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Jel Classification:C61 

Journal Article
Optimal Ramsey Capital Taxation with Endogenous Government Spending

The authors study optimal capital income taxation in heterogeneous agent economies featuring endogenous government spending. Similar to Aiyagari (1995), they find that the long-run optimal capital tax rate should not be zero as long as the competitive equilibrium risk-free interest rate differs from the subjective time discount rate. The authors first argue that this result holds in a wide range of economic environments and is not limited to only the standard incomplete market model with heterogeneous agents. As an example, a decentralized economy with limited commitment is considered. ...
Review , Volume 98 , Issue 4 , Pages 311-327

Working Paper
Optimal monetary policy under model uncertainty without commitment

This paper studies the design of optimal time-consistent monetary policy in an economy where the planner trusts its own model, while a representative household uses a set of alternative probability distributions governing the evolution of the exogenous state of the economy. In such environments, unlike in the original studies of time-consistent monetary policy, managing households' expectations becomes an active channel of optimal policymaking per se, a feature that the paternalistic government seeks to exploit. We adapt recursive methods in the spirit of Abreu, Pearce, and Stacchetti (1990) ...
Working Papers , Paper 13-20

Working Paper
Contingent Debt and Performance Pricing in an Optimal Capital Structure Model with Financial Distress and Reorganization

Building on the trade-off between agency costs and monitoring costs, we develop a dynamic theory of optimal capital structure with financial distress and reorganization. Costly monitoring eliminates the agency friction and thus the risk of inefficient liquidation. Our key assumption is that monitoring cannot be applied instantaneously. Rather, transitions between agency and monitoring are subject to search frictions. In the optimal contract, the firm seeks a monitoring opportunity whenever it is financially distressed, i.e., when the risk of liquidation is high. If a monitoring opportunity ...
Working Paper , Paper 18-17

Working Paper
Implementing the Modified Golden Rule? Optimal Ramsey Capital Taxation with Incomplete Markets Revisited

What is the prescription of Ramsey capital taxation in the long run? Aiyagari (1995) addressed the question in a heterogeneous-agent incomplete-markets (HAIM) economy, showing that a positive capital tax should be imposed to implement the so-called modified golden rule (MGR). This paper revisits the long-standing issue. We first show that the Aiyagari?s result holds if the shadow price of raising government revenues through distorting taxes converges to zero in the limit at the Ramsey optimum. This ?if? is clearly a strong condition. As long as the condition fails to hold, we show (i) there ...
Working Papers , Paper 2017-3

Working Paper
Measuring Ambiguity Aversion

We confront the generalized recursive smooth ambiguity aversion preferences of Klibanoff, Marinacci, and Mukerji (2005, 2009) with data using Bayesian methods introduced by Gallant and McCulloch (2009) to close two existing gaps in the literature. First, we use macroeconomic and financial data to estimate the size of ambiguity aversion as well as other structural parameters in a representative-agent consumption-based asset pricing model. Second, we use estimated structural parameters to investigate asset pricing implications of ambiguity aversion. Our structural parameter estimates are ...
Finance and Economics Discussion Series , Paper 2015-105

Working Paper
Does Smooth Ambiguity Matter for Asset Pricing?

We use the Bayesian method introduced by Gallant and McCulloch (2009) to estimate consumption-based asset pricing models featuring smooth ambiguity preferences. We rely on semi-nonparametric estimation of a flexible auxiliary model in our structural estimation. Based on the market and aggregate consumption data, our estimation provides statistical support for asset pricing models with smooth ambiguity. Statistical model comparison shows that models with ambiguity, learning and time-varying volatility are preferred to the long-run risk model. We analyze asset pricing implications of the ...
International Finance Discussion Papers , Paper 1221

Working Paper
Risk Management for Sovereign Debt Financing with Sustainability Conditions

We develop a model of debt sustainability analysis with optimal financing decisions in the presence of macroeconomic, financial and fiscal uncertainty. We define a coherent measure of refinancing risk, and trade off the risks of debt stock and flow dynamics, subject to debt sustainability constraints and endogenous risk and term premia. We optimize both static and dynamic financing strategies, compare them with several simple rules and consol financing to demonstrate economically significant effects of optimal financing, and show that the stock-flow tradeoff can be critical for ...
Globalization Institute Working Papers , Paper 367

Working Paper
Growth and Welfare Gains from Financial Integration Under Model Uncertainty

We build a robustness (RB) version of the Obstfeld (1994) model to study the effects of financial integration on growth and welfare. Our model can account for the empirically observed heterogeneity in the relationship between growth and volatility for different countries. The calibrated model shows that financial integration leads to significantly larger gains in growth and welfare for advanced countries than developing countries, with some developing countries experiencing growth and welfare loss in financial integration. Our analytical solutions help uncover the key mechanisms by which this ...
Research Working Paper , Paper RWP 18-12

Report
The dynamics of automobile expenditures

This paper presents a dynamic model for light motor vehicles. Consumers solve an optimal stopping problem in deciding if they want a new automobile and when in the model year to purchase it. This dynamic approach allows for determining how the mix of consumers evolves over the model year and for measuring consumers' substitution patterns across products and time. I find that temporal substitution is significant, driving consumers' entry into and exit from the market. Through counterfactuals, I show that because consumers will temporarily substitute to a large degree, failure to account for ...
Staff Reports , Paper 394

Working Paper
Portfolio choice with house value misperception

Households systematically overvalue or undervalue their houses. We compute house value misperception as the difference between self-reported and market house values. Misperception is sizable, countercyclical, and persistent. We find that a 1 percent increase in house overvaluation results, on average, in a 4.56 percent decrease in the share of risky stock holdings for those households that participate in the stock market. We then build a rational inattention model in which households make decisions based on their perceived level of housing wealth. Numerical simulations generate the effects of ...
Working Papers , Paper 17-16

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