably competent macroeconomic management and attention to equity issues it then investigates the country s significant slowdown in investment and economic growth since the late 1990s and asks whether this trend is related to the more general graduation issue our principal conclusion is that the slowdown has less to do with the problem of graduation and more to do with a set of country specific institutional and political economy challenges thus the current concern within the country that it is in some sense stuck in the middle points to the need for a set of major policy reforms to accelerate growth

financial repression and firm self financing of investment empirical evidence from brazil analysis of 86 brazilian manufacturing firms operating during a period marked by some degree of financial repression demonstrates that investment spending influences the liquid asset holdings of firms this self finance motive is weaker than the transactions motive but in general remains statistically significant across a variety of model specifications small firms are more likely than large firms to finance investment spending through accumulation of liquid assets contrary to the complementarity hypothesis however there is some evidence that firms treat liquid assets and capital as substitutes specification tests comparing the shaw hypothesis with the mckinnon hypothesis weakly favour the complementarity model

2004 trade policy review the united states many of the findings of the seventh trade policy review of the united states are similar to those reached in earlier reviews the us is unanimously acknowledged as having an open and transparent system the us economy has remained amongst the world s most competitive and has continued to support global growth by keeping its import market largely open this review finds however that the us has developed a disturbing pattern of non compliance with wto rules during the period of review the united states enacted policies most notably the infamous byrd amendment and the 2001 02 steel safeguard action that were found to be clear violations of its wto obligations despite these and other such findings the united states has obstinately refused to bring its domestic statutes in line with wto rules in addition in recent years the united states aggressive pursuit of regional and bilateral initiatives has led many members to question whether the united states is committed to the multilateral approach espoused by the wto overall despite the us s many virtues member countries expressed concern that the us s stated leadership of and commitment to the wto is not matched by its actions

a critical appraisal of mckinnon s complementarity hypothesis does the real rate of return on money matter for investment in developing countries this is the post print version of the final paper published in world development the published article is available from the link below changes resulting from the publishing process such as peer review editing corrections structural formatting and other quality control mechanisms may not be reflected in this document changes may have been made to this work since it was submitted for publication copyright 2009 elsevier b v

robust comparative statics in large dynamic economies we consider infinite horizon economies populated by a continuum of agents subject to idiosyncratic shocks this framework contains models of saving and capital accumulation with incomplete markets in the spirit of works by bewley aiyagari and huggett models of entry exit and industry dynamics in the spirit of hopenhayn s work and dynamic models of occupational choice and search models as special cases robust and easy to apply comparative statics results are established with respect to exogenous parameters as well as various kinds of changes in the markov processes governing the law of motion of the idiosyncratic shocks

equilibrium consumption and precautionary savings in a stochastically growing economy abstract the derivation of a closed form solution for consumption based on the constant elasticity utility function in the presence of stochastic labor income has proved to be intractable this paper derives a closed form equilibrium relationship between consumption and wealth one that holds along a balanced growth path in a stochastic romer endogenous growth model by employing more general recursive preferences we can disentangle the coefficient of relative risk aversion from the intertemporal elasticity of substitution the effects of key structural parameters on equilibrium consumption and its tradeoff with leisure are analyzed a significant aspect of our analysis concerns the extent to which current risk in the economy is shared between labor and capital this plays an important role in determining the impact of risk on the economy in general and on consumption in particular formal analysis is supplemented with extensive numerical simulations

optimal taxation without state contingent debt in an economy studied by lucas and stokey tax rates inherit the serial correlation structure of government expenditures belying barro s earlier result that taxes should be a random walk for any stochastic process of government expenditures to recover a version of barro s random walk tax smoothing outcome we modify lucas and stokey s economy to permit only risk free debt having only risk free debt confronts the ramsey planner with additional constraints on equilibrium allocations beyond one imposed by lucas and stokey s assumption of complete markets the ramsey outcome blends features of barro s model with lucas and stokey s in our model the contemporaneous effects of exogenous government expenditures on the government deficit and taxes resemble those in lucas and stokey s model but incomplete markets put a near unit root component into government debt and taxes an outcome like barro s however we show that without ad hoc limits on the government s asset holdings outcomes can diverge in importa

socioeconomic status and macroeconomic expectations we show that individuals macroeconomic expectations are influenced by their socioeconomic status ses people with higher income or higher education are more optimistic about future macroeconomic developments including business conditions the national unemployment rate and stock market returns the spread in beliefs between high and low ses individuals diminishes significantly during recessions a comparison with professional forecasters and historical data reveals that the beliefs wedge reflects excessive pessimism on the part of low ses individuals ses driven expectations help explain why higher ses individuals are more inclined to invest in the stock market and more likely to consider purchasing homes durable goods or cars received november 13 2017 editorial decision february 12 2019 by editor wei jiang authors have furnished an internet appendix which is available on the oxford university press web site next to the link to the final published paper online

income inequality in the united states 1913 1998 this paper presents new homogeneous series on top shares of income and wages from 1913 to 1998 in the united states using individual tax returns data top income and wages shares display a u shaped pattern over the century our series suggest that the large shocks that capital owners experienced during the great depression and world war ii have had a permanent effect on top capital incomes we argue that steep progressive income and estate taxation may have prevented large fortunes from fully recovering from these shocks top wage shares were flat before world war ii dropped precipitously during the war and did not start to recover before the late 1960s but are now higher than before world war ii as a result the working rich have replaced the rentiers at the top of the income distribution

a continuous time model of sovereign debt abstract i construct a continuous time model of strategic default and provide a numerical algorithm that solves it i compare the results and computation times to standard discrete time models of sovereign debt the method proposed here is faster than discrete time computation methods while obtaining similar quantitative results the few differences between the models can all be attributed to a painful deleveraging feature when debt issuance happens at a higher frequency the sovereign faces higher interest rate spreads along the deleveraging process so rolling over its debt becomes more costly this feature leads to a coefficient of variation for interest rate spreads that is higher and closer to the data relative to its discrete time sovereign debt model counterpart calibrated to quarterly frequency i solve three variants of the model the first includes short term maturity bonds only and a constant risk free interest rate the second allows for stochastic fluctuations in the risk free rate finally i extend the model to allow for long term bonds

2018 wto trade policy review of malaysia this paper presents an academic analysis and review of the recently completed wto trade policy review tpr of malaysia 2018 this includes suggesting policies that can help to promote malaysia s international competitiveness we show that the sharp decline in commodity prices that started in 2014 contributed in narrowing malaysia s trade balance and current account balance as a share of gdp the faster decline of exports as a share of gdp compared to imports accounted for most of the substantial reduction further the collapse of commodity prices was accompanied by a sharp depreciation of ringgit malaysia we also show that malaysia is losing international attractiveness in terms of fdi inflows relative to its economic size this is evidenced by the downward trend in malaysia s fdi performance index since 1992 further international tourism has fallen on average since 2014 due largely to a drop in tourist arrivals from singapore policymakers should introduce policies to enhance international competitiveness such as reforming the education system to produce skilled workers and reducing reliance on low skilled foreign workers

individual and aggregate labor supply in heterogeneous agent economies with intensive and extensive margins we develop a heterogeneous agent general equilibrium model that incorporates both intensive and extensive margins of labor supply a nonconvexity in the mapping between time devoted to work and labor services distinguishes between extensive and intensive margins we consider calibrated versions of this model that dier in the value of a key preference parameter for labor supply and the extent of heterogeneity the model is able to capture the salient features of the empirical distribution of hours worked including how individuals transit within this distribution we then study how the various specications inuence labor supply responses to aggregate technology shocks we nd that abstracting from intensive margin adjustment has large eects on the volatility of aggregate hours even if intensive margin uctuates relatively little

efficiency in a pure currency economy with inflation individuals who are buffeted by stochastic shocks will wish to substitute consumption intertemporally to effect this substitution they can enter into insurance contracts or they can use money this paper investigates the connection between optimum insurance and friedman s 1969 concept of the optimum quantity of money using a simplified version of lucas s 1980 pure currency economy monetary efficiency and efficient insurance are equivalent here an example is presented in which an efficient monetary equilibrium exists contrary to bewley s 1983 conjecture in the example the efficient rate of return on real balances is less than the internal rate of discount

financial liberalization in india and a new test of the complementarity hypothesis abstract this article reappraises the financial repression hypothesis for india in light of the partial liberalization of the financial sector in the early 1990s using for the first time state of the art multivariate cointegration and vector error correction models vecm from this more robust testing procedure we find that for the indian economy over the sample period 1951 99 money and capital are complementary suggesting that higher real interest rates will further raise the demand for money and lead to higher levels of investment furthermore testing for a structural break in the early 1990s to coincide with the liberalization of the financial sector in india suggests that these reforms have not significantly changed the complementary relationship between money and capital the policy implication is that further financial liberalization maybe required in india to enhance investment and economic growth

financial development and poverty reduction can there be a benefit without a cost abstract this article investigates how financial development helps to reduce poverty directly through a distributional effect beyond its indirect effect through economic growth the results obtained with data for a sample of developing countries from 1966 through 2000 suggest that the poor benefit from the ability of the banking system to facilitate transactions and provide savings opportunities through the mckinnon conduit effect but to some extent fail to reap the benefit from greater availability of credit moreover financial development is accompanied by financial instability which is particularly detrimental to the poor nevertheless the benefits of financial development for the poor outweigh the cost

domestic or global imbalances rising income risk and the fall in the us current account when default leads to exclusion from financial markets the implied loss of consumption smoothing opportunities is more costly when income volatility is high a rise in income risk thus makes default less attractive allowing creditors to relax borrowing limits i show how in an open economy this endogenous financial deepening may reduce aggregate foreign assets in response to a rise in individual income risk against the precautionary savings intuition conditions for this depend on whether default constrains complete or uncontingent contracts the post 1980 rise in us household income risk strongly reduces foreign assets when domestic markets are complete or world interest rates low

from plantations to smallholder production the role of policy in the reorganization of the sri lankan tea sector summary the sri lankan tea sector has changed from one dominated by vertically integrated plantations to one where independent processors of black tea purchase their input green leaf tea from small independent growers this paper provides a unifying conceptual framework to characterize three major factors affecting the changes in vertical coordination arrangements transaction production and management costs regulation and government policy have altered these determinants of organizational change transaction costs have been reduced by state intervention into the price for green leaf which subsequently lowered the risk of processors re negotiating prices downward production costs which continue to be dominated by labor expenses due to the lack of technological developments for harvesting have increased more for plantations than independent producers due to union pressures

pareto and piketty the macroeconomics of top income and wealth inequality abstract since the early 2000s research by thomas piketty emmanuel saez and their coauthors has revolutionized our understanding of income and wealth inequality in this paper i highlight some of the key empirical facts from this research and comment on how they relate to macroeconomics and to economic theory more generally one of the key links between data and theory is the pareto distribution the paper describes simple mechanisms that give rise to pareto distributions for income and wealth and considers the economic forces that influence top inequality over time and across countries for example it is in this context that the role of the famous r g expression is best understood

health insurance reform the impact of a medicare buy in abstract the steady state general equilibrium and welfare consequences of a medicare buy in program optional for those aged 55 64 is evaluated in a calibrated life cycle economy with incomplete markets incomplete markets and adverse selection create a potential welfare improving role for health insurance reform we find that adverse selection eliminates any market for a medicare buy in if it is offered as an unsubsidized option to individual private health insurance the subsidy needed to bring the number of uninsured to less than 5 percent of the target population could be financed by an increase in the labor income tax rate of just 0 03 0 18 percent depending on how the program is implemented

nonparametric methods and local time based estimation for dynamic power law distributions summary this paper introduces nonparametric econometric methods that characterize general power law distributions under basic stability conditions these methods extend the literature on power laws in the social sciences in several directions first we show that any stationary distribution in a random growth setting is shaped entirely by two factors the idiosyncratic volatilities and reversion rates a measure of cross sectional mean reversion for different ranks in the distribution this result is valid regardless of how growth rates and volatilities vary across different economic agents and hence applies to gibrat s law and its extensions second we present techniques to estimate these two factors using panel data third we describe how our results imply predictability as higher ranked processes must on average grow more slowly than lower ranked processes we employ our empirical methods using data on commodity prices and show that our techniques accurately describe the empirical distribution of relative commodity prices we also show that rank based out of sample forecasts of future commodity prices outperform random walk forecasts at a 1 month horizon

incomplete markets labor supply and capital accumulation we explore the accumulation of capital in the presence of limited insurance against idiosyncratic shocks borrowing constraints and endogenous labor supply in the exogenous labor supply case e g aiyagari 1994 huggett 1997 the presence of limited insurance increases the demand for savings for precautionary reasons as a consequence capital and output are higher under incomplete markets we show that if labor hours are endogenous labor supply is likely to be lower under incomplete markets because those agents who experience a high shock to productivity are ex post richer and they work fewer hours in some cases this wealth effect can overcome the aggregate precautionary savings and give rise to lower savings and output under incomplete

zipf s law and maximum sustainable growth abstract zipf s law states that the number of firms with size greater than s is inversely proportional to s most explanations start with gibrat s rule of proportional growth but require additional constraints we show that gibrat s rule at all firm levels yields zipf s law under a balance condition between the effective growth rate of incumbent firms which includes their possible demise and the growth rate of investments in entrant firms under the additional assumption that firms do not consume more resources than available we show that zipf s law is the signature that firms grow at the maximum reachable long term rate

asset returns with transactions costs and uninsured individual risk abstract we explore whether incorporating an explicit motive for holding liquid assets within an equilibrium asset pricing model helps explain the following features of asset returns and turnover in the post war u s economy i the low risk free real interest rate ii the large spread between returns on liquid assets and stocks and iii the greater transaction velocity of liquid assets relative to stocks we introduce a demand for liquid assets by adding uninsured individual risk together with differential costs of trading securities numerical simulations attempting to match the return data generate a ratio of liquid assets to income considerably below observed levels

malaysian trade policy and the 2001 wto trade policy review the purpose of this paper is two fold to examine developments in trade and investment policy regimes in malaysia following the on set of the financial crisis using the trade policy review malaysia 2001 of the wto as a reference point and to evaluate the review in terms of the objectives of the wto trade policy review mechanism as set out in the marrakesh agreement it is found that by and large malaysia has managed to come out of the crisis without compromising on its long standing commitment to maintaining a relatively open trade and investment policy regime by the regional standards however there are some disturbing post crisis developments which deserve scrutiny in a future review these include increase in the degree of dispersion of tariff rates because of high tariff peaks relating to a few product lines increased reliance on non automatic import licensing to regulate imports of a significant number of products which directly compete with domestic production by public sector enterprises and unexplained delays in meeting commitments under the general agreement on trade in services gats

the elasticity of taxable income with respect to marginal tax rates a critical review this paper critically surveys the large and growing literature estimating the elasticity of taxable income with respect to marginal tax rates using tax return data first we provide a theoretical framework showing under what assumptions this elasticity can be used as a sufficient statistic for efficiency and optimal tax analysis we discuss what other parameters should be estimated when the elasticity is not a sufficient statistic second we discuss conceptually the key issues that arise in the empirical estimation of the elasticity of taxable income using the example of the 1993 top individual income tax rate increase in the united states to illustrate those issues third we provide a critical discussion of selected empirical analyses of the elasticity of taxable income in light of the theoretical and empirical framework we laid out finally we discuss avenues for future research jel h24 h31 j22

what do we know about evolution of top wealth shares in the united states in piketty s 2014 prominent book capital in the twenty first century he argues that the concentration of wealth may become increasingly extreme in the future as piketty reminds us the group of rentiers people living off accumulated capital has been historically large and politically and socially influential because so much of large fortunes end up being inherited the current concentration of wealth is bound to predict at least weakly and perhaps strongly how important rentiers will be regardless of whether one buys into depictions such as the rentier enemy of democracy p 422 the extent to which the well off are going to rely on work versus rely on the returns to their wealth in the future is clearly important for assessing the extent to which a society will view itself as in some way a meritocracy given that the us economy has experienced rising inequality in its income and earning distributions for example piketty and saez 2003 or see the symposium on the top 1 percent in the summer 2013 issue of this journal one would expect that the distribution of wealth would follow a similar path however available evidence on this topic is much more scant and conflicting than that on income and earnings in fact when piketty 2014 reports direct estimates of wealth concentration for france the united kingdom sweden and the united states in chapter 10 of his book he finds as yet little evidence of dramatic increase in wealth concentration in any of these countries

household heterogeneity and the transmission of foreign shocks abstract we study the role of heterogeneity in the transmission of foreign shocks we build a heterogeneous agent new keynesian small open model economy hanksome that experiences a current account reversal households portfolio composition and the extent of foreign currency borrowing are key determinants of the magnitude of the contraction in consumption associated with a sudden stop in capital inflows the contraction is more severe when households are leveraged and owe debt in foreign currency in this setting the revaluation of foreign debt causes a larger contraction in aggregate consumption when debt and leverage are concentrated among poorer households closing the output gap via an exchange rate devaluation may therefore be detrimental to household welfare due to the heterogeneous impact of the foreign debt revaluation our hanksome framework can rationalize the observed fear of floating in emerging market economies even in the absence of contractionary devaluations

how important is intra household risk sharing for savings and labor supply abstract while it is recognized that the family is a risk sharing institution little is known about the quantitative effects of this source of insurance on savings and labor supply in this paper we present a model where workers females and males are subject to idiosyncratic employment risk and where capital markets are incomplete a household is formed by a female and a male who decide on consumption savings and labor supplies in a calibrated version of our model we find that intra household risk sharing has its largest impact among wealth poor households while the wealth rich use mainly savings to smooth consumption across unemployment spells wealth poor households rely on spousal labor supply for instance for low wealth households average hours worked by wives of unemployed husbands are 8 higher than those worked by wives of employed husbands this response in wives hours makes up 9 of lost family income we also study consumption losses upon an unemployment spell precautionary savings and the crowding out effects of the public unemployment insurance program on the extent of risk sharing within the household

uninsured idiosyncratic production risk with borrowing constraints the author analyzes a general equilibrium model of a heterogeneous agents economy in which the agents are subject to borrowing constraints and uninsurable idiosyncratic production risk

risk uncertainty and the dynamics of inequality abstract the dynamics of wealth inequality are studied in a continuous time blanchard yaari model investment returns are idiosyncratic and subject to knightian uncertainty in response agents formulate robust portfolio policies these policies are nonhomothetic wealthy agents invest a higher fraction of their wealth in uncertain assets yielding higher mean returns this produces a feedback mechanism that amplifies inequality it also produces an accelerated rate of convergence which helps resolve a puzzle recently identified by gabaix et al 2016 an empirically plausible increase in uncertainty can account for about half of the recent increase in top wealth shares

zipf s law for cities an explanation zipf s law is a very tight constraint on the class of admissible models of local growth it says that for most countries the size distribution of cities strikingly fits a power law the number of cities with populations greater than s is proportional to 1 s suppose that at least in the upper tail all cities follow some proportional growth process this appears to be verified empirically this automatically leads their distribution to converge to zipf s law

optimal consumption policy under uncertain income this paper considers the consumption behavior of a risk averse consumer with a preference for immediate consumption who faces an uncertain income stream and plans for a finite or infinite number of periods the consumer may borrow up to a limit or save where both saving and borrowing are subject to the same positive rate of interest we derive the optimal consumption policies for both finite and infinite planning horizons investigate their characteristics and analyze their economic and behavioral implications

the distribution of wealth and fiscal policy in economies with finitely lived agents we study the dynamics of the distribution of wealth in an overlapping generation economy with finitely lived agents and intergenerational transmission of wealth financial markets are incomplete exposing agents to both labor and capital income risk we show that the stationary wealth distribution is a pareto distribution in the right tail and that it is capital income risk rather than labor income that drives the properties of the right tail of the wealth distribution we also study analytically the dependence of the distribution of wealth of wealth inequality in particular on various fiscal policy instruments like capital income taxes and estate taxes and on different degrees of social mobility we show that capital income and estate taxes can significantly reduce wealth inequality as do institutions favoring social mobility finally we calibrate the economy to match the lorenz curve of the wealth distribution of the u s economy

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

top incomes in the long run of history a recent literature has constructed top income shares time series over the long run for more than twenty countries using income tax statistics top incomes represent a small share of the population but a very significant share of total income and total taxes paid hence aggregate economic growth per capita and gini inequality indexes are sensitive to excluding or including top incomes we discuss the estimation methods and issues that arise when constructing top income share series including income definition and comparability over time and across countries tax avoidance and tax evasion we provide a summary of the key empirical findings most countries experience a dramatic drop in top income shares in the first part of the twentieth century in general due to shocks to top capital incomes during the wars and depression shocks top income shares do not recover in the immediate postwar decades however over the last thirty years top income shares have increased substantially in english speaking countries and in india and china but not in continental european countries or japan this increase is due in part to an unprecedented surge in top wage incomes as a result wage income comprises a larger fraction of top incomes than in the past finally we discuss the theoretical and empirical models that have been proposed to account for the facts and the main questions that remain open

on income fluctuations and capital gains abstract we consider the infinite time horizon problem of asymptotically maximizing the expected accumulated discounted utility in a one good production economy the available capital in a given period is given by the production of the previous period plus a random variable the product of the discount and interest factors is either 1 greater than or 2 equal to one under 1 the optimal policy exists under certain conditions and always under 2 the optimal capital sequence almost surely goes to infinity under 1 with conditions on the utility one almost surely reaches a capital level above which the sequence is increasing

endogenous market incompleteness with investment risks abstract this paper studies a general equilibrium economy in which agents have the ability to invest in a risky technology the investment risk cannot be fully insured with optimal contracts because shocks are private information we show that the presence of investment risks lead to under accumulation of capital relative to an economy where idiosyncratic shocks can be fully insured we also show that the availability of state contingent optimal contracts compared to simple debt contracts brings the aggregate stock of capital close to the complete markets level institutional reforms that make possible the use of these contracts have important welfare consequences

the financial repression liberalization debate taking stock looking for a synthesis financial repression and liberalization became the object of fierce debates between academics and policy makers since the early 1970s as of the late 1980s financial liberalization became also part of the structural adjustment programs sponsored by the international monetary fund and the world bank however the literature on financial repression and liberalization remains controversial on its theoretical conclusions and policy implications given its importance for both the theory and policy of economic development and growth this paper looks for a possible synthesis after reviewing the theoretical contributions and empirical studies under the headings of the mckinnon shaw and new structuralists models the survey concludes that a new synthesis might be found in the post keynesian attempt to take an institutional perspective within a globalised financial and economic environment

moral hazard imperfect risk sharing and the behavior of asset returns abstract this paper develops a model of endogenous idiosyncratic risk in a simple two period general equilibrium setting and examines its implications for the behavior of asset returns the model readily generates empirically plausible idiosyncratic risk in consumption and yields more realistic behavior of asset returns than comparable models with perfect insurance the most dramatic effects of imperfect risk sharing however are not on the spreads between asset returns but on their absolute levels overall the results suggest allowing for incomplete markets can contribute to a resolution of the equity premium puzzle

the drivers of income inequality in rich countries rising income inequality has recently come centre stage as a core societal concern for rich countries the diagnosis of the forces driving inequality upwards and their relative importance remains hotly contested notably with respect to the roles of globalization versus technology and of market forces versus institutions and policy choices this survey provides a critical review and synthesis of recent research the focus is on income inequality across the entire distribution rather than only on what has been happening at the very top we pay particular attention to including what has been learned from the analysis of micro data to ensuring that the coverage is not unduly us centric and to analyses of the interrelations between the different drivers of inequality the marked differences in inequality trends across countries and time periods reflect how global economic forces such as globalisation and technological change have interacted with differing national contexts and institutions major analytical challenges stand in the way of a consensus emerging on the relative importance of different drivers in how income inequality has evolved in recent decades

currency and credit are equivalent mechanisms i study a pure exchange economy with many agents whose marginal utility of consumption is stochastically heterogeneous and independent of wealth with realized marginal utility of wealth private information i show that currency and credit are equivalent to a contract that is efficient when the privacy of information is viewed as a constraint and that the cash in advance constraint is an expression of an incentive constraint

fiscal policy with heterogeneous agents and incomplete markets i undertake a quantitative investigation into the short run effects of changes in the timing of proportional income taxes for model economies in which heterogeneous households face a borrowing constraint temporary tax changes are found to have large real effects in the benchmark model a temporary tax cut increases aggregate consumption on impact by around 29 cents for every dollar of tax revenue lost comparing the benchmark incomplete markets model to a complete markets economy income tax cuts provide a larger boost to consumption and a smaller investment stimulus when asset markets are incomplete copyright 2005 wiley blackwell

the new keynesian cross abstract the new keynesian nk cross is a graphical and analytical apparatus for heterogeneous agent hank models expressing key aggregate demand objects mpc and multipliers as functions of heterogeneity parameters it affords analytical insights into monetary fiscal and forward guidance multipliers and replicates the aggregate implications of quantitative hank the key parameter the constrained agents income elasticity to aggregate income depends on fiscal redistribution when it is larger smaller than one the effects of policies and shocks are amplified dampened with uninsurable idiosyncratic uncertainty this translates intertemporally through compounding discounting in the aggregate euler equation into further amplification dampening of future shocks

the dynamics of inequality the past forty years have seen a rapid rise in top income inequality in the united states while there is a large number of existing theories of the pareto tail of the long run income distributions almost none of these address the fast rise in top inequality observed in the data we show that standard theories which build on a random growth mechanism generate transition dynamics that are too slow relative to those observed in the data we then suggest two parsimonious deviations from the canonical model that can explain such changes scale dependence that may arise from changes in skill prices and type dependence that is the presence of some high growth types these deviations are consistent with theories in which the increase in top income inequality is driven by the rise of superstar entrepreneurs or managers

malaysia trade policy review 2006 the trade policy review tpr is an important document for small open economies like malaysia it provides an outsider perspective of its trade policies and implementation in this paper we provide an update of the malaysian economy emphasising the degree of competitiveness vis a vis other asian counterparts we also discuss the issue of regional and bilateral trading agreements involving malaysia with a focus on the services sector finally we briefly consider the issue of tariff protection an issue raised by many commentators of the tpr

trade policy review malaysia 2010 the paper reviews the recently completed trade policy review for malaysia we find that in the case of malaysia trade has been liberalised and subjected to structural changes to a very high extent over the last three decades however reform has been less effective when it comes to trade related policies such as investment policies and other national policies that de facto rather than de jure affect competition due to differential treatment of different firms brands and individuals this is also mirrored in the faltering levels of investment in malaysia an area where malaysia has been successful is the reorientation towards services a good example is the tourism industry which is mature and a major export industry in malaysia today nascent service industries such as health finance ict related services and education hold promise to become important export earners in the future the paper shows that for this new phase of structural change to be truly successful malaysia must prioritise trade negotiations and integration with her own region and especially asean

investor sophistication and capital income inequality abstract capital income inequality is large and growing fast accounting for a significant portion of total income inequality we study its growth in a general equilibrium portfolio choice model with endogenous information acquisition and heterogeneity across household sophistication and asset riskiness the model implies capital income inequality that grows with aggregate information technology investors differentially adjust both the size and the composition of their portfolios as unsophisticated investors retrench from trading risky securities and shift their portfolios to safer assets technological progress also reduces aggregate returns and increases the volume of transactions features that are consistent with recent u s data

aggregate demand and the top 1 percent there has been a large rise in us top income inequality since the 1980s we merge a widely studied model of the pareto tail of labor incomes with a canonical model of consumption and savings to study the consequences of this increase for aggregate demand our model suggests that the rise of the top 1 percent may have led to a large increase in desired savings and can explain a 0 45pp to 0 85pp decline in long run real interest rates this effect arises from both a wealth effect at the top and increased precautionary savings from declines lower in the income distribution

the impact of heterogeneity of discount factors and asset returns on inequality abstractwe investigate the effect of differential access to financial markets discount factor and wealth endowment on poverty and inequality we construct a model of educational and savings choice with heterogeneous agents motivated by empirical evidence in this economy the return on savings is a non decreasing function of the amount saved as expected more patient households tend to become wealthier and more educated the heterogeneity on portfolio returns is shown to be key to our main result the model closely fits the data on income and wealth inequalities being able to explain the existing brazil s inequality patterns the model was also calibrated to the us with similar fit we then evaluate two types of public policies based on cash transfer schemes ctss that aim to reduce poverty and inequality we find that the cts version in which receiving the benefit is conditional on educating the household s youngster outperforms its unconditional version in almost all dimensions analysed

effective protection policy appraisal and trade policy reform when the effective protection concept was rst developed it was widely regarded as a key widely used especially in the context of policy reform and policy appraisal in developing countries this paper re appraises tmeasure of the structure of protection and became widely deployed it was however subject to a he concept reviews the extent of its application and discusses the factors behind its longevity as an investigative tool the theoretical critique on the grounds that it was essentially a partial equilibrium measure which could not be easily embedded ipaper concludes that the measure still has a role to play in evaluating the structure of protection n a general equilibrium framework notwithstanding this critique the concept has continued to be

financial sector liberalization bank privatization and efficiency evidence from pakistan abstract the pakistani banking system has been transformed over the past 15 years through liberalization the entry of private banks the privatization of public sector banks and the tightening of prudential regulations the effects of these changes on bank productivity and relative efficiency are investigated using various techniques bank productivity in terms of profits has increased and new entrants have been efficient but the dispersion of efficiency remains wide the privatized banks improved their profit efficiency in the period immediately following their privatization but in the subsequent years only one significantly improved its efficiency whereas the other did not differentiate itself in terms of efficiency from the remaining state owned banks the new private domestic banks generally proved to be among the most efficient and sometimes out performed the foreign banks

anti dumping a growing problem in international trade this paper discusses the issue of anti dumping ad proliferation ad is used more frequently by more countries and against more products than ever in its history i review ad filing patterns with an emphasis on the scope of countries and industries seeking protection recent trends suggest that the widespread embrace of ad protection makes the prospect for ad reform increasingly unlikely ad is no longer being used solely by high income developed countries it is increasingly being used by middle income and even lower income countries new users have chosen to use ad very intensively per dollar of imports the new users have filed ad cases up to 15 20 times more frequently than the traditional ad users such as the us and eu the evolving set of ad users complicates ad negotiations in the near term strong opposition by the us and eu makes reform a highly unlikely outcome in the longer run rising use of ad against the us and eu could conceivably weaken their support for ad yet the same trends that might finally cause the us and eu to realise ad is a failed policy will likely make reform impossible

growth structural change and plantation tree crops the case of rubber abstract the effects of advancing economic growth on plantations are classed in five stages starting with conditions in a backward subsistence economy and ending under circumstances where manufacturing is dominant and planting tree crops no longer economic changes in relative resource prices and other factors and consequent adjustments of estates and smallholdings are taken into account doing this in light of international experiences with such crops the case of natural rubber is scrutinized in depth comparing economic effects and responses at each stage in chief producing countries the key elements in plantation adjustments of market conditions technology institutional arrangements and government interventions are finally addressed with policies likely to facilitate appropriate modifications being indicated

what determines the elasticity of substitution between capital and labor a literature review this paper provides the first comprehensive review of the empirical and theoretical literature on the determinants of the elasticity of substitution between capital and labor our focus is on the two input constant elasticity of substitution ces production function we start by presenting four concise observations that summarize the empirical literature on the estimation of motivated by these observations the main part of this survey then focuses on potential determinants of capital labor substitution we first review several approaches to the microfoundation of production functions where the elasticity of substitution eos is treated as a purely technological parameter second we outline the construction of an aggregate elasticity of substitution aes in a multi sectoral framework and investigate its dependence on underlying intra and inter sectoral substitution third we discuss the influence of the institutional framework on the extent of factor substitution overall this survey highlights that the effective elasticity of substitution ees which is typically estimated in empirical studies is generally not an immutable deep parameter but depends on a multitude of technological non technological and institutional determinants based on these insights the final section identifies a number of potential empirical and theoretical avenues for future research

intertemporal distortions in the second best we consider a very general class of public nance problems that encompasses ramsey models of optimal taxation as well as economies with limited commitment private information and political economy frictions we identify a su cient condition to rule out permanent intertemporal distortions at the optimum if there exists an admissible allocation that converges to the rst best steady state then all intertemporal distortions are temporary in the second best we analyze a series of applications to illustrate the signi cance of this result

the risk free rate in heterogeneous agent incomplete insurance economies abstract why has the average real risk free interest rate been less than one percent the question is motivated by the failure of a class of calibrated representative agent economies to explain the average return to equity and risk free debt i construct an economy where agents experience uninsurable idiosyncratic endowment shocks and smooth consumption by holding a risk free asset i calibrate the economy and characterize equilibria computationally with a borrowing constraint of one year s income the resulting risk free rate is more than one percent below the rate in the comparable representative agent economy

idiosyncratic production risk growth and the business cycle we introduce a neoclassical growth economy with idiosyncratic production risk and incomplete markets each agent is an entrepreneur operating her own technology with her own capital stock the general equilibrium is characterized by a closed form recursion in the cara normal case incomplete markets introduce a risk premium on private equity which reduces the demand for investment as compared to complete markets the steady state can thus have both a lower capital stock due to investment risk and a lower interest rate due to precautionary savings furthermore the anticipation of high real interest rates in the future feeds back into high risk premia and low investment in the present thus slowing down convergence to the steady state our results highlight the importance of private risk premia for capital accumulation and business cycles

cost of business cycles with indivisibilities and liquidity constraints it is almost universally agreed that individuals face incomplete insurance markets and cannot perfectly insure against the idiosyncratic risk in this paper simple general equilibrium models with incomplete insurance markets are examined in order to assess the impact of imperfect insurance on the magnitude of the welfare costs of business cycles two versions of incomplete insurance markets are considered and certain statistical properties of the equilibrium stochastic processes in these environments are compared with those of a perfect insurance economy

wealth inequality in the united states since 1913 evidence from capitalized income tax data this paper combines income tax returns with flow of funds data to estimate the distribution of household wealth in the united states since 1913 we estimate wealth by capitalizing the incomes reported by individual taxpayers accounting for assets that do not generate taxable income we successfully test our capitalization method in three micro datasets where we can observe both income and wealth the survey of consumer finance linked estate and income tax returns and foundations tax records wealth concentration has followed a u shaped evolution over the last 100 years it was high in the beginning of the twentieth century fell from 1929 to 1978 and has continuously increased since then the rise of wealth inequality is almost entirely due to the rise of the top 0 1 wealth share from 7 in 1979 to 22 in 2012 a level almost as high as in 1929 the bottom 90 wealth share rst increased up to the mid 1980s and then steadily declined the increase in wealth concentration is due to the surge of top incomes combined with an increase in saving rate inequality top wealth holders are younger today than in the 1960s and earn a higher fraction of total labor income in the economy we explain how our ndings can be reconciled with survey of consumer finances and estate tax data

between scylla and charybdis income distribution consumer credit and business cycles we introduce a macroeconomic model with heterogeneous households and an aggregate banking sector in order to analyze the impact of rising income inequality under different credit scenarios growing inequality produces debt led consumption boom dynamics when the banking sector is characterized by a lower capital requirement and a higher willingness to lend instead when inequality rises but the banking sector is highly regulated aggregate demand and output fall our results also yield new insights on the appropriate fiscal policy reaction to stabilize the economy acting on the progressivity of the tax system seems more effective than a proactive countercyclical fiscal policy jel c63 d31 e62 g01

united arab emirates trade policy review this paper reviews the wto s first trade policy review tpr of the united arab emirates the tpr raises a number of concerns about barriers to foreign investment and competition in reviewing the evaluation the approach adopted in this paper is to elaborate on two main issues insufficiently developed in the tpr the first is investment treaties which are treated by the uae as legally superior to and prevailing over domestic legal instruments the second is free trade zones which constitute an economic enclave free of barriers to foreign investment and competition the paper provides preliminary statistical evidence on the relationship between inward fdi free trade zones and bilateral investment treaties suggesting the presence of a statistically significant positive association between the three the evidence lends initial support to the concerns raised by the review

international lending and borrowing in a stochastic stationary equilibrium this paper develops a simple general equilibrium model of international borrowing and lending in which national products are subject to random fluctuations international capital flows arise from the efforts of risk averse households in different countries to self insure against random income fluctuations by accumulating foreign claims that can be used to finance a less variable profile of consumption relative to national income in the absence of aggregate uncertainty a stationary rational expectations equilibrium is shown to exist despite the fact that rates of time preference differ among countries a number of results many of which enrich those in the existing literature are obtained copyright 1990 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

information and inequality abstract this paper studies wealth inequality in a blanchard yaari model with idiosyncratic investment returns its key innovation is to assume that individuals can buy information information reduces uncertainty about the unknown mean investment return reduced estimation risk encourages investment in higher yielding risky assets as a result endogenous information acquisition amplifies wealth inequality wealthy individuals buy more information which leads them to invest a higher share of their wealth in higher yielding assets which then makes them even wealthier the model s empirical implications are studied using monte carlo simulations and perturbation approximations an empirically plausible decrease in information costs can explain about two thirds of the observed increase in the top 1 wealth share