endogenous trading constraints with incomplete asset markets abstract this paper endogenizes the borrowing constraints on capital in a production economy with incomplete markets we find that these limits get looser with income a property that is consistent with us data on credit limits the framework with endogenous limits is then used to study the effects of a revenue neutral tax reform that eliminates capital income taxes our results illustrate that it is very important to take into account the effects of tax policies on the limits throughout the transition these effects can be big enough to change the overall conclusion about the desirability of a tax reform

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

the constitution of economic policy one of the most exciting intellectual moments of my career was my 1984 discovery of knut wicksell s unknown and untranslated dissertation finanztheoretische untersuchungen buried in the dusty stacks of chicago s old harper library only the immediate post dissertation leisure of an academic novice allowed for the browsing that produced my own dramatic example of learning by serendipity wicksell s new principle of justice in taxation gave me a tremendous surge of self confidence wicksell who was an established figure in the history of economic ideas challenged the orthodoxy of public finance theory along lines that were congenial with my own developing stream of critical consciousness from that moment in chicago i took on the determination to make wicksell s contribution known to a wider audience and i commenced immediately a translation effort that took some time and considerable help from elizabeth henderson before final publication this abstract was borrowed from another version of this item

u s reits as an asset class in international investment portfolios an examination of u s real estate investment trust reit efficiency as a portfolio component from the perspective of all g 7 countries for the period 1985 through 1994 indicates that u s reits offer both an inflation hedge and diversification nevertheless including reits in test portfolios did not yield statistically significant increases in risk adjusted return over the period as a whole subperiod analyses indicated large temporal differences in reit efficiency as a portfolio component

wealth distribution in life cycle economies abstract this paper compares the age wealth distribution produced in life cycle economies to the corresponding distribution in the us economy the idea is to calibrate the model economies to match features of the us earnings distribution and then examine the wealth distribution implications of the model economies the findings are that the calibrated model economies with earnings and lifetime uncertainty can replicate measures of both aggregate wealth and transfer wealth in the us furthermore the model economies produce the us wealth gini and a significant fraction of the wealth inequality within age groups however the model economies produce less than half the fraction of wealth held by the top 1 percent of us households

crowding out and crowding in when does redistribution improve risk sharing in limited commitment economies abstract when the risk of default constrains financial contracts public insurance policies can significantly affect private risk sharing this is because by changing income expectations and volatility redistribution changes the attractiveness of default and thus endogenous borrowing constraints extending results by krueger and perri 2011 8 this paper analyses the conditions under which redistribution can improve private insurance by making default less attractive to the income rich whose income it reduces i first explain why public redistribution typically crowds out private insurance in the two income economy and identify the role of income persistence and saving after default second i show how in endowment economies with three income states or more and in economies with capital redistributive taxes can improve or crowd in private consumption insurance finally in a quantitative exercise using a realistic income process calibrated to us micro data moderate redistribution crowds in private insurance with production but not in an endowment economy

debt deleveraging and the liquidity trap a fisher minsky koo approach in this paper we present a simple new keynesian style model of debt driven slumps that is situations in which an overhang of debt on the part of some agents who are forced into rapid deleveraging is depressing aggregate demand making some agents debt constrained is a surprisingly powerful assumption fisherian debt deflation the possibility of a liquidity trap the paradox of thrift a keynesiantype multiplier and a rationale for expansionary fiscal policy all emerge naturally from the model we argue that this approach sheds considerable light both on current economic difficulties and on historical episodes including japan s lost decade now in its 18th year and the great depression itself

does international diversification work better for real estate than for stocks and bonds international diversification is now an established fact for stock and bond portfolios for real estate shares however this acceptance has so far not been the case this study is an investigation of the effectiveness of international real estate diversification relative to international diversification of stock and bond portfolios tests of international correlation matrixes of real estate returns common stock returns and bond returns indicate significantly lower correlations between national real estate returns than between common stock or bond returns the implication is that international diversification reduces the risk of a real estate portfolio more than that of common stock and bond portfolios

the optimum quantity of debt abstract we find that the welfare gains to being at the optimum quantity of debt rather than the current us level are small and therefore concerns regarding the high level of debt in the us economy may be misplaced this finding is based on a model of a large number of infinitely lived households whose saving behavior is influenced by precautionary saving motives and borrowing constraints this model incorporates a different role for government debt than is found in standard models and it captures different cost benefit trade offs on the benefit side government debt enhances the liquidity of households by providing an additional means of smoothing consumption and by effectively loosening borrowing constraints on the cost side the implied taxes have adverse wealth distribution and incentive effects in addition government debt crowds out capital via higher interest rates and lowers per capita consumption

the effectiveness of government debt and transfers as insurance abstract government debt and redistributive taxation can help people to smooth consumption when facing uninsurable individual specific risk i examine the effects that variations in public debt and transfers have on risk sharing efficiency and the distribution of resources i find that risk sharing can be improved significantly by both debt and transfers but that debt has adverse effects on equity when used in isolation debt will enhance welfare if transfers are lower than optimal however the beneficial effects of public debt vanish if transfers are used optimally

u s inequality debt constraints or incomplete asset markets abstract to examine the role of debt constraints and incomplete asset markets lack of insurance markets in explaining u s inequality we run horse races between competing models for a widely used model we decompose inequality into its fundamental driving forces the underlying source of inequality in all models is uninsurable idiosyncratic risk both debt constraints and incomplete asset markets are needed to account for inequality but asset market incompleteness is the key friction it better accounts for the concentration and dispersion of wealth and is the most costly friction in terms of welfare tight debt constraints are important for explaining the lower tail of the wealth distribution

wealth inequality and intergenerational links previous work has had difficulty generating household saving behaviour that makes the distribution of wealth much more concentrated than that of labour earnings and that makes the richest households hold onto large amounts of wealth even during very old age i construct a quantitative general equilibrium overlapping generations model in which parents and children are linked by accidental and voluntary bequests and by earnings ability i show that voluntary bequests can explain the emergence of large estates while accidental bequests alone cannot and that adding earnings persistence within families increases wealth concentration even more i also show that the introduction of a bequest motive generates lifetime savings profiles more consistent with the data

liquidity constrained markets versus debt constrained markets this paper compares two different models in a common environment the first model has liquidity constraints in that consumers save a single asset that they cannot sell short the second model has debt constraints in that consumers cannot borrow so much that they would want to default but is otherwise a standard complete markets model both models share the features that individuals are unable to completely insure against idiosyncratic shocks and that interest rates are lower than subjective discount rates in a stochastic environment the two models have quite different dynamic properties with the debt constrained model exhibiting simple stochastic steady states while the liquidity constrained model has greater persistence of shocks

consumer bankruptcy a fresh start consumer bankruptcy provides partial insurance against bad luck but by driving up interest rates makes life cycle smoothing more difficult we argue that to assess this trade off one needs a quantitative model of consumer bankruptcy with three key features life cycle component idiosyncratic earnings uncertainty and expense uncertainty exogenous negative shocks to household balance sheets we find that transitory and persistent earnings shocks have very different implications for evaluating bankruptcy rules more persistent shocks make the bankruptcy option more desirable larger transitory shocks have the opposite effect our findings suggest the current us bankruptcy system may be desirable for reasonable parameter values jel d14 d91 k35

endogenous debt constraints in a life cycle model with an application to social security this paper develops a simple life cycle model that embeds a theory of debt restrictions based on the existence of inalienable property rights a la kehoe and levine 1993 debt constrained asset markets review of economic studies 60 4 865 888 2001 liquidity constrained markets versus debt constrained markets econometrica 69 3 575 598 in our environment net debtors have the option of defaulting on unsecured debt at the cost of being subjected to wage garnishment and or having some or all of their future assets seized by creditors one advantage of our framework is that it encompasses two standard versions of the life cycle model one with perfect capital markets and one with a non negative net worth restriction we study the impact of a payroll financed social security system to illustrate the role of endogenous debt constraints and compare our results to a model with exogenous debt constraints whereas the aggregate effects are similar under both types of constraints the distributional consequences are found to be significantly different across debt regimes

welfare implications of the bankruptcy reform act of 1999 abstract in recent years personal bankruptcy has become an important issue to consumers creditors and legislators alike over 40 billion dollars of unsecured debt were discharged in 1998 by 1 44 million households these losses have led legislators to propose a variety of changes in bankruptcy law the most important and recent of which is the bankruptcy reform act of 1999 ba99 i develop a dynamic stochastic general equilibrium model of personal bankruptcy to investigate the trade off between the consumption smoothing role of bankruptcy and the interest rate and deadweight costs it imposes i find that stringent means tests would reduce filing rates only slightly and would have only modest welfare consequences on the other hand the elimination of bankruptcy altogether is found to have substantial benefits this result is robust to income shock persistence and to stringency in the application of means tests

public debt under limited private credit there is a conventional wisdom in economics that public debt can serve as a substitute for private credit if private borrowing is limited the purpose of this paper is to show that while a government could in principle use such a policy to fully relax borrowing limits this is not generally optimal in our economy agents invest in a short term asset a long term asset and government bonds agents are subject to idiosyncratic liquidity shocks prior to the maturity of the long term asset we show that a high public debt policy fully relaxes private borrowing limits and is suboptimal this is because agents expecting such a policy respond by investing less than is socially optimal in the short asset which can protect them in the event of a liquidity shock the optimal policy is more constrained and it induces a wedge between the technological rate of return on the long asset and the rate of return on bonds in such a regime agents subject to liquidity shocks are also borrowing constrained and this expectation of being borrowing constrained induces them to invest the optimal level in the short asset jel h63 e62 g20

determinants of oligopsony power the haitian coffee case abstract this paper investigates the determinants of oligopsony power exerted by coffee exporters in haiti it develops and estimates a two equation model with cross parameter restrictions one equation for the lerner index of oligopsony and the other for the residual supply function facing exporters empirical results indicate that both institutional arrangements and domestic market conditions have significantly shaped oligopsony power

investing in international real estate stocks a review of the literature this paper summarises the various findings of studies completed on the benefits of international diversification using real estate stocks with the increased availability of data and analytical tools the quantity and variety of work over the past decade have increased dramatically in this area the first two sections of the paper chronologically review the studies focusing on how the diversification benefits are analysed in a mixed asset portfolio context or a real estate only portfolio context the third section highlights work that uses alternative analyses to the traditional mean variance framework to examine the international real estate stock as an investment alternative almost all of the studies reach the same conclusion diversification gains are possible but are often reduced if currency risk is included in the analysis

accounting for the u s earnings and wealth inequality we show that a theory of earnings and wealth inequality based on the optimal choices of ex ante identical households that face uninsured idiosyncratic shocks to their endowments of efficiency labor units accounts for the u s earnings and wealth inequality almost exactly

inflation and financial deepening comment abstract in a recent paper moore 1986 has criticized mckinnon s 1976 analysis of the relationship between a country s savings propensities and its money income ratio on both logical and empirical grounds and has proposed an alternative treatment we argue here that moore s critique and proposed alternative while containing useful insights are theoretically and empirically problematic and we propose a synthesis of mckinnon s and moore s treatments we also develop a simple growth model based upon our synthesis which is shown to generate certain significant implications for the neo structuralist critique of the mckinnon shaw financial liberalization prescription

effective tax rates in macroeconomics cross country estimates of tax rates on factor incomes and consumption abstract this paper proposes a method for computing tax rates using national accounts and revenue statistics using this method we construct time series of tax rates for large industrial countries the method identifies the revenue raised by different taxes at the general government level and defines aggregate measures of the corresponding tax bases this method yields estimates of effective tax rates on factor incomes and consumption consistent with the tax distortions faced by a representative agent in a general equilibrium framework these tax rates compare favorably with existing estimates of marginal tax rates and highlight important international differences in tax policy

reducing government debt in the presence of inequality abstract what are the welfare effects of government debt in particular what are the welfare consequences of government debt reductions we answer these questions with the help of an incomplete markets economy with production households are subject to uninsurable income shocks we make several contributions first by targeting the skewed wealth and earnings distribution of the us economy in our calibration we identify inequality as the major driver of the welfare effects of public debt gdp changes second we show that in order to fully gauge the welfare consequences and the political feasibility of government debt changes it is crucial to consider the transitional dynamics between stationary equilibria our results therefore have important implications for the design of debt reduction policies since the skewed wealth distribution generates a large fraction of borrowing constrained households a public debt reduction should be non linear such that the tax burden is postponed into the future

financial globalization inequality and the rising public debt abstract during the last three decades government debt has increased in most developed countries during the same period we have also observed a significant liberalization of international financial markets we propose a multicountry model with incomplete markets and show that governments may choose higher levels of debt when financial markets become internationally integrated we also show that public debt increases with the volatility of uninsurable income idiosyncratic risk to the extent that the increase in income inequality observed in some industrialized countries has been associated with higher idiosyncratic risk the paper suggests another potential mechanism for the rise in public debt jel d31 e62 f65 h63

exchange rate uncertainty forward contracts and international portfolio selection in this paper ex ante efficient portfolio selection strategies are developed to realize potential gains from international diversification under flexible exchange rates it is shown that exchange rate uncertainty is a largely nondiversiflable factor adversely affecting the performance of international portfolios therefore it is essential to effectively control exchange rate volatility for that purpose two methods of exchange risk reduction are simultaneously employed multicurrency diversification and hedging via forward exchange contracts the empirical findings show that international portfolio selection strategies designed to control both estimation and exchange risks almost consistently outperform the u s domestic portfolio in out of sample periods since grubel 11 applied modern portfolio theory mpt to international investment various authors such as levy and sarnat 17 solnik 20 and lessard 16 have examined the gains from international diversification of investment portfolios for the purpose of establishing the gains from international diversification these studies constructed international portfolios using historical risk and return data from a period of fixed or relatively stable exchange rates and showed that internationally diversified portfolios dominated purely domestic portfolios in terms of mean variance efficiency from the standpoint of today s investors however the previous studies fail to offer operational guidance for international diversification for two important reasons first it is now questionable whether the past findings are still relevant under the current flexible exchange rate regime second by being ex post in nature the past studies ignored the issue of estimation risk or parameter uncertainty and therefore may have overstated the realizable portion of the potential gains from international diversification fluctuating exchange rates are likely to mitigate the potential gains from international diversification by making investment in foreign securities more risky as will be shown later a fluctuating exchange rate contributes to the risk of foreign investment not only through its own variance but also through its positive covariances with the local stock market returns during our sample period of 1980 through 1985 for example exchange rate volatility is found to account for about fifty percent of the volatility of dollar returns from investment in the stock markets of such major countries as germany japan and the u k furthermore the exchange rate changes vis a vis the u s dollar are found to be

income and wealth heterogeneity in the macroeconomy how do movements in the distribution of income and wealth affect the macroeconomy we analyze this question using a calibrated version of the stochastic growth model with partially uninsurable idiosyncratic risk and movements in aggregate productivity our main finding is that in the stationary stochastic equilibrium the behavior of the macroeconomic aggregates can be almost perfectly described using only the mean of the wealth distribution this result is robust to substantial changes in both parameter values and model specification our benchmark model whose only difference from the representative agent framework is the existence of uninsurable idiosyncratic risk displays far less cross sectional dispersion and skewness in wealth than u s data however an extension that relies on a small amount of heterogeneity in thrift does succeed in replicating the key features of the wealth data furthermore this extension features aggregate time series that depart significantly from permanent income behavior

the great moderation in micro labor earnings abstract between 1980 and the early 1990s the variability of labor earnings growth rates across the prime age working population fell significantly this decline and timing are consistent with other macro and micro observations about growth variability that are collectively referred to as the great moderation the variability of earnings growth is negatively correlated with age at any point in time and the u s working age population got older during this period because the baby boom was aging however the decrease in variability was roughly uniform across all age groups so population aging is not the source of the overall decline the variance of log changes also declined at multi year frequencies in such a way as to suggest that both permanent and transitory components of earnings shocks became more moderate a simple identification strategy for separating age and cohort effects shows a very intuitive pattern of permanent and transitory shocks over the life cycle and confirms that a shift over time in the stochastic process occurred even after controlling for age effects

consumption smoothing in island economies can public insurance reduce welfare abstract in this paper we study the effects of certain types of public compulsory insurance arrangements for aggregate shocks on private allocations in environments with limited commitment we show that this type of insurance can improve the wellbeing of private situations but it can also deteriorate it we also describe how different characteristics of the environment affect the role of public insurance using data on the mexican progresa program we document the impact that some government programs have in crowding out private transfers

the laffer curve revisited abstract laffer curves for the us the eu 14 and individual european countries are compared using a neoclassical growth model featuring constant frisch elasticity cfe preferences new tax rate data is provided the us can maximally increase tax revenues by 30 with labor taxes and 6 with capital taxes we obtain 8 and 1 for the eu 14 there 54 of a labor tax cut and 79 of a capital tax cut are self financing the consumption tax laffer curve does not peak endogenous growth and human capital accumulation affect the results quantitatively household heterogeneity may not be important while transition matters greatly

public versus private provision of liquidity is there a trade off abstract to what extent is public debt private liquidity much policy advice given in the aftermath of the financial crisis rests on the assumption that increasing public debt relaxes borrowing constraints of private households this is the case for ad hoc debt limits which are exogenous to public policy instead if debt limits are fully endogenous as e g in the case of the natural borrowing limit public debt has no impact we assume that borrowing limits arise because of limited contract enforceability and are therefore determined as equilibrium outcomes using an incomplete markets economy in which households are subject to uninsurable earnings shocks we show that public debt provides some liquidity but less so than it would if constraints were imposed ad hoc we show that generating borrowing constraints as an equilibrium outcome substantially alters the answers to other important questions such as for the welfare effects of government debt or its impact on real economic activity

why do governments end up with debt short run effects matter this paper reconsiders the impact of public debt in an economy with heterogeneous households and incomplete markets to emphasize the short run effects of an increase in public debt as compared to models that rest on steady state analysis we show that the welfare gains of a public debt increase are substantially higher when transitional dynamics are accounted for the additional debt issue allows for a temporary reduction in the income tax rate which stimulates labor supply and generates an overshooting of the interest rate the short run gains create a temptation to deviate toward higher levels of debt debt increases continue to generate welfare gains even when debt is considerably higher than its long run optimal level

the effects of financial development in the short and long run theory and evidence from india abstract although many view financial access as a means of reducing poverty or increasing growth empirical studies have produced contradictory results one problem is that most studies cover only a short time frame and do not consider dynamic effects i show that introducing credit in a general model of intertemporal consumption creates a boom in consumption and reduces poverty initially but eventually reduces mean consumption because credit substitutes for precautionary wealth using new consistent consumption data that cover a much longer time period than most studies my empirical findings show that increased access to bank branches in rural india increased consumption initially and reduced poverty but consumption later fell and poverty rose the long term effect is still positive however suggesting that credit may have a beneficial role beyond consumption smoothing

endogenous borrowing constraints with incomplete markets this article develops ways to endogenize the borrowing constraints used in a class of computable incomplete markets models we allow the constraints to depend on an investor s characteristics such as time preference risk aversion and income streams the proposed constraint can be interpreted as a borrowing limit within which an investor has no incentive to default using a numerical algorithm we find that for an array of structural parameters the endogenous borrowing constraints can be much less stringent than the ad hoc borrowing constraints adopted by the existing studies

ricardian equivalence in the presence of capital market imperfections abstract it is a common claim that ricardian equivalence fails if capital markets are imperfect the validity of this claim is examined for the case of informationally imperfect capital markets we present three alternative models of adverse selection and analyze the effects of debt finance in these models it is shown that a debt financed tax cut can lead to pareto improvement in some cases in the theoretically most preferable model however ricardian equivalence survives in spite of genuine imperfections in the capital market the results point to the importance of specifying the exact nature of imperfection

consumption and risk sharing over the life cycle a striking feature of u s data on income and consumption is that inequality increases with age this paper asks if individual specific earnings risk can provide a coherent explanation we find that it can we construct an overlapping generations general equilibrium model in which households face uninsurable earnings shocks over the course of their lifetimes earnings inequality is exogenous and is calibrated to match data from the u s panel study on income dynamics consumption inequality is endogenous and matches well data from the u s consumer expenditure survey the total risk households face is decomposed into that realized before entering the labor market and that realized throughout the working years in welfare terms the latter is found to be more important than the former

the horizontally s shaped laffer curve in a neoclassical growth model with incomplete markets and heterogeneous liquidity constrained agents the properties of the laffer curve depend on whether debt or transfers are adjusted to balance the government budget constraint the laffer curve conditional on public debt is horizontally s shaped two opposing forces explain this result first when government wealth increases the fiscal burden declines calling for lower tax rates second because the interest rate decreases when government wealth increases fiscal revenues may also decline calling for higher taxes for sufficiently negative government debt the second force dominates leading to the odd shape of the laffer curve conditional on debt

the rise and decline of rent seeking activity in the brazilian coffee sector lessons from the imposition and removal of coffee export quotas summary brazil the world s largest coffee exporter encouraged efforts in the 1960s to form the international coffee agreement ica which restricted total coffee exports via country export quotas the quotas led to significant domestic quota rents in producing countries this paper analyzes the effects of rent seeking in brazil the brazilian institute of coffee ibc which was responsible for coffee policy was the focus of rent seeking the paper models the policy instruments used by the ibc shows how rent seeking affected policy industry efficiency and the distribution of rents explains the causes and effects of ibc reforms in the late 1980s and draws lessons from the experience

fiscal policy and asset prices with incomplete markets we study the simultaneous impact of fiscal policy decisions on macroeconomic activity wealth distribution and asset prices we consider a general equilibrium overlapping generations model with incomplete markets and heterogeneous agents where government debt and capital are imperfect substitutes increases in public debt lead to significant increases in the riskless rate and to a reduction in the equity premium while higher capital income tax rates lead to a higher equity premium the crowding out effects on capital and output are much higher than in models where government debt and capital are perfect substitutes which thus ignore households portfolio reallocation decisions the author 2012 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

welfare implications of endogenous credit limits with bankruptcy this paper studies the aggregate welfare consequences of changes in the prescribed penalty for personal bankruptcy and in social insurance policies when borrowing limits may respond to these changes it uses a dynamic general equilibrium model of an exchange economy with incomplete markets and a continuum of agents the borrowing constraint and the risk of default are endogenous and the default penalty restricts an individual s access to the markets for a fixed period of time the effect on the stationary equilibrium of an exogenous reduction of 1 and 2 years in this exclusion period is explored quantitatively for comparison purposes the same experiment is carried out under the assumption made in related studies that the borrowing limit is fixed a small welfare loss follows in either case in contrast in a small open economy welfare may increase substantially but only if the borrowing constraint is endogenous similar results follow from an exogenous change in social policy that reduces individual income variability