Optimal redistributive capital taxation in a neoclassical growth model

This paper provides a counterexample to the simplest version of the redistribution models considered by Judd (1985) in which the government chooses an optimal distortionary tax on capitalists to finance a lump-sum payment to workers. I show that the steady-state optimal tax on capital income is generally non-zero when the capitalists’ utility is logarithmic and the government faces a balanced-budget constraint. With log utility, agents’ optimal decisions depend solely on the current rate of return, not any future rates of return or tax rates. This feature of the economy effectively deprives the government of a useful policy instrument because promises about future tax rates can no longer influence current allocations. When combined with a lack of other suitable policy instruments (such as government bonds), the result is an inability to decentralize the allocations that are consistent with a zero-limiting capital tax. I show that the standard approach to solving the dynamic optimal tax problem yields the wrong answer in this (knife-edge) case because it fails to properly enforce the constraints associated with the competitive equilibrium. Specifically, the standard approach lets in an additional policy instrument through the back door.     

Optimal growth in the two-sector neoclassical growth model

This article analyzes optimal growth in the neoclassical two-sector model. First, the optimal savings ratio is derived corresponding to that growth path which maximizes consumption at each point of time. Secondly, it can be shown that this optimal savings ratio is the limit for the optimal savings ratio as derived by Pontryagin's maximum principle for an optimal policy, when the social discount rate for future per capita consumption approaches zero.This work was supported by the Deutsche Forschungsgemeinschaft, West-Germany.     

Harrodian and neoclassical paths in a constrained growth model

We provide a reformulation of disequilibrium growth theory, using the inverse optimum approach under rigidities. The long-run solutions are either Harrodian paths of warranted growth, with increasing unemployment, or inflationary long-run equilibria, with full employment.     

Equilibrium portfolios in the neoclassical growth model

This paper studies equilibrium portfolios in the standard neoclassical growth model under uncertainty with heterogeneous agents and dynamically complete markets. Preferences are purposely restricted to be quasi-homothetic. The main source of heterogeneity across agents is due to different endowments of shares of the representative firm at date 0. Fixing portfolios is the optimal equilibrium strategy in stationary endowment economies with dynamically complete markets. However, when the environment displays changing degrees of heterogeneity across agents, the trading strategy of fixed portfolios cannot be optimal in equilibrium. Very importantly, our framework can generate changing heterogeneity if and only if either minimum consumption requirements are not zero or labor income is not zero and the value of human and non-human wealth are linearly independent.     

On capital accumulation paths in a neoclassical stochastic growth model

Summary. Boldrin and Montrucchio [2] showed that any twice continuously differentiable function could be obtained as the optimal policy function for some value of the discount parameter in a deterministic neoclassical growth model. I extend their result to the stochastic growth model with non-degenerate shocks to preferences or technology. This indicates that one can obtain complex dynamics endogenously in a wide variety of economic models, both under certainty and uncertainty. Further, this result motivates the analysis of convergence of adaptive learning mechanisms to rational expectations in economic models with (potentially) complicated dynamics. Received: June 21, 1996; revised version: October 31, 1996     

Corruption in a neoclassical growth model with a non-convex production function

In this article, we analyze the bureaucrats’ corruption problem in a simple neoclassical growth model with a non-convex production function. In this model, we consider direct relations between product (income) taxation and corruption, and between corruption and public goods provision. As the main result, we show that the optimal consumption growth path in this economy is higher in a non-corrupt environment than in a corrupt environment and the higher the proportion of corrupt bureaucrats, the higher the cost of corruption to society.     

Adding cycles into the neoclassical growth model

We propose a stochastic Solow growth model where a cyclical component is added to the total factor productivity process. Theoretically, an important feature of the model is that its main equation takes a state space representation where key parameters can be estimated via an unobserved component approach without involving capital stock measures. In addition, the dynamic properties of the model are mostly unaffected by the newly introduced cyclical component. Empirically, our novel framework is consistent with secular U.S. empirical evidence.     

Friedman meets Becker and Mulligan in a monetary neoclassical growth model

We study a neoclassical growth model with the time preference determined by resources spent on imagining future pleasures along the line of Becker and Mulligan (Q J Econ 112:729–758, 1997). We introduce money into the economy via a cash-in-advance constraint and study the effect of higher seignorage taxes or higher monetary growth rates on capital, consumption and welfare in the long run. We find that if the fraction of investment constrained by cash is smaller than a threshold, the negative-monetary-growth Friedman (The Optimum Quantity of Money and Other Essays, 1969) rule does not hold and the optimal inflation rate is positive. Calibrating our model yields a mild optimal inflation rate per annum with a switch from zero inflation to optimal inflation creating a sizable welfare gain in terms of consumption equivalence.     

Corruption in a neoclassical growth model with a non-convex production function: comment

In Pereira and da Cruz Vieira (Int Rev Econ 57:335?C346, 2010), it is claimed that previous studies on corruption using the neoclassical growth model in the Ramsey tradition typically exploited a convex production function with productive government spending. Moreover, a non-convex intensive form technology representation is proposed as derived from the (presumptive) strictly convex function in levels. We show that none of these claims are true, for the general function is neither convex nor concave and fails to be linearly homogeneous. As a consequence, all the findings derived in Pereira and da Cruz Vieira (2010) are not peculiar to non-convex production functions.     

Investment subsidies and redistributive capital income taxation in a neoclassical growth model

How do investment subsidies bear on pure redistribution when coupled with capital income taxes? In a heterogeneous agent, neoclassical growth framework it is found that on impact, with no optimizing behavior, investment subsidies are good for growth but bad for redistribution. The opposite holds for capital income taxes. But when the government acts as a Stackelberg leader vis-à-vis the private sector (the follower), the optimal feedback policy is by construction time-consistent and implies that in a long-run optimum the tax scheme does not distort accumulation. This holds regardless of social preferences. For the feedback Stackelberg equilibrium I find that (pure) redistribution can go either way and capital income taxes are nonzero in the long-run, time-consistent optimum, depending on the social weight of those who receive redistributive transfers, the distribution of pretax factor incomes, and the intertemporal elasticity of substitution. It is argued that investment subsidies may be an important indirect tool for redistribution, and may allow for the separation of “efficiency” and “equity” concerns.     

Optimal fiscal policy in the neoclassical growth model revisited

This paper studies optimal taxation in a version of the neoclassical growth model in which investment becomes productive within the period, thereby making the supply of capital elastic in the short run. Because taxing capital is distortionary in the short run, the government׳s ability/desire to raise revenues through capital income taxation in the initial period or when the economy is hit with a bad shock is greatly curtailed. Our timing assumption also leads to a tractable Ramsey problem without state-contingent debt, which can give rise to debt-financed budget deficits during recessions.     

Real purchasing power in the neoclassical monetary growth model

In the one sector neoclassical monetary growth model, the balanced growth path under perfect foresight is a saddle point. The paper demonstrates that this instability problem can be resolved by entering real purchasing power into the liquidity preference function as well as into the consumption function. This process allows an additional mechanism based on income effects in money demand by which a change in real balances can influence the growth path. Stability now depends critically on the size of such income effects given wealth effects from money demand. If stability is restored, the nature of the traditional non-neutrality of money must be qualified.     

On the neoclassical growth model with non-constant discounting

We study the neoclassical growth model with non-constant discounting. We do not assume specific functional forms for discounting and demonstrate that the competitive economy always performs better than the planning economy.     

International capital flows and convergence in the neoclassical growth model

To analyze how capital mobility affects economic growth and convergence, this paper will use the analytical solution to the neoclassical growth model with a constant saving rate, beginning with the closed-economy Solow growth model. An introduction to international capital flows will follow. In an open economy, free capital mobility assures an instantaneous convergence in interest rates that, under a perfect competence situation, implies the instantaneous convergence in income levels among homogeneous countries. Taking into account this question and to reconcile these results with empirical evidence, that is, with the gradual convergence observed, the assumption is introduced that in spite of free capital mobility, there are international credit restrictions. In this case, we will show how the rate of convergence depends on the international capital inflows received. The authors would like to thank Maria Isabel Abradelo for her help in translating this paper.     

East Asian growth experience revisited from the perspective of a neoclassical model

The business cycle accounting “wedge” methodology is used to identify the mechanisms driving the rapid growth of Hong Kong, Singapore, South Korea, and Taiwan since 1966. Analysis with a neoclassical growth model reveals that growth in these economies has been sustained by different mechanisms at different stages of development. Factor accumulation, which arises primarily from increases in capital wedges, accounts for most of the rapid growth in the earlier stages. However, in the later stages, total factor productivity growth becomes the primary driver.     

Rationality of liquidity preferences and the neoclassical monetary growth model

In the neoclassical monetary growth literature, the rationality condition in the sense of freedom from money illusion is imposed on the demand for nominal balances by assuming that this demand is homogenous of degree one in nominal income and nominal wealth. We argue that the price level should enter into this demand as a separate argument, and that the rationality condition should require that the demand be homogenous of degree one in nominal income, nominal wealth, and the price level. Then, the symmetry issue of the real purchasing power is consequential to the structure of the neoclassical monetary growth model.     

An optimal monetary policy in an aggregate neoclassical model of economic growth

This paper shows that the usual Ramsey-Cass-Koopmans optimal-growth theory is applicable to decentralized monetary economies and illustrates, with a simple model, how optimal growth can be achieved via a simple monetary policy. Securities and the endogeneity aspect of the money supply are explicitly introduced. This paper shows that the steady state under optimal growth is a saddle point, that the dynamic behavior of the capital-labor ratio and real per capita consumption is identical to that found in the usual literature in which money is not introduced, and that the optimal monetary policy is “counter-cyclical.”