1,720,982 research outputs found
Optimal life-cycle labour supply, consumption, and investment: The role of longevity-linked assets
No full textWe solve in closed form the problem of an agent who maximises his inter-temporal lifetime utility. The agent is subject to the so-called longevity risk, i.e. his force of mortality is stochastic. His utility is additively separable on leisure (while working) and consumption. Consumer's preferences belong to the Hyperbolic Absolute Risk Aversion family, with a subsistence consumption level. The individual optimally chooses labour supply, consumption, and portfolio allocation. We study these optimal choices when the agent has access to a complete financial market, where he can trade in longevity-linked securities. He can also contribute to a personal pension scheme. A calibrated application shows that the optimal demand for the longevity-linked assets crucially depends on the stages of the agent's life and his wage profiles. This observation opens up the possibility of longevity risk transfers across individuals with heterogeneous characteristics
Optimal stopping time, consumption, labour, and portfolio decision for a pension scheme
No full textIn this work we solve in a closed form the problem of an agent who wants to optimise the inter-temporal recursive utility of both his consumption and leisure by choosing: (1) the optimal inter-temporal consumption, (2) the optimal inter-temporal labour supply, (3) the optimal share of wealth to invest in a risky asset, and (4) the optimal retirement age. The wage of the agent is assumed to be stochastic and correlated with the risky asset on the financial market. The problem is split into two sub-problems: the optimal consumption, labour, and portfolio problem is solved first, and then the optimal stopping time is approached. We compute the solution through both the so-called martingale approach and the solution of the Hamilton–Jacobi–Bellman partial differential equation. In the numerical simulations we compare two cases, with and without the opportunity, for the agent, to work after retirement, at a lower wage rate
Is a Monetary Union a Never-Ending Story?
No full textThis paper extends the existing literature on the long-run sustainability of a monetary union using an optimal stopping framework. We assume that inflation is endogenous and money growth is the control variable. Under a particular condition on some parameters, the union goes on forever. Moreover, the effective breakdown of the union is governed by two critical thresholds (affected also by countries’s political weights): (i) a lower level for domestic inflation; (ii) an upper level for union’s inflation. The optimal time for leaving a monetary union is the first time either domestic inflation goes down the former threshold or union’s inflation goes over the latter threshold
Optimal Real Exchange Rate Targeting: A Stochastic Analysis
No full textThis paper extends the literature on real exchange rate targeting inside a stochastic optimization framework where the real exchange rate displays long run mean reversion while temporarily reflecting a “liquidity effect”. In a time-varying volatility framework, we detect two thresholds, respectively for long run volatility and the reaction of volatility to real exchange rate shocks, beyond which an active stabilization policy is welfare increasing. However, since the Garch literature relative to many developing countries provides quantitative estimates significantly below the above thresholds, this paper makes a rather strong case against the adoption of real exchange rate targeting in emerging market economies
Ex-post equivalence under capital gains taxation
No full textIn this article, we analyze a state-contingent tax on capital gains, We start by focusing on Auerbach's (1991) retrospective capital gains tax device. Although this system is equivalent to an accrual method from an ex-ante perspective, it is not on an ex-post basis. As recognized by Auerbach. this causes a fairness problem. To overcome this limitation, we follow Zhu (1992) and design a state-contingent tax rule. As will be proven, state-contingent taxation can modify the risk profile of assets and also ensure ex-post equivalence
Optimal portfolio and spending rules for endowment funds
Full text linkWe investigate the role of different spending rules in a dynamic asset allocation model for university endowment funds. In particular, we consider the fixed consumption-wealth ratio (CW) rule and the hybrid rule which smoothes spending over time. We derive the optimal portfolios under these two strategies and compare them with a theoretically optimal (Merton) strategy. We show that the optimal portfolio with habit is less risky compared to the optimal portfolio without habit. A calibrated numerical analysis on U.S. data shows, similarly, that the optimal portfolio under the hybrid strategy is less risky than the optimal portfolios under both the CW and the classical Merton strategies, in typical market conditions. Our numerical analysis also shows that spending under the hybrid strategy is less volatile than the other strategies. Thus, endowments following the hybrid spending rule use asset allocation to protect spending. However, in terms of the endowment’s wealth, the hybrid strategy comparatively outperforms the conventional Merton and CW strategies when the market is highly volatile but under-performs them when there is strong stock market growth and low volatility. Overall, the hybrid strategy is effective in terms of stability of spending and intergenerational equity because, even if it allows short-term fluctuation in spending, it ensures greater
stability in the long run
Dynamic Tax Evasion with Habit Formation
No full textdynamic framework only recently. We argue that the decision to avoid taxes is dynamically embedded with consumption decisions, which in turn are driven by consumption habits. The model is cast in a dynamic context with an infinite horizon. Our paper makes several contributions to the existing literature on tax evasion: 1) habit formation has a dampening effect on tax evasion; 2) as the representative consumer grows older, the gap between habit and consumption decreases and his tax evasion decreases; 3) the effect of an increase in tax evasion depends on the ration of habit to capital, i.e. the presence of the Yitzhaki (1974) paradox depends on such a ratio; 4) we show that in the long run the ratio increases while the relationship between evasion and the tax rate changes from being positive to being negative; 5) the model has policy implications: other things being equal, it is better to induce people to reduce their level of tax evasion with controls rather than fines
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