Wealth distribution and fiscal policy

This article is a progress report on research that attempts to include one type of market incompleteness and frictions in macroeconomic models. The focus of the research is the absence of insurance markets in which individual-specific risks may be insured against. The article describes some areas where this type of research has been and promises to be particularly useful, including consumption and saving, wealth distribution, asset markets, business cycles, and fiscal policies. The article also describes work in each of these areas that was presented at a conference sponsored by the Federal Reserve Bank of Minneapolis in the fall of 1993.

The (Intertemporal) Equity-Efficiency Trade-Off of Fiscal Consolidation

We study the dynamics of the distribution of overlapping generation economy with finitely lived agents and inter-generational transmission of wealth. Financial markets are incomplete, exposing agents to both labor income and capital income risk. We show that the stationary wealth distribution is a Pareto distribution in the right tail and that it is capital income risk, rather than labor income, that drives the properties of the right tail of the wealth distribution. We also study analytically the dependence of the distribution of wealth, of wealth inequality in particular, on various fiscal policy instruments like capital income taxes and estate taxes. We show that capital income and estate taxes can significantly reduce wealth inequality. Finally, we characterize optimal redistributive taxes with respect to a utilitarian social welfaremeasure. Social welfare is maximized short of minimal wealth inequality and with zero estate taxes. Finally, we study the effects of different degrees of social mobility on the wealth distribution.

Fiscal Policy with Heterogeneous Agents, Banks and Nancial Frictions

This paper develops a multi-country post-Kaleckian model that incorporates the role of the government. One key novelty of the model is that it integrates cross-country effects of changes in both income distribution and fiscal policy. The model is used to estimate econometrically the effects of income distribution and fiscal policy on the components of aggregate demand and the budget balance in EU15 countries. The results show that a simultaneous increase in the wage share in all EU15 countries would increase demand and the primary budget balance in all countries. A simultaneous increase in government spending turns out to boost economic activity in all the EU15 countries, indicating the positive economic effects of expansionary fiscal policy. Moreover, a progressive tax policy that would be implemented simultaneously at the EU level would lead to an increase in output in all countries.

The paper provides a survey of fiscal and monetary policies during the 1930s under the Hoover and Roosevelt Administrations and how they influenced the policies during the recent Great Recession. The discussion of the causal impacts of monetary policy focuses on papers written in the last decade and the findings of scholars using dynamic structural general equilibrium modeling. The discussion of fiscal policy shows why economists do not see the New Deal as a Keynesian stimulus, describes the significant shift toward excise taxation during the 1930s, and surveys estimates of the impact of federal spending on local economies. The paper concludes with discussion of the lessons for the present from 1930s monetary and fiscal policy.

This paper presents a macro simulation model to quantify the effects of stabilisation packages on the distribution of income and wealth. It is a macro-micro model since it combines macroeconomic aspects with the microeconomic optimising behaviour characteristic of computable general equilibrium models. It can be applied to many developing countries by changing the institutional characteristics that describe commodity markets, financial markets and labour markets. Since the simulation package incorporated quite a large number of closures, the model is referred to as a maquette. The paper closes with illustrative simulations of the maquette showing how the distribution of income and wealth of a primary exporting economy is likely to be affected by alternative fiscal, monetary and exchange rate policies in response to a reduction in the availability of external funds to finance a fiscal deficit ...

This paper considers an endogenous growth model with public capital and heterogeneous agents. Heterogeneity is due to differences in discount factors and inherent abilities. This allows us to closely approximate the 2007 U.S. income and wealth distributions. Government expenditures, including public investment, are financed through a progressive income tax along with a flat tax on consumption. Three revenue-neutral fiscal policy reforms are considered: (i) an increase in the degree of progressivity of the tax schedule that reduces the after-tax income distribution Gini coefficient to its lowest value over the period 1979–2009, (ii) a reduction in the progressivity ratio that causes the Gini coefficient of the wealth distribution to come close to 1, and (iii) an increase in the fraction of output allocated to public investment that has the same positive impact on the growth rate as reform (ii). It is shown that increasing investment in public capital is the only type of policy that simultaneously enhances growth and reduces both types of inequality (income and wealth). We also find that the public-investment-to-output ratio that maximizes social welfare crucially depends on the elasticity of the labor supply. With a more elastic labor supply the optimal ratio is 4.40%, whereas with a less elastic labor supply it is 5.53%.

We develop a dynamic model economy where self-employed entrepreneurs allocate their net worth to their firm capital and risk-less government bonds, facing borrowing constraints, uninsurable labour endowment and capital depreciation risk. We derive a numerical approximation of the model's equilibrium and compare it with a benchmark economy with no capital risk. Unlike labour endowment risk, capital risk reduces aggregate capital accumulation and wages and generates a positive risk premium. Low-(high-) net-worth entrepreneurs, whose consumption depends primarily on labour (financial) income, hold higher (lower) capital risk exposure. These patterns exacerbate inequality by increasing the share of financially constrained individuals and fattening the tails of the net worth distribution. Fiscal policy affects these outcomes by redistributing resources and affecting the risk premium. Capital tax cuts benefit more low-or high-net-worth entrepreneurs, depending on whether taxes on bonds or labour income finance them.

The Perpetual Youth model is widely used in macroeconomics to assess the intergenerational effects of fiscal and monetary policy. Little attention has been devoted to the effects in terms of instantaneous wealth distribution. In this paper, the instantaneous non-human wealth distribution that characterizes the steady state equilibrium of a Perpetual Youth model is assessed and, for this scope, a Generalized Lorenz Curve of wealth distribution at the steady state equilibrium is derived. I find that: i) an increase in interest rates increases financial wealth concentration; ii) economies with a higher population turnover rates exhibit lower financial wealth concentration.

The Markov process amplitude (MPA) EEG model effectively representing spontaneous brain activity of the EEG was introduced. The relationship between the electrical mechanism for EEG generation and the proposed model was also investigated. The MPA EEG model was described by the sinusoidal waves with the randomly fluctuating amplitude of the first-order Markov process. The parameters of the MPA EEG model were determined optimally based on the real EEG records. The results of model outputs in the frequency domain demonstrated an excellent fit with the power spectrum of the corresponding EEG. The simulated model signal in the time domain also showed good agreement with the EEG time series. The satisfactory results from the MPA EEG model suggest its possible applicability in clinical practice. Furthermore, from the high goodness of fit, the authors think that the neurons oscillate at fixed frequencies and are modulated by synaptic interactions in accordance with the first-order Markov process.

Bernoulli and first-order Markov processes are used to approximate the output process of a class of slotted multiuser random-access communication networks. The parameters of the approximating processes are analytically calculated for a network operating under a specific random-access algorithm. The mean time that a packet spends in the central node of the star topology is calculated under the proposed approximations of the output processes of the interconnected networks. The results are compared with simulation results of the actual system. It turns out that the memoryless approximation gives satisfactory results up to a certain per-network-traffic load. Beyond that point, the first-order Markov processes performs better. >

Purpose The main purpose of this study is to see the macroeconomic effects of monetary and fiscal policy shocks in South Africa. Design/methodology/approach The joint effects of monetary and fiscal policy are analyzed by applying short-run contemporaneous restrictions for the identification of shocks in an SVAR in order to derive impulse response functions. Hence, a general AB model of (Amisano and Giannini, 1997) identification scheme, which is not recursive, is employed in this study. Findings The author shows that monetary tightening leads to a fall in real economic activity and depreciates the exchange rate. And in regard to the fiscal policy, the author calculates an initial government spending multiplier of 0.20, which later peaks at 0.40. The tax multiplier is almost 0 on impact and statistically insignificant. However, the author finds evidence supporting the existence of accommodative stance between monetary policy and fiscal policy, which is important for economic and political decision-making. Originality/value Empirical studies that deal with the joint effects of monetary and fiscal policy for South Africa through the SVAR framework are quite limited. This paper, therefore, contributes to the empirical literature on the effects of monetary and fiscal policy in a small open economy like South Africa.

A simple asset pricing model with heterogeneous agents, uninsurable labor income and limited stock market participation

We study the role an illiquid durable consumption good plays in determining the level of precautionary savings and the distribution of wealth in a standard Aiyagari model (i.e. a model with heterogeneous agents, idiosyncratic uncertainty, and borrowing constraints). Transactions costs induce an inaction region over which the durable stock and the associated user cost are not adjusted in response to changes in income, increasing, on average, the volatility of non-durable consumption. The volatility of total consumption is then a function of the share of the durable good in the utility function and the width of the inaction region. We are particularly interested in parameterizations which increase the precautionary motive for saving through an increase in "committed expenditure risk." We find, for an empirically relevant share of durable consumption and for all transaction costs below an upper threshold, that the level of precautionary savings is increasing in the transaction costs. Transaction costs have only a modest impact on the degree of wealth dispersion, as measured by the Gini index, as the associated increase in savings is close to linear in wealth. While we are unable to match the dispersion of wealth in the data, we increase the dispersion over a single asset model (Gini index of .71 for financial assets and .37 for total wealth) and we are able to match the relative dispersion of financial to durable assets, i.e. we find financial assets much more unequal than durable assets. We also match the ratio of housing wealth to total wealth for the median agent. We calibrate the model to data from the PSID, the CES, and the SCF.