Working Papers

New Eras, Consumption, and Saving

This paper looks at consumption and saving when the economy is subjected to a non-ergodic regime change. The non-ergodic regime change causes the uncertainty of future income to increase from O(k) to O(k²) where k is the forecast horizon. Households have an overwhelming incentive to prevent the O(k²) uncertainty from entering the consumption stream, which they do by shifting it into the saving stream. Even though the O(k²) uncertainty is transitory,  the effect on wealth accumulation is permanent.

Pareto Improving Tax Reform

A computable general equilibrium model with taxation is constructed with heterogeneity in tastes, technology, and endowments. The equilibrium is shown to be unique and easy to compute. Pareto efficiency requires a uniform rate of taxation. Given an inefficient tax regime, it is shown how to implement an efficient uniform taxation regime where everybody in the economy is made strictly better off. A numerical example is included.

General Equilibrium with Imperfect Competition

A computable general equilibrium model is constructed with imperfect competition and with heterogeneous firms, tastes, endowments, and technologies. The number of firms in each market is endogenous. The equilibrium is shown to be unique and easily computed. Necessary and sufficient conditions for efficiency are derived. Efficiency is possible, but requires that the rate of profit be the same for all industries.

Time Series Econometrics and General Equilibrium

A DGE model is developed that has a solution for both log prices and quantities that is a standard time series econometric model. Definitions for globalization and convergence are given, and these are used to derive the time series implications for prices and quantities. In the applied work we find that the Grilli-Yang commodity price data set appears to be inconsistent with convergence and globalization.

Economics Simplified

This paper argues that economics can be greatly simplified at no scientific cost. The cGE model, a GE model with Cobb-Douglas functional forms, is shown to be consistent with any conceivable economic data set. While GE and cGE models explain the data equally well, the cGE model is better in that it is simpler, it is linear, it has a unique equilibrium in ℚ instead of ℝ, and computation is easier.

Learning about New Eras

After World War II many feared the American economy would slip back into the Great Depression. This paper attempts to estimate the point in time when enough post-war data had been collected to convince people that in fact the post-war economy would be characterized by growth and stability. Using Bayesian methods a welfare measure of the cost of post-war uncertainty is constructed. Calculations show that post-war uncertainty was significant until the beginning of the 1970’s. This suggests that it may be some time before the uncertainty regarding the current 2008 financial crisis is resolved.

Heterogeneity and Optimal Monetary Policy

Monetary policy is examined in a model with heterogeneous individuals and two types of money: inside and outside money. A closed-form solution is derived with a simple formula for each individual’s optimal monetary rule. This formula is used to explain the political forces the government faces in adopting a monetary rule; for example why the Friedman rule would not be adopted despite being Pareto optimal. When the model is calibrated to U.S. data, it is shown that the very poor favor the Friedman rule, but the remaining population have an overwhelming incentive to block its implementation.