Redistribution, taxes, and the median voter
We study a simple model of production, accumulation, and redistribution, where agents are heterogeneous in their initial wealth, and a sequence of redistributive tax rates is voted upon. Though the policy is infinite-dimensional, we prove that a median voter theorem holds if households have identical, Gorman aggregable preferences; furthermore, the tax policy preferred by the median voter has the ?bang- bang? property.
AUTHORS: Bassetto, Marco; Benhabib, Jess
Growth and investment across countries
This paper examines the channels through which country characteristics affect growth. We investigate whether "primitives," or rates of factor accumulation, are sufficient statistics for economic growth, and whether "ancillary variables," such as political instability, income distribution, and financial development, affect growth by influencing levels of investment in physical and human capital. Our results suggest that financial development is an important determinant of both total factor productivity growth and levels of investment. Political instability is also found to influence levels of physical capital accumulation. However, the impact of many of the ancillary variables on levels of investment are not very robust to the inclusion of country fixed effects.
AUTHORS: Benhabib, Jess; Spiegel, Mark M.
Sentiments and aggregate demand fluctuations
We formalize the Keynesian insight that aggregate demand driven by sentiments can generate output fluctuations under rational expectations. When production decisions must be made un- der imperfect information about aggregate demand, optimal decisions based on sentiments can generate stochastic self-fulfilling rational expectations equilibria in standard economies without aggregate shocks, externalities, persistent informational frictions, or even any strategic comple- mentarity. Our general equilibrium model is deliberately simple, but could serve as a benchmark for more complicated equilibrium models with additional features.
AUTHORS: Benhabib, Jess; Wang, Pengfei; Wen, Yi
Uncertainty and sentiment-driven equilibria
We construct a model to capture the Keynesian idea that production and employment decisions are based on expectations of aggregate demand driven by sentiments and that realized demand follows from the production and employment decisions of firms. We cast the Keynesian idea into a simple model with imperfect information about aggregate demand and we characterize the rational expectations equilibria of this model. We find that the equilibrium is not unique despite the absence of any non-convexities or strategic complementarity in the model. In addition to multiple fundamental equilibria, there can be serially correlated stochastic equilibria driven by self-fulfilling consumer sentiments. Furthermore, these sentiment-driven equilibria are not based on randomizations of the fundamental equilibria.
AUTHORS: Benhabib, Jess; Wang, Pengfei; Wen, Yi
On the economics of fiscal populism in an open economy
We study a representative agent, open economy in which government-provided services that enter the domestic production function must be financed with distortionary taxes, and focus on the optimal size of government and the associated optimal tax rate. If the government can precommit its actions, it maximizes individual welfare by announcing and implementing a constant tax rate, which we label the orthodox tax rate. This tax rate is time inconsistent, and under discretion the government implements a tax that maximizes each periods output. We label this the populist tax rate. It may be higher or lower than the orthodox rate, depending on whether the elasticity of substitution in production between private and public inputs is below or above one. We also characterize the second-best tax rate that can be sustained through trigger strategies. This best sustainable tax rate is constant and lies between the orthodox and populist extremes.
AUTHORS: Benhabib, Jess; Velasco, Andres
The design of monetary and fiscal policy: a global perspective
We study the emergence of multiple equilibria in models with capital and bonds under various monetary and fiscal policies. We show that the presence of capital is indeed another independent source of local and global multiplicities, even under active policies that yield local determinacy. We also show how a very similar mechanism generates multiplicities in models with bonds and distortionary taxation. We then explore the design of monetary policies that avoid multiple equilibria. We show that interest rate policies that respond to the output gap, while potentially a source of significant inefficiencies, may be effective in preventing multiple equilibria and costly oscillatory equilibrium dynamics.
AUTHORS: Benhabib, Jess; Eusepi, Stefano
Human capital and technology diffusion
This paper generalizes the Nelson-Phelps catch-up model of technology diffusion facilitated by levels of human capital. We allow for the possibility that the pattern of technology diffusion can be exponential, which would predict that nations would exhibit positive catch-up with the leader nation, or logistic, in which a country with a sufficiently small capital stock may exhibit slower total factor productivity growth than the leader nation. ; We derive a nonlinear specification for total factor productivity growth that nests these two specifications. We estimate this specification for a cross-section of nations from 1960 through 1995. Our results support the logistic specification, and are robust to a number of sensitivity checks. ; Our model also appears to predict slow total factor productivity growth well. 22 of the 27 nations that we identify as lacking the critical human capital levels needed to achieve faster total factor productivity growth than the leader nation in 1960 did achieve lower growth over the next 35 years.
AUTHORS: Benhabib, Jess; Spiegel, Mark M.
Reestablishing the income-democracy nexus
A number of recent empirical studies have cast doubt on the "modernization theory" of democratization, which posits that increases in income are conducive to increases in democracy levels. This doubt stems mainly from the fact that while a strong positive correlation exists between income and democracy levels, the relationship disappears when one controls for country fixed effects. This raises the possibility that the correlation in the data reflects a third causal characteristic, such as institutional quality. In this paper, we reexamine the robustness of the income-democracy relationship. We extend the research on this topic in two dimensions: first, we make use of newer income data, which allows for the construction of larger samples with more within-country observations. Second, we concentrate on panel estimation methods that explicitly allow for the fact that the primary measures of democracy are censored with substantial mass at the boundaries, or binary censored variables. Our results show that when one uses both the new income data available and a properly non linear estimator, a statistically significant positive income-democracy relationship is robust to the inclusion of country fixed effects.
AUTHORS: Benhabib, Jess; Corvalen, Alejandro; Spiegel, Mark M.
Modernization and Discrete Measures of Democracy
We reassess the empirical evidence for a positive relationship between income and democracy, commonly known as the ?modernization hypothesis,? using discrete democracy measures. While discrete measures have been advocated in the literature, they pose estimation problems under fixed effects due to incidental parameter issues. We use two methods to address these issues, the bias-correction method of Fernandez-Val, which directly computes the marginal effects, and the parameterized Wooldridge method. Estimation under the Fernandez-Val method consistently indicates a statistically and economically important role for income in democracy, while under the Wooldridge method we obtain much smaller and not always statistically significant coefficients. A likelihood ratio test rejects the pooled full sample used under the Wooldridge estimation method against the smaller fixed effects sample that only admits observations with changing democracy measures. Our analysis therefore favors a positive role for income in promoting democracy, but does not preclude a role for institutions in determining democratic status as the omitted countries under Fernandez Val-fixed effect method appear to differ systematically by institutional quality measures which have a positive impact on democratization.
AUTHORS: Corvalen, Alejandro; Benhabib, Jess; Spiegel, Mark M.
Moderate inflation and the deflation-depression link
In a recent paper, Atkeson and Kehoe (2004) demonstrated the lack of a robust empirical relationship between inflation and growth for a cross-section of countries with 19th and 20th century data, concluding that the historical evidence only provides weak support for the contention that deflation episodes are harmful to economic growth. In this paper, we revisit this relationship by allowing for inflation and growth to have a nonlinear specification dependent on inflation levels. In particular, we allow for the possibility that high inflation is negatively correlated with growth, while a positive relationship exists over the range of negative-to-moderate inflation. Our results confirm a positive relationship between inflation and growth at moderate inflation levels, and support the contention that the relationship between inflation and growth is non-linear over the entire sample range.
AUTHORS: Spiegel, Mark M.; Benhabib, Jess