Human beliefs, while always remaining in equilibrium, serve as a an equilibrium selector and determine the degree of aggregate volatility. Fully rational and risk averse economic agents expect macro-level dynamics to be characterized by a specific degree of volatility. Given this expectation the...

In a general equilibrium model with fully rational agents and built in micro-level uncertainty we show that debt financed government spending on consumption can be welfare improving at all horizons despite the fact that it inhibits the process of physical capital formation. In addition, we show...

We construct a novel model of equilibrium unemployment. Specifically, in a dynamic micro based model, we illustrate that rational and profit maximizing firms can choose to pay wages that exceed the market clearing level to restrict competition. Resulting unemployment and above market clearing...

In this paper we extend the dimensionality of the standard income taxation problem. Specifically, we allow agents to purchase at a price, from the government, discounts on their marginal tax rates. Consequently agents have two decision variables: the level of income they choose to earn and the...

The paper develops a model of sudden reversals of in foreign investment flows. The paper suggests that microlevel incentives and microlevel decisions stand at the root of investment crises. Specifically, we argue that if high quality projects are in limited supply and foreign investors are not...

The paper analyzes, in a general equilibrium framework under the assumption of fixed costs and microlevel uncertainty, the impact of transitory aggregate shocks on the behavior of macroeconomic variables. We establish that transitory shocks can have persistent effects and can cause significant...

We show using elementary arguments that the utilitarian approach to optimal taxation leads to results that are very sensitive to the underlying formulation of the problem. In particular, we argue that there are legitimate optimal taxation problems that admit solutions of a different form than...

The optimal labor income taxation problem is cast in the context of the Polish economy. We use the actual Polish data on labor income and the corresponding tax revenue provided by the Polish Tax Authority to calibrate the optimal taxation Problem of Mirrlees to the Polish data. We solve the...

We prove in the context of optimal taxation that the utility possibility frontier can be reached with step functions. This opens a possibility of existence of legitimate - with suitably chosen marginal social welfare weights - optimal taxation problems that admit solutions of a different form...

The paper focuses on short run macroeconomic dynamics triggered by demand side shocks. In particular, the paper analyzes, in a general equilibrium framework, the impact of transitory demand side shocks on the behavior of macroeconomic variables and examines the relevance of policy instruments...