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Series:Discussion Paper / Institute for Empirical Macroeconomics  Bank:Federal Reserve Bank of Minneapolis 

Discussion Paper
The social discount rate

In welfare theory it is standard to pick the consumption stream that maximizes the welfare of the representative agent. We argue against this position, and show that a benevolent social planner will generally place a greater weight on future consumption than does the representative agent.
Discussion Paper / Institute for Empirical Macroeconomics , Paper 137

Discussion Paper
Capital accumulation in a model of growth and creative destruction

Capital accumulation and creative destruction is modeled together with risk-averse households. The novel aspect-risk-averse households-allows to use well-known models not only for analyzing long-run growth as in the literature but also short-run fluctuations. The model remains analytically tractable due to a very convenient property of the household's investment decision in this stochastic continuous-time setup.
Discussion Paper / Institute for Empirical Macroeconomics , Paper 139

Discussion Paper
Bad politicians

We present a simple theory of the quality of elected officials. Quality has (at least) two dimensions: competence and honesty. Voters prefer competent and honest policymakers, so high-quality citizens have a greater chance of being elected to office. But low-quality citizens have a comparative advantage in pursuing elective office, because their market wages are lower than the market wages of high-quality citizens (competence), and/or because they reap higher returns from holding office (honesty). In the political equilibrium, the average quality of the elected body depends on the structure ...
Discussion Paper / Institute for Empirical Macroeconomics , Paper 134

Discussion Paper
Knowledge exchange, matching, and agglomeration

Despite wide recognition of their significant role in explaining sustained growth and economic development, uncompensated knowledge spillovers have not yet been fully modeled with a microeconomic foundation. The main purpose of this paper is to illustrate the exchange of knowledge as well as its consequences on agglomerative activity in a general-equilibrium search-theoretic framework. Agents, possessing differentiated types of knowledge, search for partners to exchange ideas and create new knowledge in order to improve production efficacy. When individuals types of knowledge are too diverse, ...
Discussion Paper / Institute for Empirical Macroeconomics , Paper 135

Discussion Paper
Time inconsistent preferences and Social Security

In this paper we examine the role of social security in an economy populated by overlapping generations of individuals with time-inconsistent preferences who face mortality risk, individual income risk, and borrowing constraints. Agents in this economy are heterogeneous with respect to age, employment status, retirement status, hours worked, and asset holdings. We consider two cases of time-inconsistent preferences. First, we model agents as quasi-hyperbolic discounters. They can be sophisticated and play a symmetric Nash game against their future selves; or they can be naive and believe that ...
Discussion Paper / Institute for Empirical Macroeconomics , Paper 136

Discussion Paper
Does the progressivity of taxes matter for economic growth?

A sizeable literature has argued that the growth effects of changes in flat rate taxes are small. In this paper, we investigate the relatively unexplored area of the growth effect of changes in the tax structure, in particular, in the progressivity of taxes. Considering such a tax reform seems empirically more relevant than considering changes in flat tax rates. We construct a general equilibrium model of endogenous growth in which there is heterogeneity in income and in the tax rates. We limit heterogeneity to two types, skilled and unskilled, and posit that the probability of staying or ...
Discussion Paper / Institute for Empirical Macroeconomics , Paper 138

Discussion Paper
Urban structure and growth

Most economic activity occurs in cities. This creates a tension between local increasing returns, implied by the existence of cities, and aggregate constant returns, implied by balanced growth. To address this tension, we develop a theory of economic growth in an urban environment. We show how the urban structure is the margin that eliminates local increasing returns to yield constant returns to scale in the aggregate, thereby implying a city size distribution that is well described by a power distribution with coefficient one: Zipf's Law. Under strong assumptions our theory produces Zipf's ...
Discussion Paper / Institute for Empirical Macroeconomics , Paper 141

Discussion Paper
Ben-Porath meets skill-biased technical change: a theoretical analysis of rising inequality

In this paper we present an analytically tractable general equilibrium overlapping-generations model of human capital accumulation, and study its implications for the evolution of the U.S. wage distribution from 1970 to 2000. The key feature of the model, and the only source of heterogeneity, is that individuals differ in their ability to accumulate human capital. Therefore, wage inequality results only from differences in human capital accumulation. We examine the response of this model to skill-biased technical change (SBTC) theoretically. We show that in response to SBTC, the model ...
Discussion Paper / Institute for Empirical Macroeconomics , Paper 144

Discussion Paper
Learning your earning: are labor income shocks really very persistent?

The current literature offers two views on the nature of the labor income process. According to the first view, which we call the restricted income profiles (RIP) model, individuals are subject to large and very persistent shocks while facing similar life-cycle income profiles (MaCurdy, 1982). According to the alternative view, which we call the heterogeneous income profiles (HIP) model, individuals are subject to income shocks with modest persistence while facing individual-specific income profiles (Lillard and Weiss, 1979). In this paper we study the restrictions imposed by the RIP and HIP ...
Discussion Paper / Institute for Empirical Macroeconomics , Paper 145

Discussion Paper
Dynamic optimal taxation with private information

We study dynamic optimal taxation in a class of economies with private information. Constrained optimal allocations in these environments are complicated and history-dependent. Yet, we show that they can be implemented as competitive equilibria in market economies supplemented with simple tax systems. The market structure in these economies is similar to that in Bewley (1986): agents supply labor and trade risk-free claims to future consumption, subject to a budget constraint and a debt limit. Optimal taxes are conditioned only on two observable characteristicsan agents accumulated stock of ...
Discussion Paper / Institute for Empirical Macroeconomics , Paper 140

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