nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2005‒01‒23
four papers chosen by
Christian Zimmermann
University of Connecticut

  1. Estimating Macroeconomic Models: A Likelihood Approach By Jesús Fernández-Villaverde; Juan F. Rubio-Ramirez
  2. Comparing Solution Methods for Dynamic Equilibrium Economies By S. B. Aruoba; Jesús Fernández-Villaverde; Juan F. Rubio-Ramirez
  3. On the Optimal Progressivity of the Income Tax Code By Juan Carlos Conesa; Dirk Krueger
  4. Financial Markets and Wages By Claudio Michelacci; Vincenzo Quadrini

  1. By: Jesús Fernández-Villaverde; Juan F. Rubio-Ramirez
    Date: 2005–01–17
  2. By: S. B. Aruoba; Jesús Fernández-Villaverde; Juan F. Rubio-Ramirez
    Date: 2005–01–17
  3. By: Juan Carlos Conesa; Dirk Krueger
    Abstract: This paper computes the optimal progressivity of the income tax code in a dynamic general equilibrium model with household heterogeneity in which uninsurable labor productivity risk gives rise to a nontrivial income and wealth distribution. A progressive tax system serves as a partial substitute for missing insurance markets and enhances an equal distribution of economic welfare. These beneficial effects of a progressive tax system have to be traded off against the efficiency loss arising from distorting endogenous labor supply and capital accumulation decisions. Using a utilitarian steady state social welfare criterion we find that the optimal US income tax is well approximated by a flat tax rate of 17.2% and a fixed deduction of about $9,400. The steady state welfare gains from a fundamental tax reform towards this tax system are equivalent to 1.7% higher consumption in each state of the world. An explicit computation of the transition path induced by a reform of the current towards the optimal tax system indicates that a majority of the population currently alive (roughly 62%) would experience welfare gains, suggesting that such fundamental income tax reform is not only desirable, but may also be politically feasible.
    JEL: E62 H21 H24
    Date: 2005–01
  4. By: Claudio Michelacci; Vincenzo Quadrini
    Abstract: We study a labor market equilibrium model in which firms sign optimal long-term contracts with workers. Firms that are financially constrained offer an increasing wage profile: They pay lower wages today in exchange of higher wages once they become unconstrained and operate at a larger scale. In equilibrium, constrained firms are on average smaller and pay lower wages. In this way the model generates a positive relation between firm size and wages. Using data from the National Longitudinal Survey of Youth (NLSY) we show that the key dynamic properties of the model are supported by the data.
    JEL: G31 J31 E24
    Date: 2005–01

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