“…Table 2 compares some of the model-generated targets with their actual values for the U.S. economy. Given the calibrated level for credit, our economy is characterized by roughly 8% of agents at the borrowing constraint-which we label "constrained agents"-and a total of roughly 21% of borrowers; these values are close to their actual counterparties (Jappelli, 1990;Abrahám and Cárceles-Poveda, 2010;. 13 Unconstrained agents represent about 92% of the population: 79% of the population hold a non-negative level of assets, while 13% of the population hold negative assets, that is, are borrowers.…”
Section: Steady-state Calibrationmentioning
confidence: 98%
“…Total credit is relative to output; the number of borrowers and hand-to-mouth households is relative to total population. Data are fromCastañeda et al (2003) for wealth quintiles and the Gini index,Abrahám and Cárceles-Poveda (2010) for the number of borrowers, and for the number of poor hand-to-mouth households.…”
Contrary to a well-established view, public debt expansions may tighten the household borrowing constraint over time. Within an incomplete-markets model featuring an endogenous borrowing limit, we show that plausible debt-financed fiscal policies generate such tightening through an increase in the interest rate. The tightening makes constrained agents deleverage and reinforces the precautionary saving motive of the unconstrained. This appetite for assets affects factor prices and this, in some cases, amplifies the households' reactions to the policies. For example, the tightening can substantially magnify the government spending multiplier by strengthening the typical negative wealth effect on labor supply induced by the fiscal stimulus. Moreover, the tightening affects political support for the policies mainly through price effects.JEL Classification: E21, E44, E62, H60.
“…Table 2 compares some of the model-generated targets with their actual values for the U.S. economy. Given the calibrated level for credit, our economy is characterized by roughly 8% of agents at the borrowing constraint-which we label "constrained agents"-and a total of roughly 21% of borrowers; these values are close to their actual counterparties (Jappelli, 1990;Abrahám and Cárceles-Poveda, 2010;. 13 Unconstrained agents represent about 92% of the population: 79% of the population hold a non-negative level of assets, while 13% of the population hold negative assets, that is, are borrowers.…”
Section: Steady-state Calibrationmentioning
confidence: 98%
“…Total credit is relative to output; the number of borrowers and hand-to-mouth households is relative to total population. Data are fromCastañeda et al (2003) for wealth quintiles and the Gini index,Abrahám and Cárceles-Poveda (2010) for the number of borrowers, and for the number of poor hand-to-mouth households.…”
Contrary to a well-established view, public debt expansions may tighten the household borrowing constraint over time. Within an incomplete-markets model featuring an endogenous borrowing limit, we show that plausible debt-financed fiscal policies generate such tightening through an increase in the interest rate. The tightening makes constrained agents deleverage and reinforces the precautionary saving motive of the unconstrained. This appetite for assets affects factor prices and this, in some cases, amplifies the households' reactions to the policies. For example, the tightening can substantially magnify the government spending multiplier by strengthening the typical negative wealth effect on labor supply induced by the fiscal stimulus. Moreover, the tightening affects political support for the policies mainly through price effects.JEL Classification: E21, E44, E62, H60.
“…Abraham and Carceles-Poveda (2010) studied a similar model but with aggregate production. The endogenous borrowing constraints depend on shocks and aggregate capital stock, and thus are independent of agents' choices.…”
Unlike the prediction of a frictionless open economy model, long-term average savings and investment rates are highly correlated across countries-a puzzle first identified by Feldstein and Horioka (1980). We quantitatively investigate the impact of two types of financial frictions on this correlation. One is limited enforcement, where contracts are enforced by the threat of default penalties. The other is limited spanning, where the only asset available is noncontingent bonds. We find that the calibrated model with both frictions produces a savings-investment correlation and a volume of capital flows close to the data. To solve the puzzle, the limited enforcement friction needs low default penalties under which capital flows are much lower than those in the data, and the limited spanning friction needs to exogenously restrict capital flows to the observed level. When combined, the two frictions interact to endogenously restrict capital flows and thereby solve the Feldstein-Horioka puzzle.
“…Capital tax cuts in general, such as the one introduced by the Bush administration in 2003 and extended through 2012, have been the subject of intense debate in both academic and policy circles. 1 Supporters of these tax reforms argue that they promote investment and output, and improve e¢ ciency. Opponents, on the other hand, are concerned with the negative wealth distributional consequences of these reforms.…”
Section: Introductionmentioning
confidence: 99%
“…In a similar framework, a related policy prescription by Lucas (1990) was that if the highly distortionary capital income tax were to be replaced by a higher (and less distortionary) labor income tax in the US, households could enjoy signi…cant welfare gains (a 1 percent increase in annual consumption) as the capital income tax cut stimulates 1 The Bush tax reform, known as the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA), encompasses a cut in both capital gains and dividend taxes. This paper however, focuses only on capital gains taxes and aims to address a central question in this literature regarding the elimination of capital income taxes.…”
I quantify the welfare effects of replacing the US capital income tax with higher labor income taxes under international financial integration using a two-country, heterogeneousagent incomplete markets model calibrated to represent the US and the rest of the world. Short-run and long-run factor price dynamics are key: after the tax reform, interest rates rise less under financial openness than in autarky. Therefore, wealthy households gain less. Posttax wages also fall less as a result of the faster capital accumulation, so the poor are hurt less. Hence, the distributional impacts of the reform are significantly dampened relative to autarky although a majority of households prefer the status quo. Aggregate welfare effect to the US is a permanent 0.2% consumption equivalent loss under financial openness which is roughly 15% of the welfare loss under autarky.JEL codes: E62, F41, D52, F68
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