The literature has shown that the implied welfare gains from international financial integration are very small. We revisit the existing findings and document that welfare gains can be substantial if capital goods are not perfect substitutes. We use a model of optimal savings that includes a...

Extensive growth based on the expansion of inputs is likely to be subject to diminishing returns. Therefore it is often viewed as having no effect on per capita magnitudes in the long run. This Paper argues that periods of extensive growth through capital accumulation may be a precursor to...

If capital is an essential input, the neoclassical growth model has a steady state with zero capital. From this, one is inclined to conclude that an economy starting without capital can never grow. We challenge this view and claim that, if the production function satisfies the Inada conditions,...

We reconsider the optimal taxation of income from labour and capital in the stochastic growth model analysed by Chari et al. (1994, 1995), but using a linear-quadratic (LQ) approximation to derive a log-linear approximation to the optimal policy rules. The example illustrates how inaccurate...

This paper computes the optimal progressivity of the income tax code in a dynamic general equilibrium model with household heterogeneity in which uninsurable labour productivity risk gives rise to a nontrivial income and wealth distribution. A progressive tax system serves as a partial...

This paper explores the relationship between the myopia, the solvency and the reputation of a government choosing the optimal financing policy given a particular path of government spending. A central result is the demonstration of a logical link between government myopia and insolvency in the...

This paper studies optimal taxation of entrepreneurial capital and financial assets in economies with private information. Returns to entrepreneurial capital are risky and depend on entrepreneurs’ effort, which is not observed. The presence of idiosyncratic risk in capital returns implies that...

The aim of this Paper is to test for the extent of incompleteness in the market for US Government debt. We show that when a government pursues an optimal tax policy and issues a full set of contingent claims, the value of debt has the same or less persistence than other variables in the economy...

We analyze optimal taxation in an economy with monopsonistic labour markets. The individuals, whose only decisions are whether to work, or not, have heterogeneous productivities and opportunity costs of work. Given its preferences for redistribution, the government, which does not observe the...