Real interest and inflation rates have been very low in many industrialized countries since the Great Recession. In this paper, a mechanism of low and floating real interest and inflation rates is examined based on the concept a “Nash equilibrium of a Pareto inefficient path” and the law of motion for trend inflation. I show that, because the link between the marginal product of capital and the...

We use a very standard life-cycle growth model, in which individuals have a labor-leisure choice in each period of their lives, to prove that an optimizing government will almost always find it optimal to tax or subsidize interest income. The intuition for our result is straightforward. In a life-cycle model the individual’s optimal consumption-work plan is almost never constant and an optimizi...

We study optimal government policy in an economy where (i) search frictions create a coordination problem and generate multiple Pareto-ranked equilibria and (ii) the government finances the provision of a public good by taxing trade. The government must choose the tax rate before it knows which equilibrium will obtain, and therefore an important part of the problem is determining how the policy...

A growing literature relies on natural experiments to establish causal effects in macroeconomics. In diverse applications, natural experiments have been used to verify underlying assumptions of conventional models, quantify specific model parameters, and identify mechanisms that have major effects on macroeconomic quantities but are absent from conventional models. We discuss and compare the us...

Should the generosity of unemployment benefits and the progressivity of income taxes depend on the presence of business cycles? This paper proposes a tractable model where there is a role for social insurance against uninsurable shocks to income and unemployment, as well as inefficient business cycles driven by aggregate shocks through matching frictions and nominal rigidities. We derive an aug...

Recent! research! in!both! the! social! and!natural! sciences!has!been!devoted! to! increasing!our! ability!to!predict!disasters,!prepare!for!them!and!mitigate!their!costs.!Curiously,!we!appear!to! know!very!little!about!the!fiscal!consequences!of!disasters.!The!likely!fiscal!impact!of!a!natural! disaster! has! not! been! examined! before! in! any! comparable! or! comparative! framework.! We! e...

Este paper tem como objetivo descrever, segundo a Escola Austríaca de Economia, as políticas monetárias adotadas pelo Federal Reserve partir 2008 (Quantitative Easing – QE, Qualitative QL e Zero Percent Interest Rate Policy ZIRP) prolongaram os desajustes na alocação recursos, enfraqueceram economia americana (indivíduos empresas tornaram-se mais dependentes juros artificialmente baixos) aument...

Social values shape policy outcomes. We examine the role of postmaterialism, a widely used concept in the social sciences, for the mix of capital and labour taxation chosen by a society. Following political scientist Inglehart, we define the degree of postmaterialism as the relative importance which individuals or a society as a whole ascribe to non-material values over material things. We inco...

We analyse the implications of optimal taxation for the stochastic behaviour of debt. We show that when a government pursues an optimal fiscal policy under complete markets, the value of debt has the same or less persistence than other variables in the economy and it declines in response to shocks that cause the deficit to increase. By contrast, under incomplete markets debt shows more persiste...

In this paper, we analyze how the introduction of habits and aspirations a ects the distribution of wealth when individuals’ labor productivity is subject to idiosyncratic shocks and bequests arise from a joy-of-giving motive. In the presence of either bequests or aspirations, labor income shocks are transmitted intergenerationally and this transmission, together with the contemporaneous income...