1,721,016 research outputs found
Nominal GDP targeting and the tax burden
No full textAn overlapping generations model is set out in which monetary policy matters for distortionary taxes because unanticipated inflation has real wealth effects on households with nominal government debt. The model is used to study the tax burden under inflation and nominal GDP targeting. Nominal GDP targeting makes taxes less volatile than inflation targeting but raises average taxes. With a quadratic loss function, the expected tax burden is minimized with only indexed debt under inflation targeting, but with both indexed and nominal debt under nominal GDP targeting. Nominal GDP targeting lowers the tax burden relative to inflation targeting (except at very high indexation shares), but this conclusion hinges on risk aversion, productivity persistence and the loss function for the tax burden
Solving heterogeneous-belief asset pricing models with short selling constraints and many agents
No full textShort-selling constraints are common in financial markets, while physical assets such as housing often lack markets for short-selling altogether. As a result, investment decisions are often restricted by such constraints. This paper studies asset prices in behavioural heterogeneous-belief models with short-selling constraints. We provide expressions for price and demands in a market with arbitrarily many belief types, plus efficient solution algorithms, relevant for a wide range of models. Extensions include conditional short-selling constraints, multiple asset markets, and a market maker. An application studies how an alternative uptick rule, as in the United States, affects price and wealth distribution in a market with many belief types in evolutionary competition
Solving heterogeneous-belief asset pricing models with short-selling constraints and many agents
No full textShort-selling constraints are common in financial markets, while physical assets such as housing often lack markets for short-selling altogether. As a result, investment decisions are often restricted by such constraints. This paper studies asset prices in behavioral heterogeneous-belief models with short-selling constraints and arbitrarily many belief types. We provide conditions on beliefs such that short-selling constraints bind for different types, along with analytic expressions for price and demands that allow us to construct fast solution algorithms relevant for a wide range of models. An application studies how an alternative uptick rule, as in the United States, affects price dynamics and wealth distribution in a market with many belief types in evolutionary competition. In a numerical example, we highlight a scenario in which a modified version of the alternative uptick rule, triggered by smaller percentage falls in price, reduces both asset mispricing and wealth inequality relative to the current regulation. As extensions, we show how our method applies to multiple asset markets with short-selling constraints, additional heterogeneities, and price setting by a market maker
Heterogeneous beliefs and short selling taxes: a note
No full textShort selling is widespread in financial markets but regulators can ban short positions. The intermediate policy of taxing short sellers has been studied in an asset pricing model with evolutionary competition of two belief types (Anufriev and Tuinstra, 2013). We extend this approach to an arbitrary number of belief types H, giving 3^h - 2^H cases to check each period in the worst-case scenario. We provide analytic expressions for asset prices along with conditions on beliefs (optimism) that determine which types take long, short or zero asset positions at the market-clearing price. We use these results to construct a fast solution algorithm (quadratic in H) which can solve models with hundreds or thousands of types in a matter of seconds. A numerical example with a short-selling tax and many heterogeneous beliefs in evolutionary competition shows that price dynamics can differ substantially relative to the benchmark of few types
Solving linear rational expectations models in the presence of structural change: Some extensions
No full textStandard solution methods for linear rational expectations models assume a time-invariant structure. Recent work has gone beyond this by formulating solution methods for linear rational expectations models subject to structural changes, such as parameter shifts and policy reforms, that are announced in advance. This paper contributes to this literature by presenting solutions for some cases – imperfectly credible policy reforms; delayed announcement to some fraction of agents; and indeterminacy of the terminal solution (multiple equilibria) – that received little attention so far. These solutions are illustrated using several applications, including a New Keynesian model in which the Taylor principle is not satisfied by the terminal structure
Optimal pensions with endogenous labour supply
No full textWe show that a two-part pension system provides optimal capital accumulation without distorting labour supply, thereby achieving the first-best. An economy with too little retirement saving should combine a negative income tax with a consumption tax to replicate the first-best allocation without using any lump-sum taxes. Our results are shown in a classic Diamond overlapping generations model that is augmented with endogenous labour supply on the intensive margin
Should a pension reform be announced? A reply
No full textFedotenkov (2016) shows that a reduction in the pay-as-you-go (PAYG) contribution rate leads to larger welfare losses for the first transitional generation if the reform is announced in advance. His analysis is based on expected lifetime utility at the reform announcement date. This note reconsiders the reform from the alternative perspective of implementation date. It argues that an announced reform may be preferable because it raises realized consumption of the first transitional generation in old age. Implications for social welfare evaluations are illustrated with a numerical example
Simulating multiple equilibria in rational expectations models with occasionally-binding constraints: An algorithm and a policy application
No full textThis paper presents an algorithm for simulating multiple equilibria in otherwise-linear dynamic models with occasionally-binding constraints. Our algorithm extends the guess-and-verify approach of Guerrieri and Iacoviello (2015) to detect and simulate multiple perfect foresight equilibria, and allows arbitrary “news shocks” up to a finite horizon. When there are multiple equilibria, we show how to compute expected paths using a “prior probabilities” approach and we provide an approach for running stochastic simulations with switching between equilibria on the simulated path. A policy application studies a New Keynesian model with a zero lower bound on nominal interest rates and multiple equilibria, including a “bad” solution based on self-fulfilling pessimistic expectations. A price-level targeting rule does not always eliminate the bad solution, but it shrinks the indeterminacy region substantially and improves stabilization and welfare relative to more conventional interest rate rules or forward guidance
- …
