nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2005‒09‒02
six papers chosen by
Christian Zimmermann
University of Connecticut

  1. Does Income Inequality Lead to Consumption Inequality? Evidence and Theory By Dirk Krueger; Fabrizio Perri
  3. Three Equations Generating an Industrial Revolution? By Michele Boldrin; Larry E. Jones; Aubhik Khan
  4. From Busts to Booms in Babies and Goodies By Michele Boldrin; Larry E. Jones; Alice Schoonbroodt
  5. The Method of Endogenous Gridpoints for Solving Dynamic Stochastic Optimization Problems By Christopher D. Carroll
  6. Unexploited Connections Between Intra- and Inter-temporal Allocation By Thomas F. Crossley; Hamish W. Low

  1. By: Dirk Krueger (University of Frankfurt, NBER, CEPR, and CFS); Fabrizio Perri (New York University, Federal Reserve Bank of Minneapolis)
    Abstract: Using data from the Consumer Expenditure Survey we first document that the recent increase in income inequality in the US has not been accompanied by a corresponding rise in consumption inequality. Much of this divergence is due to different trends in within-group inequality, which has increased significantly for income but little for consumption. We then develop a simple framework that allows us to analytically characterize how within-group income inequality affects consumption inequality in a world in which agents can trade a full set of contingent consumption claims, subject to endogenous constraints emanating from the limited enforcement of intertemporal contracts (as in Kehoe and Levine, 1993). Finally, we quantitatively evaluate, in the context of a calibrated general equilibrium production economy, whether this set-up, or alternatively a standard incomplete markets model (as in Ayiagari 1994), can account for the documented stylized consumption inequality facts from the US data.
    Keywords: Limited Enforcement, Risk Sharing, Consumption Inequality
    JEL: E21 D91 D63 D31 G22
    Date: 2005–01–15
  2. By: Marta González; Josep Pijoan-Mas (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: This paper quantifies the macroeconomic and distributional implications of an array of flat tax reforms for Spain. A standard general equilibrium economy with heterogeneous agents is used to infer the behavioral parameters of individuals and to evaluate the impact of the tax reforms. We find that a revenue neutral reform with a marginal tax equal to 17.42% and a fixed deduction equal to 15% of per capita income will yield increases in aggregate consumption and labor productivity equal to 7.6% and 2.5% respectively. Admittedly, this type of reforms also generate increases in the gini indices of after tax income and consumption. However, a revenue neutral flat tax reform with a marginal tax equal to 23.37% and a fixed deduction equal to 35% still displays aggregate gains and has the good property that people in the lowest quintile of wage distribution pay lower taxes and enjoy higher consumption than under the current income tax.
    Keywords: Income tax, policy reform, heterogeneous agents, general equilibrium.
    JEL: H31 E62 D31 C68
    Date: 2005–05
  3. By: Michele Boldrin; Larry E. Jones; Aubhik Khan
    Date: 2005–08–31
  4. By: Michele Boldrin; Larry E. Jones; Alice Schoonbroodt
    Date: 2005–08–31
  5. By: Christopher D. Carroll (Department of Economics, The Johns Hopkins University)
    Abstract: This paper introduces a method for solving numerical dynamic stochastic optimization problems that avoids rootfinding operations. The idea is applicable to many microeconomic and macroeconomic problems, including life cycle, buffer-stock, and stochastic growth problems. Software is provided.
    Keywords: Dynamic optimization, precautionary saving, stochastic growth model, endogenous gridpoints, liquidity constraints
    JEL: C6 D9 E2
    Date: 2005–01–18
  6. By: Thomas F. Crossley; Hamish W. Low
    Abstract: This paper shows that a power utility specification of preferences over total expenditure (ie. CRRA preferences) implies that intratemporal demands are in the PIGL/PIGLOG class. This class generates (at most) rank two demand systems and we can test the validity of power utility on cross-section data. Further, if we maintain the assumption of power utility, and within period preferences are not homothetic, then the intertemporal preference parameter is identified by the curvature of Engel curves. Under the power utility assumption, neither Euler equation estimation nor structural consumption function estimation is necessary to identify the power parameter. In our empirical work, we use demand data to estimate the power utility parameter and to test the assumption of the power utility representation. We .nd estimates of the power parameter larger than obtained from Euler equation estimation, but we reject the power specification of within period utility.
    Keywords: elasticity of intertemporal substitution, Euler equation estimation, demand systems
    JEL: D91 E21 D12
    Date: 2005–08

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