Research
Capital Taxation with Entrepreneurial Risk (Job Market Paper) (updated version)
This paper studies the effects of capital taxation in a dynamic heterogeneous-agent economy with uninsurable entrepreneurial risk. Although it allows for rich general-equilibrium effects and a stationary distribution of wealth, the model is highly tractable. This permits a clear analysis, not only of the steady state, but also of the entire transitional dynamics following any change in tax policies. Unlike either the complete-markets paradigm or Bewley-type models, where idiosyncratic risk impacts only labor income, here it is shown that capital taxation may actually stimulate capital accumulation. In particular, for the preferred calibrated version of the model, when the tax on capital is 25%, aggregate output is about 4% higher than what it would have been had the tax rate been zero. Turning to the welfare effects of a reform in capital taxation, it is shown how these effects depend on whether one focuses on the steady state or also takes into account transitional dynamics, as well as how they vary in the cross-section of the population (rich vs poor, entrepreneurs vs non-entrepreneurs).
This paper revisits the macroeconomic effects of government consumption in the neoclassical growth model augmented with idiosyncratic investment (or entrepreneurial) risk. Under complete markets, a permanent ncrease in government consumption has no long-run effect on the interest ate, the capital-labor ratio, and productivity, while it increases work ours due to the familiar negative wealth effect. These results are upset once we allow for incomplete markets. The very same negative wealth effect now implies a reduction in risk taking and investment. This in turn leads to lower risk-free rate and, under certain conditions, also to a lower capital-labor ratio, lower productivity and lower wages.
Consumption Behavior in Greece: Alternative Explanations, Identification, and Interpretations
This paper uses annual
Greek data to test the permanent income hypothesis (PIH) versus the view that
consumption responds to current income. The PIH is rejected by all tests, and
so is the simple Keynesian hypothesis with a constant marginal propensity to
consume. Possible reasons for the failure of the PIH are then examined, and in
particular liquidity constraints, as proxied by unemployment, the amount of new
loans, and private interest rate spreads. Finally, the paper examines the
relevance of a more sophisticated consumption function, with a time-varying
marginal propensity to consume. It is shown that liquidity constraints, in the
form of the spread between private interest rates on loans and deposits,
negatively affect the marginal propensity to consume out of current disposable
labor income. However this result disappears when total disposable income is
considered instead. A possible interpretation is that consumers are able to
self-insure and to buffer the shocks to their labor income by investing in
non-human assets.