nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2010‒10‒30
29 papers chosen by
Christian Zimmermann
University of Connecticut

  1. The labor wedge as a matching friction By Anton A. Cheremukhin; Paulina Restrepo-Echavarria
  2. Understanding the effect of productivity changes on international relative prices: the role of news shocks By Deokwoo Nam; Jian Wang
  3. Endogenous On-the-job Search and Frictional Wage Dispersion By Matthias S. Hertweck
  4. Banks, Credit Market Frictions, and Business Cycles By Ali Dib
  5. The Welfare Gains of Age Related Optimal Income Taxation By Bastani, Spencer; Blomquist, Sören; Micheletto, Luca
  6. Are Unit Root Tests Useful in the Debate over the (Non)Stationarity of Hours Worked? By Amélie Charles; Olivier Darné; Fabien Tripier
  7. Credit Crunch in a Small Open Economy By Michał Brzoza-Brzezina; Krzysztof Makarski
  8. A Growth Model of Global Imbalances By Lionel Artige; Laurent Cavenaile
  9. An Asymptotically Non-Scale Endogenous Growth Model By Harashima, Taiji
  10. Credit risk transfers and the macroeconomy By Ester Faia
  11. Imperfect Interbank Markets and the Lender of Last Resort By Tarishi Matsuoka
  12. Time Preference and the Distributions of Wealth and Income By Suen, Richard M. H.
  13. Approximate and Almost-Exact Aggregation in Dynamic Stochastic Heterogeneous-Agent Models By Reiter, Michael
  14. On the game-theoretic foundations of competitive search equilibrium. By Kircher, Philipp; Galenianos, Manolis
  15. Input and output inventories in general equilibrium By Matteo Iacoviello; Fabio Schiantarelli; Scott Schuh
  16. Market power and efficiency in a search model. By Galenianos, Manolis; Kircher, Philipp; Virag, Gabor
  17. Explaining the Effects of Government Spending Shocks By Zubairy, Sarah
  18. The Effect of Social Security, Demography and Technology on Retirement By Ferreira, Pedro Cavalcanti; Santos, Marcelo Rodrigues dos
  19. Labor Market Policy Instruments and the Role of Economic Turbulence By Philip Schuster
  20. Sustainable Public Debt, Credit Constraints, and Social Welfare By Real Arai; Takuma Kunieda
  21. Is there a fiscal free lunch in a liquidity trap? By Christopher J. Erceg; Jesper Linde
  22. Liquidity and asset market dynamics By Guillaume Rocheteau; Randall Wright
  23. Sorting versus screening: search frictions and competing mechanisms. By Eeckhout, Jan; Kircher, Philipp
  24. Pricing, Advertising, and Market Structure with Frictions By Gomis-Porqueras, Pedro; Julien, Benoit; Wang, Chengsi
  25. Hayashi meets Kiyotaki and Moore: a theory of capital adjustment costs By Pengfei Wang; Yi Wen
  26. R&D-Based Growth in the Post-Modern Era. By Holger Strulik; Klaus Prettner; Alexia Prskawetz
  27. Equilibrium Price Dispersion and Rigidity: A New Monetarist Approach By Allen Head; Lucy Qian Liu; Guido Menzio; Randall Wright
  28. Growth and Distributional Effects of Inflation with Progressive Taxation By Seiya , Fujisaki; Kazuo, Mino
  29. Can Sustained Economic Growth and Declining Population Coexist? Barro-Becker Children Meet Lucas By Ceyhun Elgin; Semih Tumen

  1. By: Anton A. Cheremukhin; Paulina Restrepo-Echavarria
    Abstract: The labor wedge accounts for a large fraction of business cycle fluctuations. This paper uses a search and matching model to decompose the labor wedge into three classes of labor market frictions and evaluate their role. We find that frictions to job destruction and bargaining commonly considered in the search literature are not helpful in explaining the labor wedge. We also identify an asymmetric effect of separation, bargaining and matching frictions on unemployment, as well as a potential solution to Shimer's puzzle.
    Keywords: Business cycles - Econometric models ; Labor supply ; Unemployment ; Labor turnover
    Date: 2010
  2. By: Deokwoo Nam; Jian Wang
    Abstract: The terms of trade and the real exchange rate of the US appreciate when the US labor productivity increases relative to the rest of the world. This finding is at odds with predictions from standard international macroeconomic models. In this paper, we find that incorporating news shocks to total factor productivity (TFP) in an otherwise standard dynamic stochastic general equilibrium (DSGE) model with variable capital utilization can help the model replicate the above empirical finding. Labor productivity increases in our model after a positive news shock to TFP because of an increase in capital utilization. Under some plausible calibrations, the wealth effect of good news about future productivity can increase domestic demand strongly and induce an increase in home prices relative to foreign prices.
    Keywords: Business cycles - Econometric models ; International finance ; International trade - Econometric models ; Labor productivity
    Date: 2010
  3. By: Matthias S. Hertweck (University of Basel)
    Abstract: This paper addresses the large degree of frictional wage dispersion in US data. The standard job matching model without on-the-job search cannot replicate this pattern. With on-the-job search, however, unemployed job searchers are more will- ing to accept low wage offers since they can continue to seek for better employment opportunities. This explains why observably identical workers may be paid very dif- ferently. Therefore, we examine the quantitative implications of on-the-job search in a stochastic job matching model. Our key result is that the inclusion of variable on-the-job search increases the degree of frictional wage dispersion by an order of a magnitude.
    Keywords: Matching, On-the-job Search, Wage Dispersion
    JEL: E24 J31 J64
    Date: 2010
  4. By: Ali Dib
    Abstract: The author proposes a micro-founded framework that incorporates an active banking sector into a dynamic stochastic general-equilibrium model with a financial accelerator. He evaluates the role of the banking sector in the transmission and propagation of the real effects of aggregate shocks, and assesses the importance of financial shocks in U.S. business cycle fluctuations. The banking sector consists of two types of profitmaximizing banks that offer different banking services and transact in an interbank market. Loans are produced using interbank borrowing and bank capital subject to a regulatory capital requirement. Banks have monopoly power, set nominal deposit and prime lending rates, choose their leverage ratio and their portfolio composition, and can endogenously default on a fraction of their interbank borrowing. Because it is costly to raise capital to satisfy the regulatory capital requirement, the banking sector attenuates the real effects of financial shocks, reduces macroeconomic volatilities, and helps stabilize the economy. The model also includes two unconventional monetary policies (quantitative and qualitative easing) that reduce the negative impacts of financial crises.
    Keywords: Economic models; Business fluctuations and cycles; Credit and credit aggregates; Financial stability
    JEL: E32 E44 G1
    Date: 2010
  5. By: Bastani, Spencer (Uppsala Center for Fiscal Studies); Blomquist, Sören (Uppsala Center for Fiscal Studies); Micheletto, Luca (Uppsala Center for Fiscal Studies)
    Abstract: Using a calibrated overlapping generations model we quantify the welfare gains of an age dependent income tax. Agents face uncertainty regarding future abilities and can by saving transfer consumption across periods. The welfare gain of switching from an age-independent to an age-dependent nonlinear tax amounts in our benchmark model to around three percent of GDP. The gains are particularly high when there are restrictions on debt policy. The gains of using a nonlinear- as opposed to a linear tax are even larger. Surprisingly, it is of secondary importance to optimally choose the tax on interest income.
    Keywords: labor income taxation; capital income taxation; age-dependent taxes; OLG model
    JEL: H21 H23 H24
    Date: 2010–10–25
  6. By: Amélie Charles (Audencia Nantes, School of Management - Audencia, School of Management); Olivier Darné (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272); Fabien Tripier (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272)
    Abstract: This article compares the performances of some non-stationarity tests on simulated series, using the business-cycle model of Chang et al. (2007) [Y. Chang, T. Doh, F. Schorfheide, (2007). Non-stationary Hours in a DSGE Model. Journal of Money, Credit and Banking 39, 357-1373] as data generating process. Overall, Monte Carlo simulations show that the efficient unit root tests of Ng and Perron (2001) [Ng, S., Perron, P. (2001). Lag length selection and the construction of unit root tests with good size and power. Econometrica 69, 1519-1554] are more powerful than the standard non-stationarity tests (ADF and KPSS). More precisely, these efficient tests are able to reject frequently the unit-root hypothesis on simulated series using the best specification of business-cycle model found by Chang et al. (2007), in which hours worked are stationary with adjustment costs.
    Keywords: unit root rest; DSGE models; hours worked
    Date: 2010–10–18
  7. By: Michał Brzoza-Brzezina (National Bank of Poland, Economic Institute; Warsaw School of Economics); Krzysztof Makarski (National Bank of Poland, Economic Institute; Warsaw School of Economics)
    Abstract: We construct an open-economy DSGE model with a banking sector to analyse the impact of the recent credit crunch on a small open economy. In our model the banking sector operates under monopolistic competition, collects deposits and grants collateralized loans. Collateral effects amplify monetary policy actions, interest rate stickiness dampens the transmission of interest rates, and financial shocks generate non-negligible real and nominal effects. As an application we estimate the model for Poland - a typical small open economy. According to the results, financial shocks had a substantial, though not overwhelming, impact on the Polish economy during the 2008/09 crisis, lowering GDP by approximately 1.5 percent.
    Keywords: credit crunch, monetary policy, DSGE with banking sector
    JEL: E32 E44 E52
    Date: 2010
  8. By: Lionel Artige; Laurent Cavenaile
    Abstract: Global imbalances are considered as one of the main culprits of the financial crisis which started in the United States in 2007. This paper aims to build a two- country deterministic growth framework with overlapping generations to investigate the macroeconomic effects of global imbalances that originate from forced saving in one country. This framework allows us to study the existence of a dynamic equi- librium with global imbalances, the impact on the world interest rate, and the short-run and long-run welfare implications on the young and old generations in both countries. In particular, we show that global imbalances worsen the welfare of the young generations of both countries in the short run and can offset the potential gain of the international integration of capital markets.
    Date: 2010
  9. By: Harashima, Taiji
    Abstract: This paper presents an endogenous growth model in which the economy grows without either scale effects or population growth. The key mechanism is substitution between investments in capital and technology when firms face increasing uncompensated knowledge spillovers. The model indicates that, as population increases, firms invest more in capital than in technology because there are more uncompensated knowledge spillovers as a result of both Marshall-Arrow-Romer and Jacobs externalities. Consequently, scale effects asymptotically diminish as population increases and disappear at a sufficiently large population while the economy can grow without population growth. In present-day industrialized economies, therefore, both scale effects and population growth have little influence over economic growth.
    Keywords: Endogenous growth; Scale effects; Non scale model; Balanced growth; Knowledge spillovers
    JEL: O41 O33 E10
    Date: 2010–10–20
  10. By: Ester Faia (Goethe University Frankfurt, House of Finance, office 3.47, Grueneburgplatz 1, 60323, Frankfurt am Main, Germany.)
    Abstract: The recent financial crisis has highlighted the limits of the "originate to distribute" model of banking, but its nexus with the macroeconomy and monetary policy remains unexplored. I build a DSGE model with banks (along the lines of Holmström and Tirole [28] and Parlour and Plantin [39]) and examine its properties with and without active secondary markets for credit risk transfer. The possibility of transferring credit reduces the impact of liquidity shocks on bank balance sheets, but also reduces the bank incentive to monitor. As a result, secondary markets allow to release bank capital and exacerbate the effect of productivity and other macroeconomic shocks on output and inflation. By offering a possibility of capital recycling and by reducing bank monitoring, secondary credit markets in general equilibrium allow banks to take on more risk. JEL Classification: E3, E5, G3.
    Keywords: credit risk transfer, dual moral hazard, monetary policy, liquidity, welfare.
    Date: 2010–10
  11. By: Tarishi Matsuoka (Graduate School of Economics, Kyoto University)
    Abstract: This paper presents a monetary model in which interbank markets bear limited commitment to contracts. Limited commitment reduces the proportion of assets that can be used as collateral, and thus banks with high liquidity demands face borrowing constraints in interbank markets. These constraints can be relieved by the central bank (a lender of last resort) through the provision of liquidity loans. I show that the constrained-efficient allocation can be decentralized by controlling only the money growth rate if commitment to interbank contracts is not limited. Otherwise, a proper combination of central bank loans and monetary policy is needed to bring the market equilibrium into a state of constrained efficiency.
    Keywords: Overlapping generations, money, interbank markets, limited commitment, the lender of last resort
    JEL: E42 E51 G21
    Date: 2010–10
  12. By: Suen, Richard M. H.
    Abstract: This paper presents a dynamic competitive equilibrium model in which heterogeneity in time preferences alone can generate the observed patterns of wealth and income inequality in the United States. This model generalizes the standard deterministic neoclassical growth model by introducing (i) a direct preference for wealth by the consumers and (ii) human capital formation. The first feature prevents the wealth distribution from collapsing into a degenerate distribution. The second feature generates a strong positive correlation between earnings and wealth across agents. A calibrated version of this model is able to replicate the wealth and income distributions of the United States.
    Keywords: Inequality; Heterogeneity; Time Preference; Human Capital
    JEL: D31 O15 E21
    Date: 2010–09
  13. By: Reiter, Michael (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)
    Abstract: The paper presents a new method to solve DSGE models with a great number of heterogeneous agents. Using tools from systems and control theory, it is shown how to reduce the dimension of the state and the policy vector so that the reduced model approximates the original model with high precision. The method is illustrated with a stochastic growth model with incomplete markets similar to Krusell and Smith (1998), and with a model of heterogeneous firms with state-dependent pricing. For versions of those models that are nonlinear in individual variables, but linearized in aggregate variables, approximations with 50 to 200 state variables deliver solutions that are precise up to machine precision. The paper also shows how to reduce the state vector even further, with a very small reduction in precision.
    Keywords: Heterogeneous agents, aggregation, model reduction
    JEL: C63 C68 E21
    Date: 2010–10
  14. By: Kircher, Philipp; Galenianos, Manolis
    Abstract: We provide a unified directed search framework with general production and matching specifications that encompasses most of the existing literature. We prove the existence of subgame perfect Nash equilibria in pure firm strategies in a finite version of the model. We use this result to derive a more complete characterization of the equilibrium set for the finite economy and to extend convergence results as the economy becomes large to general production and matching specifications. The latter extends the micro-foundations for the standard market-utility assumption used in competitive search models with a continuum of agents to new environments.
    Date: 2010
  15. By: Matteo Iacoviello; Fabio Schiantarelli; Scott Schuh
    Abstract: We build and estimate a two-sector (goods and services) dynamic stochastic general equilibrium model with two types of inventories: materials (input) inventories facilitate the production of finished goods, while finished goods (output) inventories yield utility services. The model is estimated using Bayesian methods. The estimated model replicates the volatility and cyclicality of inventory investment and inventory-to-target ratios. Although inventories are an important element of the model's propagation mechanism, shocks to inventory efficiency or management are not an important source of business cycles. When the model is estimated over two subperiods (pre and post 1984), changes in the volatility of inventory shocks or in structural parameters associated with inventories, such as the input inventory to output ratio, play a small role in reducing the volatility of output.
    Date: 2010
  16. By: Galenianos, Manolis; Kircher, Philipp; Virag, Gabor
    Abstract: We build a theoretical model to study the welfare effects and resulting policy implications of firms’ market power in a frictional labor market. Our environment has two main characteristics: wages play a role in allocating labor across firms and there is a finite number of agents. We find that the decentralized equilibrium is inefficient and that the firms’ market power results in the misallocation of workers from the highto the low-productivity firms. A minimum wage forces the low-productivity firms to increase their wage, leading them to hire even more often thereby exacerbating the inefficiencies. Moderate unemployment benefits can increase welfare because they limit firms’ market power by improving the workers’ outside option.
    Date: 2010
  17. By: Zubairy, Sarah
    Abstract: The objective of this paper is to identify and explain effects of a government spending shock. After accounting for large military events, I find that in response to a structural unanticipated government spending shock, output, hours, consumption and wages all rise, whereas investment falls on impact. I construct and estimate a dynamic general equilibrium model featuring deep habit formation and show that it successfully explains these effects. In particular, deep habits give rise to countercyclical markups and thus act as transmission mechanism for the effects of government spending shocks on private consumption and wages. In addition, I show that deep habits significantly improve the fit of the model compared to a model with habit formation at the level of aggregate goods.
    Keywords: deep habits; fiscal shocks; government spending; countercyclical markups
    JEL: C51 E62 E32
    Date: 2010–05–24
  18. By: Ferreira, Pedro Cavalcanti; Santos, Marcelo Rodrigues dos
    Abstract: This article investigates the causes in the reduction of labor force participation ofthe old. We argue that the changes in social security policy, in technology and indemography may account for most of the changes in retirement over the second partof the last century in the U.S. economy. We develop a dynamic general equilibriummodel with endogenous retirement that embeds social security legislation. The modelis able to match very closely the increase in the retirement rate of males aged 65 andolder. It also quanti es the isolated impact on retirement and on the solvency of thesocial security system of the di¤erent factors. The model suggests that technologicaland demographic changes had a strong in uence on retirement, so that it would haveincreased signi cantly even if the social security rules had not changed. However, asthe latter became much more generous in the past, changes in social security policycan account not only for a sizeable part of the expansion of retirement, but also for themost of the observed increase in the social security expenses as a share of GDP.
    Date: 2010–10–21
  19. By: Philip Schuster
    Abstract: Times of high unemployment always inspire debates on the role of labor market policy and its optimal implementation. This paper uses a dynamic model of search unemployment and bilateral wage bargaining to characterize optimal labor market policy in a possibly turbulent environment. A firing externality, generated by the existence of a partial unemployment insurance system, distorts the pre-policy equilibrium along three margins: job creation, job acceptance, and job destruction. Optimal policy is characterized by a payroll tax, a firing tax, and a hiring subsidy. Endogenous job acceptance demands that a firing tax and a hiring subsidy have to be set equal in any case and cannot be used to correct for the possible failure of the Hosios condition. In that case the optimal policy mix has to be extended by either an output or recruitment tax/subsidy. It is further shown that the derived policy mix is robust to the introduction of economic turbulence in form of state-dependent worker transitions between skill classes. This is crucial as widely discussed intergroup redistribution schemes, like in-work benefits targeted at low-skilled workers, are rendered considerably less effective in that case. Instead of redistribution from high- to low-skilled workers or from firing firms to unemployed workers, the paper identifies a scheme involving redistribution from firing to hiring firms to be optimal.
    Keywords: Search and matching, employment subsidies, economic turbulence, policy spill-over
    JEL: E24 E61 J08
    Date: 2010–10
  20. By: Real Arai (Institute of Economic Research, Kyoto University); Takuma Kunieda (Department of Economics and Finance, City University of Hong Kong)
    Abstract: Whether the sustainability of public debt is promoted or foiled by credit market imperfections depends upon the fiscal policy rules. Under the golden rule, as credit constraints dissipate, public debt is more likely sustainable, whereas under the balanced budget rule, it is less likely sustainable. We also examine the social welfare under the two different fiscal rules. The balanced budget rule is more beneficial to the super-near future generations than the golden rule, whereas the golden rule is more beneficial to the near future generations than the balanced budget rule. However, to the far future generations, the balanced budget rule once again becomes more beneficial than the golden rule.
    Keywords: Fiscal sustainability; credit constraints; social welfare; heterogeneous agents endogenous growth
    JEL: E63 O40
    Date: 2010–10
  21. By: Christopher J. Erceg; Jesper Linde
    Abstract: This paper uses a DSGE model to examine the effects of an expansion in government spending in a liquidity trap. If the liquidity trap is very prolonged, the spending multiplier can be much larger than in normal circumstances, and the budgetary costs minimal. But given this "fiscal free lunch," it is unclear why policymakers would want to limit the size of fiscal expansion. Our paper addresses this question in a model environment in which the duration of the liquidity trap is determined endogenously, and depends on the size of the fiscal stimulus. We show that even if the multiplier is high for small increases in government spending, it may decrease substantially at higher spending levels; thus, it is crucial to distinguish between the marginal and average responses of output and government debt.
    Date: 2010
  22. By: Guillaume Rocheteau; Randall Wright
    Abstract: We study economies with an essential role for liquid assets in transactions. The model can generate multiple stationary equilibria, across which asset prices, market participation, capitalization, output and welfare are positively related. It can also generate a variety of nonstationary equilibria, even when fundamentals are deterministic and time invariant, including periodic, chaotic, and stochastic (sunspot) equilibria with recurrent market crashes. Some equilibria have asset price trajectories that resemble bubbles growing and bursting. We also analyze endogenous private and public liquidity provision. Sometimes it is efficient to have enough liquid assets to satiate demand; other times it is not.
    Keywords: Liquidity (Economics) ; Asset pricing
    Date: 2010
  23. By: Eeckhout, Jan; Kircher, Philipp
    Abstract: In a market where sellers compete by posting trading mechanisms, we allow for a general search technology and show that its features crucially affect the equilibrium mechanism. Price posting prevails when meetings are rival, i.e., when a meeting by one buyer reduces another buyer's meeting probability. Under price posting buyers reveal their type by sorting ex-ante. Only if the meeting technology is sufficiently non-rival, price posting is not an equilibrium. Multiple buyer types then visit the same sellers who screen ex-post through auctions.
    Date: 2010–07
  24. By: Gomis-Porqueras, Pedro; Julien, Benoit; Wang, Chengsi
    Abstract: This paper develops a model of pricing and advertising in a matching environment with capacity constrained sellers and uncoordinated buyers. Sellers' search intensity attracts buyers only probabilistically through costly informative advertisement. Equilibrium prices and profit maximizing advertising levels are derived and their properties analyzed. The model generates an inverted U-shape relationship between individual advertisement and market tightness which is robust to alternative advertising technologies. The well known empirical fact in the IO literature reflects the trade-off between price and market tightness-matching effects. Finally, in this environment we can alleviate the discontinuity problem, allowing for unique symmetric equilibrium price to be derived.
    Keywords: Directed searching; Advertising; Pricing;Market structure
    JEL: L11 L13 M37
    Date: 2010–10–16
  25. By: Pengfei Wang; Yi Wen
    Abstract: Firm-level investment is lumpy and volatile but aggregate investment is much smoother and highly serially correlated. These different patterns of investment behavior have been viewed as indicating convex adjustment costs at the aggregate level but non-convex adjustment costs at the firm level. This paper shows that financial frictions in the form of collateralized borrowing at the firm level (Kiyotaki and Moore, 1997) can give rise to convex adjustment costs at the aggregate level yet at the same time generate lumpiness in plant-level investment. In particular, our model can (i) derive aggregate capital adjustment cost functions identical to those assumed by Hayashi (1982) and (ii) explain the weak empirical relationship between Tobin’s Q and plant-level investment. Although aggregate adjustment cost functions can be derived from microfoundations, they are subject to the Lucas critique because parameters in such functions may not be structural and policy invariant.>
    Keywords: Capital investments ; Tobin's q
    Date: 2010
  26. By: Holger Strulik; Klaus Prettner; Alexia Prskawetz
    Abstract: Conventional R&D-based growth theory suggests that productivity growth is positively correlated with population size or population growth, an implication which is hard to see in the data. Here we integrate micro-founded fertility and schooling into an otherwise standard R&D-based growth model. We then show how a Beckerian child quality-quantity trade-off explains why higher growth of productivity and income per capita are associated with lower population growth. The medium-run prospects for future economic growth - when fertility is going to be below replacement level in virtually all fully developed countries - are thus much better than predicted by conventional R&D-based growth theory..
    Keywords: Endogenous growth, R&D, declining population, fertility, schooling, human capital, postmodern society, post-transitional fertility.
    Date: 2010–10
  27. By: Allen Head (Department of Economics, Queen's University); Lucy Qian Liu (International Monetary Fund (IMF)); Guido Menzio (Department of Economics, University of Pennsylvania); Randall Wright (Department of Economics, University of Wisconsin-Madison)
    Abstract: Why do some sellers set prices in nominal terms that do not respond to changes in the aggregate price level? In many models, prices are sticky by assumption. Here it is a result. We use search theory, with two consequences: prices are set in dollars since money is the medium of exchange; and equilibrium implies a nondegenerate price distribution. When money increases, some sellers keep prices constant, earning less per unit but making it up on volume, so profit is unaffected. The model is consistent with the micro data. But, in contrast with other sticky-price models, money is neutral.
    Keywords: Search, Sticky Prices, Monetary Policy
    JEL: D43 E51 E52
    Date: 2010–09–03
  28. By: Seiya , Fujisaki; Kazuo, Mino
    Abstract: This paper examines the growth and income distribution effects of inflation in a growing economy with heterogeneous households and progressive income taxation. Assuming that the cash-in-advance constraint applies to investment as well as to consumption spending, we show that a higher growth of monetary supply yields a negative impact on growth and an ambiguous effect on income distribution. Numerical example with plausible parameter values, however, demonstrate that those long-run effects of inflation tax are rather small. In contrast, fiscal distortion caused by progressive taxation yield significant impacts on growth and distribution
    Keywords: Inflation Tax; Progressive Income Tax; Growth; Income Distribution
    JEL: E32 O40
    Date: 2010–10–20
  29. By: Ceyhun Elgin; Semih Tumen
    Date: 2010–11

This nep-dge issue is ©2010 by Christian Zimmermann. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.