Time preference and productivity: observations in a growth model with heterogeneous agents

We study optimal long-run capital taxation in a closed economy with heterogeneity in agents' time-discount factors where borrowing is allowed but restricted by a collateral constraint. Financial frictions distort intertemporal optimization margins and the tax system serves a dual role: first, it is used to finance government consumption; second, it serves to alleviate the distortions arising from the binding collateral constraint. The discrepancy between the private and the social discount factors pushes for a subsidy on capital, while the discrepancy introduced by the collateral constraint pushes for a tax in the long-run. When consumption smoothing motives are muted, the two effects counter-balance each other and the tax is zero. With finite elasticity of intertemporal substitution, the second discrepancy dominates and the tax on capital income is positive in the long-run.

This paper argues that in a homogeneous monetary Real Business Cycle economy where a complete set of nominal contingent claims exist, the requirement to collateralize loans, alone, does not affect the equilibrium allocation when monetary policy is chosen optimally: the Pareto optimal allocation can be supported. Rather, it is the presence of additional inefficiencies such as market incompleteness or heterogeneity of agents that limits the ability of optimal monetary policy, and more precisely, inflation, to support the first best allocation. In our model policy is non-Ricardian or equivalently outside money exists, and the Central Bank trades only in short-term nominally risk-free bonds: as a consequence monetary policy that sets rates of interest and accommodates money demand effectively determines the allocation of prices at equilibrium. A Friedman rule (r=0), which would be optimal in the absence of collateral constraints, here it is not: at the resulting prices collateral constraints bind. A path of prices that avoids binding collateral constraints necessarily involves a non-zero interest rate. The path of prices that supports the Pareto optimal allocation occurs when the collateral constraint binds: a positive inflation tax on money balances is efficient. For interest rates that permit the collateral constraint to bind, a policy of stable inflation (alternatively, money growth) implies that the collateral constraint binds after a sequence of positive (respectively negative) productivity shocks followed by a negative (respectively positive) productivity shock.

Intertemporal equilibrium with heterogeneous agents, endogenous dividends and collateral constraints

Capital taxation with heterogeneous discounting and collateralized borrowing

We examine the quantitative importance of financial market shocks in accounting for business cycle fluctuations. We emphasize the role financial markets play in reallocating funds from cash-rich, low productivity firms to cash-poor, high productivity firms. We use evidence on financial flows to analyze the importance of this role of financial markets. This evidence shows that in the aggregate, funds available to firms internally are more than adequate to finance investment. At the firm level, we find that for publicly traded firms (in Compustat), almost all investment is financed internally while, using a alternative data source (Amadeus), we find that most investment by privately held firms is financed through borrowing. These observations suggest that the quantitative impact of financial market shocks depend both on the sensitivity of investment and output of privately held firms to such shocks and on the extent to which the investment and output of publicly held firms respond to the actions of privately held firms. Motivated by these observations, we build a quantitative model featuring publicly and privately held firms that face collateral constraints and idiosyncratic risk over productivity. We model financial market shocks as shocks to the collateral constraints. In our model, each firm has a monopoly in producing a differentiated good and uses the goods produced by other firms as an input for production -- features that create non-financial linkages between publicly and privately held firms. In our calibrated model, we find that a shock to the collateral constraints which generates a one standard deviation decline in the debt-to-asset ratio leads to a 0.5% decline in aggregate output on impact, roughly comparable to the effect of a one standard deviation shock to aggregate productivity in a standard real business cycle model. In this sense, we find that disturbances in financial markets are a promising source of business cycle luctuations when non-financial linkages across firms are sufficiently strong.

On discounting and voting in a simple growth model

On discounting and voting in a simple growth model

I. Learning, Adaptation and Complex Dynamics.- Heterogeneous, Boundedly Rational Agents in the Cournot Duopoly.- Adaptive Coordination and Aggregate Efficiency in Minority Games.- Heterogeneous Models with Learning and Homoclinic Bifurcations.- Learning to Compete and Coordinate in a Complex World.- A Model of Distributed Markets with Heterogeneous Agents.- II. Micro Foundations of Macro Behaviour.- An Exact Physical Approach to Market Participation Models.- Financial Fragility, Heterogeneous Agents' Interaction, and Aggregate Dynamics.- Heterogeneous Interacting Economic Agents and Stochastic Games.- Modeling Behavioral Heterogeneity in Demand Theory.- III. Social Interactions and Networks.- The Joint Dynamics of Networks and Knowledge.- Stable Hedonic Networks.- A Dynamic Model of Job Networking and Persistent Inequality.- Bandwagon Effects on Female Labour Force Participation: An Application to the Netherlands.- Interacting Agents and Continuous Opinions Dynamics.- IV. Finance.- An Interacting-Agent Model of Financial Crises.- Mean Field Effects and Interaction Cycles in Financial Markets.- The Genoa Artificial Stock Market: Microstructure and Simulations.- V. Growth and Dynamics.- A Simple Quantity Adjustment Model of Economic Fluctuations and Growth.- The Phillips Curve as an Attractor in a Dynamic Macroeconomic Model.- Technical Progress in a Dynamic Input-Output Model with Heterogenous Labour.

This volume contains a selection of Professor Uzawa's important contributions to mathematical economics. Subjects covered by these nineteen essays include consumption, production, equilibrium, capital, growth, planning, international trade, and the theory of social overhead capital. Written in the 1960s and early 1970s, the papers form a basis upon which economic theory has developed over the last twenty years. The collection includes some of Uzawa's classic contributions, such as 'Preference and Rational Choice in the Theory of Consumption' (presented at the First Stanford Symposium), 'Time Preference, the Consumption Function, and Optimum Asset Holdings', 'Neutral Inventions and the Stability of Growth Equilibrium', 'On a Two-Sector Model of Economic Growth', 'Time Preference and the Penrose Effect in a Two-Class Model of Economic Growth', and 'On the Economics of Social Overhead Capital'. The collection will be useful not only in understanding the nature of the development in economic theory today, but also in reflecting upon the direction toward which economic theory will be advancing in the future.

We first consider a closed model, where households' time discount depends on externality in consumption. We can prove that there is a unique steady state, which is a saddle point. Then we extend the model to a two‐country world, and derive the condition on the effects of consumption externality under which there is a unique free trade steady state with saddle‐point stability.

In this paper we examine the quantitative effects of margin regulation on volatility in asset markets. We consider a general equilibrium infinite-horizon economy with heterogeneous agents and collateral constraints. There are two assets in the economy which can be used as collateral for short-term loans. For the first asset the margin requirement is exogenously regulated while the margin requirement for the second asset is determined endogenously. In our calibrated economy, the presence of collateral constraints leads to strong excess volatility. Thus, a regulation of margin requirements may have stabilizing effects. However, in line with the empirical evidence on margin regulation in U.S. stock markets, we show that changes in the regulation of one class of assets may have only small effects on these assets' return volatility if investors have access to another (unregulated) class of collateralizable assets to take up leverage. In contrast, a countercyclical margin regulation of all asset classes in the economy has a very strong dampening effect on asset return volatility. JEL Classification: D53, G01, G12, G18

This study aimed to examine the effects of monetary policy on macroeconomic variables with regard to the collateral constraint. For this purpose, a dynamic stochastic general equilibrium (DSGE) was developed for Iran’s economic status. Two scenarios were considered as to account for the behavior of the central bank. In the first scenario, the monetary rule is modeled according to the GDP gap and inflation. In the second scenario that is modeled by macro-prudential rule, in addition to the GDP gap and inflation, it is also the central bank responses to the housing price gap that contributes to a steady state. An examination of the impulse response functions in the two scenarios indicated that the monetary shock increased production and inflation. A monetary shock has a positive impact on the consumption of patient households (lenders) and a negative effect on impatient households’ (borrowers) consumption. The collateral constraint was assumed to cause the effects of shocks to be continued on both groups. A comparison between the two scenarios indicated that if the central bank responds to the housing price deviation, in addition to the GDP gap and inflation, the effectiveness of the monetary policy will be strengthened.

Margin regulation and volatility

In this paper we examine the quantitative effects of margin regulation on volatility in asset markets. We consider a general equilibrium in finite-horizon economy with heterogeneous agents and collateral constraints. There are two assets in the economy which can be used as collateral for short-term loans. For the first asset the margin requirement is exogenously regulated while the margin requirement for the second asset is determined endogenously. In our calibrated economy, the presence of collateral constraints leads to strong excess volatility. Thus, a regulation of margin requirements may have stabilizing effects. However, in line with the empirical evidence on margin regulation in U.S. stock markets, we show that changes in the regulation of one class of assets may have only small effects on these assets' return volatility if investors have access to another (unregulated) class of collateralizable assets to take up leverage. In contrast, a countercyclical margin regulation of all asset classes in the economy has a very strong dampening effect on asset return volatility.

This paper establishes a dynamic stochastic partial equilibrium model for explaining residential investment dynamics in the United States, focusing on the distinctive cyclical features of residential investment in that it leads the whole economy. This paper is different from the existing literature by adding three new features to the model: news shocks, collateral constraints and agent heterogeneity. The partial equilibrium analysis where interest rates are exogenously fixed shows that these assumptions are essential to generating the dynamic pattern in which residential investment leads consumption and GDP.