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Keywords:Incomplete Markets 

Working Paper
The Politics of Flat Taxes

We study the determination of flat tax systems using a workhorse macroeconomic model of inequality. Our first result is that, despite the multidimensional policy space, equilibrium policies are typically unique (up to a fine grid numerical approximation). The majority voting outcome features (i) zero labor income taxation, (ii) simultaneous use of capital income and consumption taxation, and (iii) generally low transfers. We discuss the role of three factors?the initial heterogeneity in sources of income, the mobility of income and wealth, and the forward-looking aspect of voting?in ...
Working Papers , Paper 14-42R

Working Paper
Time-Inconsistent Optimal Quantity of Debt

A key property of the Aiyagari-type heterogeneous-agent models is that the equilibrium interest rate of public debt lies below the time discount rate. This fundamental property, however, implies that the Ramsey planner’s fiscal policy may be time-inconsistent because the forward-looking planner would have a dominant incentive to issue plenty of debt such that all households are fully self-insured against idiosyncratic risk. But such a full self-insurance allocation may be paradoxical because, to achieve it, the optimal labor tax rate may approach 100% and aggregate consumption may approach ...
Working Papers , Paper 2020-037

Working Paper
Should Capital Be Taxed?

We design an infinite-horizon heterogeneous-agents and incomplete-markets model to demonstrate analytically that in the absence of any redistributional effects of government policies, optimal capital tax is zero despite capital overaccumulation under precautionary savings and borrowing constraints. Our result indicates that public debt is a better tool than capital taxation to restore aggregate productive efficiency.
Working Papers , Paper 2020-033

Working Paper
Optimal Fiscal Policies under Market Failures

The aggregate capital stock in a nation can be overaccumulated for many different reasons. This paper studies which policy or policy mix is more effective in achieving the socially optimal (golden rule) level of aggregate capital stock in an infinite-horizon heterogeneous-agents incomplete-markets economy where capital is over-accumulated for two distinct reasons: (i) precautionary savings and (ii) production externalities. By solving the Ramsey problem analytically along the entire transitional path, we show that public debt and capital taxation play very distinct roles in dealing with the ...
Working Papers , Paper 2020-002

Working Paper
The Ramsey Steady State Conundrum in Heterogeneous-Agent Economies

In infinite horizon, heterogeneous-agent and incomplete-market models, the existence of an interior Ramsey steady state is often assumed instead of proven. This paper demonstrates the critical importance of proving the existence of the Ramsey steady state when conducting theoretical or numerical analysis on optimal fiscal policies. We use an analytically tractable heterogeneous-agent model to make our point by showing that the conditions for the existence of an interior Ramsey steady state are quite sensitive to structural parameter values. In particular, we show that researchers may draw ...
Working Papers

Working Paper
Designing Unemployment Insurance for Developing Countries

The benefits of implementing Unemployment Insurance Savings Accounts (UISAs) are studied in the presence of the multiple sources of information frictions often existing in developing countries. A benchmark incomplete markets economy is calibrated to Mexico in the early 2000s. The unconstrained optimal allocation would imply very large welfare gains relative to the benchmark economy (similar to an increase in consumption of 23% in every period). More importantly, in presence of multiple sources of information frictions, about half of those potential gains can be accrued through the ...
Working Papers , Paper 2018-6

Working Paper
Capital Income Taxation with Housing

This paper quantitatively investigates capital income taxation in the general-equilibrium overlap-ping generations model with household heterogeneity and housing. Housing tax policy is found to affect how capital income should be taxed, due to substitution between housing and non-housing capital. Given the existing U.S. preferential tax treatment for owner-occupied housing, the optimal capital income tax rate is close to zero (1%), contrary to the high optimal capital income tax rate found with overlapping generations models without housing. A low capital income tax rate improves welfare by ...
Working Papers , Paper 20-02

Working Paper
Don’t Tax Capital — Optimal Ramsey Taxation in Heterogeneous Agent Economies with Quasi-Linear Preferences

We build a tractable heterogeneous-agent incomplete-markets model with quasi-linear preferences to address a set of long-standing issues in the optimal Ramsey taxation literature. The tractability of our model enables us to analytically prove the existence of a Ramsey steady state and establish several novel results: (i) Depending on the government's capacity to issue debt, there can exist different types of Ramsey steady states but they have the same implications for optimal long-run tax policies. (ii) The optimal capital tax is exclusively zero in a Ramsey steady state regardless of the ...
Working Papers , Paper 2019-007

Working Paper
Optimal Ramsey Taxation in Heterogeneous Agent Economies with Quasi-Linear Preferences

We build a tractable heterogeneous-agent incomplete-markets model with quasi-linear preferences to address a set of long-standing issues in the optimal Ramsey taxation literature. The tractability of our model enables us to analytically prove the existence of the Ramsey steady state and establish several novel results within standard parameter spaces: (i) The failure of the modified golden rule (MGR) cannot by itself justify a positive steady-state capital tax—we prove that in the absence of wealth redistribution effects the optimal capital tax is exclusively zero in the Ramsey steady state ...
Working Papers , Paper 2019-007

Working Paper
Are Government Bonds Net Wealth or a Liability? ---Optimal Debt and Taxes in an OLG Model with Uninsurable Income Risk

A positive national debt is often rationalized either by the assumption of dynamic inefficiency in an overlapping-generations (OLG) model, or by the hypothesis of heterogeneous-agents and incomplete-markets (HAIM) in an infinite horizon model. Both assumptions imply insufficient private liquidity to support private saving and investment, thus calling for a positive level of public debt to improve social welfare. However, since public debt is financed often by distortionary future taxes, optimal debt and tax policies ought to be studied jointly in a single framework. In this paper we use a ...
Working Papers , Paper 2020-007

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