The historical behavior of interest rates and growth rates in U.S. data suggests that the government can, with a high probability, run temporary budget deficits and then roll over the resulting government debt forever. The purpose of this paper is to document this finding and to examine its...

In this paper we argue that very high marginal labor income tax rates are an effective tool for social insurance even when households have preferences with high labor supply elasticity, make dynamic savings decisions, and policies have general equilibrium effects. To make this point we construct...

This paper studies optimal taxation of earnings when the degree of tax progressivity is allowed to vary with age. The setting is an overlapping-generations model that incorporates irreversible skill investment, flexible labor supply, ex-ante heterogeneity in the disutility of work and the cost...

Episodes of unanticipated inflation reduce the real value of nominal claims and thus redistribute wealth from lenders to borrowers. In this study, we consider redistribution as a channel for aggregate and welfare effects of inflation. We model an inflation episode as an unanticipated shock to...

In a static setup, migration of unskilled labor may be resisted by the entire native-born population because, being relatively low earners, migrants are net beneficiaries of the fiscal system. However, the paper shows that with a pay-as-you-go pension, an important pillar of the welfare state,...

International capital mobility has typically been ignored in discussions of the welfare effects of the capital income tax. In the a typical analysis which does consider the open economy it is recognized that highly-elastic capital flows could significantly alter the usual conclusions. While...

This paper explores the gains to monetary union. We consider a two-country overlapping generations model. Agents work when young and have random tastes over the composition (domestic vs. foreign goods) of old age consumption. In equilibrium, governments require that local currency be used for...

This paper investigates the welfare costs of business cycles in a heterogeneous agent, overlapping generations economy which is distinguished by idiosyncratic labor market risk. Aggregate variation arises both in terms of aggregate productivity shocks and countercyclical variation in the...

Most countries exhibit large and persistent geographical differences in wages, income and unemployment rates. A growing class of "place based" policies attempt to address these differences through public investments and subsidies that target disadvantaged neighborhoods, cities or regions. Place...

This paper proposes a welfare criterion for economies in which agents have heterogeneously distorted beliefs. Instead of taking a stand on whose belief is correct, our criterion asserts that an allocation is belief-neutral efficient (inefficient) if it is efficient (inefficient) under any convex...