This paper studies the interaction between inequality and house prices using an incomplete market model with heterogeneous households. The model links cross-sectional household portfolio saving decisions to housing market outcomes. It illustrates a new price formation mechanism in which an investment motive among the wealthy plays a key role. A quantitative application of the theory rationalize...

Using the standard real business cycle model with lump-sum taxes, we analyze the impact of fiscal policy when agents form expectations using adaptive learning rather than rational expectations (RE). The output multipliers for government purchases are significantly higher under learning, and fall within empirical bounds reported in the literature (in sharp contrast to the implausibly low values ...

Hidden Insurance in a Moral Hazard Economy We consider an economy where individuals privately choose effort and trade competitively priced securities that pay off with effort-determined probability. We show that if insurance against a negative shock is sufficiently incomplete, then standard functional form restrictions ensure that individual objective functions are optimized by an effort and in...

Changes in the monthly pattern of Earned Income Tax Credit disbursements over the past decade identify a large macroeconomic consumption response from EITC checks. This paper recovers a large and significant MPC out of EITC disbursements based on a comprehensive array of macroeconomic data and econometric specifications. Point estimates of the contemporaneous consumption response average 0.7 an...

Using the standard real business cycle model with lump-sum taxes, we analyze the impact of fiscal policy when agents form expectations using adaptive learning rather than rational expectations (RE). The output multipliers for government purchases are significantly higher under learning, and fall within empirical bounds reported in the literature (in sharp contrast to the implausibly low values ...

I consider the saving and investment decisions of American and Italian consumers in a lifecycle model with temptation preferences. Comparing the choices with and without Social Security protection, I show that savings are postponed, less wealth is accumulated, and the portfolio share held in equities at retirement is larger with Social Security. Social Security distorts the decisions of agents ...

This paper answers the question posed in the title within a model where agents receive idiosyncratic, wage-rate shocks that are privately observed. When the model social insurance system is comprised by the US social security and income tax system, then the maximum ex-ante welfare gain to improved insurance is equivalent to a 12.3 percent increase in consumption. We determine the reasons behind...

Interpreting Time Horizon Effects in Inter-Temporal Choice We compare different designs that have been used to test for an impact of time horizon on discounting, using real incentives and two representative data sets. With the most commonly used type of design we replicate the typical finding of declining (hyperbolic) discounting, but with other designs find constant or increasing discounting. ...

This paper studies a two-sector New Keynesian model that captures the hump-shaped response of non-durable and durable spending to a monetary shock when non-durable prices are sticky and durable goods are flexibly priced. Based on the estimated parameters, we show that habit formation and investment adjustment costs are not sufficient to generate the gradual response of non-durable and durable s...

This paper examines the role for tax policies in productivity-shock driven economies with catching-up-with-the-Joneses utility functions. The optimal tax policy is shown to affect the economy countercyclically via procyclical taxes, i.e., “cooling down” the economy with higher taxes when it is “overheating” in booms and “stimulating” the economy with lower taxes in recessions to keep consumptio...