Free trade, factor returns, and factor accumulation

A model of development is studied in which physical capital and unskilled labor are good substitutes, and skilled labor is complementary to the resulting aggregate. Growth in a closed economy is compared with two open regimes. Inflows of physical capital only reduce the interest rate and raise both wage rates. The skilled wage rises more sharply, however, increasing the skill premium and accelerating human capital accumulation. Full integration with a larger and more developed neighbor also reduces the interest rate and raises both wage rates, but in this case the skill premium falls and human capital accumulation changes very little.     

Optimal growth with many consumers

A method is described for constructing all Pareto-optimal allocations for a dynamic economy with many heterogeneous consumers, under certainty, in which both the technology and consumer preferences are recursive but preferences need not be additively separable over time. Optimal (perfect foresight competitive equilibrium) allocations are obtained through the study of a dynamic program. For an economy with one consumption good, sufficient conditions are given for the existence of a unique interior stationary distribution of consumption and wealth. For a two-person exchange economy, sufficient conditions are given for the global asymptotic stability of the unique interior stationary point.     

Optimal fiscal and monetary policy in an economy without capital

This paper is concerned with the structure and time-consistency of optimal fiscal and monetary policy in an economy without capital. In a dynamic context, optimal taxation means distributing tax distortions over time in a welfare-maximizing way. For a barter economy, our main finding is that with debt commitments of sufficiently rich maturity structure, an optimal policy, if one exists, is time-consistent. In a monetary economy, the idea of optimal taxation must be broadened to include an ‘inflation tax’, and we find that time-consistency does not carry over. An optimal ‘inflation tax’ requires commitment by ‘rules’ in a sense that has no counterpart in the dynamic theory of ordinary excise taxes. The reason time-consistency fails in a monetary economy is that nominal assets should, from a welfare-maximizing point of view, always be taxed away via an immediate inflation in a kind of ‘capital levy’. This emerges as a new possibility when money is introduced into an economy without capital.     

A decomposition theorem for income redistribution policies

Income redistribution policies are examined in a model where households differ from each other in a vector of characteristics. It is shown that any redistribution policy can be expressed as the sum of a set of policies, each of which transfers income only within cohorts of households that are identical in all characteristics except one.     

Introduction to dynamic general equilibrium

This introduces the symposium on dynamic general equilibrium.     

Moving costs, nondurable consumption and portfolio choice

The substantial adjustment cost for housing affects nondurable consumption and portfolio allocations, as well as the frequency of housing transactions. A simple theoretical model, roughly calibrated, is used to assess the quantitative impact of adjustment costs on those decisions. The impact on portfolios is found to be significant, suggesting that housing wealth should be useful in empirical studies of portfolio choice. The welfare loss from the transaction cost is also substantial. The effect on nondurable consumption is small, however, so adjustment costs can explain only a small part of the equity premium puzzle.     

A two-person game of information transmission

We consider a statistical decision problem faced by a two player organization whose members may not agree on outcome evaluations and prior probabilities. One player is specialized in gathering information and transmitting it to the other, who takes the decision. This process is modeled as a game. Qualitative properties of the equilibria are analyzed. The impact of improving the quality of available information on the equilibrium welfares of the two individuals is studied. Better information generally may not improve welfare. We give conditions under which it will.     

Information,trade and common knowledge

In any voluntary trading process, if agents have rational expectations, then it is common knowledge among them that the equilibrium trade is feasible and individually rational. This condition is used to show that when risk-averse traders begin at a Pareto optimal allocation (relative to their prior beliefs) and then receive private information (which disturbs the marginal conditions), they can still never agree to any non-null trade. On markets, information is revealed by price changes. An equilibrium with fully revealing price changes always exists, and even at other equilibria the information revealed by price changes “swamps” each trader's private information.     

Two representations of information structures and their comparisons

Decisions in Economics and Finance - This paper compares two representations of informativeness.