Search Results
Working Paper
Capital-Labor Substitution and Equilibrium Indeterminacy
Empirical evidence indicates that the elasticity of capital-labor substitution for the aggregate U.S. economy is below unity. In contrast, the existing indeterminacy literature has mostly restricted attention to a Cobb-Douglas production function which imposes a substitution elasticity exactly equal to unity. This paper examines the quantitative relationship between capital-labor substitution and the conditions needed for equilibrium indeterminacy (and belief-driven fluctuations) in a one-sector growth model. With variable capital utilization, the substitution elasticity has little ...
Working Paper
Maintenance Expenditures and Indeterminacy under Increasing Returns to Scale
This paper develops a one-sector real business cycle model in which competitive firms allocate resources for the production of goods, investment in new capital, and maintenance of existing capital. Firms also choose the utilization rate of existing capital. A higher utilization rate leads to faster capital depreciation, while an increase in maintenance activity has the opposite effect. We show that as the equilibrium ratio of maintenance expenditures to GDP rises, the required degree of increasing returns for local indeterminacy declines over a wide range of parameter combinations. When the ...
Journal Article
On business cycles and countercyclical policies
Since the third quarter of 2000, the U.S. economy began to experience a slowdown in its rate of growth. This slowdown serves as a reminder that the business cycle is still alive and raises the following questions: What do we know about the driving forces behind the business cycle? What should policymakers do in the face of economic fluctuations? ; The authors examine two explanations for business cycles that are well-known in academic circles: the animal spirits theory and the real business cycle theory. The former is closely connected with the Keynesian economic tradition and identifies ...
Working Paper
The welfare effects of tax simplification: a general-equilibrium analysis
An analysis of various schemes for simplifying the U.S. tax system, which finds that a uniform tax system performs almost as well as a system with separate taxes on labor and capital incomes, provided that a depreciation allowance is maintained.
Working Paper
Tax structure, welfare, and the stability of equilibrium in a model of dynamic optimal fiscal policy
A demonstration that the assumed structure of taxation can have dramatic effects on economic welfare and on the stability of the steady state in a dynamic general-equilibrium model of optimal fiscal policy. The authors find that household welfare is highest under a structure that includes separate tax rates on labor and capital incomes, double taxation of dividends, and tax-deductible depreciation.
Working Paper
Indeterminacy and stabilization policy
A demonstration of how an income tax schedule that exhibits a progressivity feature can ensure saddle-path stability in a one-sector, real business-cycle model with sufficient increasing returns in production, thereby shielding the economy against sunspot fluctuations.
Journal Article
Tax structure and welfare in a model of optimal fiscal policy
A study of the welfare implications of some basic structural features of the U.S. tax code, including the tax deductibility of depreciation and the practice of taxing labor income differently than capital income. The results show that long-run welfare and output can be improved by a policy of accelerated depreciation, whereby the depreciation rate for tax purposes exceeds the rate of economic depreciation.
Working Paper
Optimal taxation of capital income with imperfectly competitive product markets
We show that the steady-state optimal tax on capital income can be negative, positive, or zero in a neoclassical growth model that allows for imperfectly competitive product markets. The sign of the optimal tax rate depends crucially on (1) the degree of monopoly power, (2) the extent to which monopoly profits can be taxed, (3) the size of the depreciation allowance, and (4) the magnitude of government expenditures. For an empirically plausible set of parameters, we find that the steady-state optimal capital tax can range between -10 and 22%.
Working Paper
Fiscal policy, increasing returns, and endogenous fluctuations
We examine the quantitative implications of government fiscal policy in a discrete-time one-sector growth model with a productive externality that generates social increasing returns to scale. Starting from a laissez-faire economy that exhibits an indeterminate steady state (a sink), we show that the introduction of a constant capital tax or subsidy can lead to various forms of endogenous fluctuations, including stable 2-, 4-, 8-, and 10- cycles, quasi-periodic orbits, and chaos. In contrast, a constant labor tax or subsidy has no effect on the qualitative nature of the model's dynamics. ...
Journal Article
Tax structure, optimal fiscal policy, and the business cycle
The development of a real business cycle model in which government fiscal variables such as tax rates and public expenditures are endogenous. The authors characterize the "optimal" behavior of these policy variables over the business cycle and relate this behavior to movements in private-sector variables like output, consumption, labor hours, and investment.