Government Spending and Consumption in the Presence of Borrowing
Abstract: Empirical estimates of the effect of government spending indicate crowding-in effect on aggregate output, consumption and labor supply, a positive co-movement between consumption of durables and non-durables and a cyclical crowding in-crowding out effect on investment. But most of the neo-classical real business cycle models fail to explain most of these empirical facts and frequently, all of them. I develop an RBC model where some agents face a binding borrowing constraint. The borrowing constraint is imposed in the form of a collateral constraint on these agents when they seek to borrow from the private debt market. Credit history is also important for borrowing. I show that once the model is properly calibrated, the impulse response functions of an unanticipated increase in government spending match all of their empirical counterparts.
Abstract: Traditionally, Dynamic Scoring experiments are carried out using representative agent based macroeconomic models. Existing literature does not provide any objection to this approach. In this paper, I develop a heterogeneous agent model similar to the Saver-Spenders model of Mankiw(2000). But spenders in my model are merely credit constrained and not Rule of thumb consumers. Both groups are intertemporal optimizers because of the existence of Internal Habit Persistence. Transition path of most of the macro and fiscal variables for various tax cuts under alternative financing scheme shows pattern which are significantly different and sometimes contrasting to the representative agent model. Dynamic scoring calculations reveal a downward bias of the representative agent model. Underestimation of the dynamic response could be as large as 45%. Finally, steady state results indicate smaller impact of contractionary policies on major fiscal variables such as net tax revenue and tax base. Over all, the paper argues that the need to use heterogeneous agent based model in dynamic fiscal calculations is not only desirable but also essential.
Abstract: In this paper, I analyze consumption, aggregate savings, output and welfare implications of five different social security arrangements whenever there is demographic uncertainty. Following Bohn(2002), I analyze the effect of an uncertain population growth in an extended version of a modified Life-cycle model developed by Gertler(1999). Population growth dampens savings and output under all arrangements. Pay-as-you-go-Defined Benefit system appears to fare better than all other alternatives, falling short of the private annuity market with no pension system. But social security in general increases social welfare, with Fully Funded systems faring the best. Thus there appears to be a clear trade off between growth and social welfare. The social security system also reduces the volatility of the economy.
Abstract: In this paper, I use a model of quality choice to highlight the importance of variable entry cost in the competition between an incumbent public school and an entrant charter school. When there is a capacity constraint and when the public school accommodates the charter school, an increase in state and federal funding has no effect on the market share but raises quality of education. But when local funding increases, the effect on market share and education quality depends on the nature of the entry cost.
Abstract: In this paper, we investigate empirically the extent to which government consumption substitutes for private consumption in the six GCC countries. We use a simple macroeconomic model that establishes the relationship between government and private consumption following the seminal work by Barro(1981). We show that the equilibrium relationship that is delivered by the model has direct econometric interpretation which formally defines a co-integrating relationship. We apply various panel and country specific time series co-integrating technique to estimate the long run elasticity of substitution between government and private consumption. Our estimate will shed light on the substitutability between government and private consumption which is very important for the success of many macroeconomic fiscal policies.
|Work in Progress|
Who Bears the Public Debt?
Understanding the Distributional
Aspect of Government Debt Burden using a Heterogeneous
Abstract: In this paper, I develop a heterogeneous agent model similar to the Saver-Spenders model of Mankiw(2000). But spenders in my model are merely credit constrained and not Rule of thumb consumers. Both groups are intertemporal optimizers because of the existence of Internal Habit Persistence. Debt financing experiments exhibit stronger role for the stochastic discount factor, a result different from the representative agent based model but frequently shows up in empirical estimates. It also provides interesting results for the distribution of fiscal burden among the saver and spender, challenging some of the conventional wisdom on tax burden. Over all, the paper argues that the need to use heterogeneous agent based model in dynamic fiscal calculations is not only desirable but also essential.
Abstract: Aggregate public school enrollment in primary education in the USA in the last 100 years has been roughly constant at 0.88 or 88% of the total enrollment. This contradicts with the conventional wisdom and the "popular press" which argues that there have been significant changes in the quality of education and the cost of education itself over this long period, although the latter claim has been challenged by a recent paper by Fernandez and Rogerson(2001). Also there appears to be a divergence between the qualities of education in private vs. public schools, indicated by various sources. This paper tries to investigate the reason why the fraction of public school enrollment has been constant over such a long period of time. I use a canonical model of schooling decisions which is widely used in literature and try to analyze the effect of income inequality, mean income and changes in the quality of education on the public enrollment. My approach sharply contrasts with the existing literature which mainly focuses on the role of schooling decisions on income inequality. Using a parametric model, I identify the threshold income level below which parents send their kids to public school and above which they send their kids to private school. Analytical results show how this threshold income level changes with the income inequality of the economy and how the changes in the threshold income effect the enrollment decisions. Under the assumption of no quality change in education and an unchanged real cost of education, I show that the model calibrated to 1989 USA data can match the aggregate enrollment figures for the USA almost perfectly. I then show that the model, applied to each individual state, can also match their enrollment decisions, although not uniquely. Therefore, the paper draws support to the empirical work of Fernandez and Rogerson(2001).
Abstract: We use a Panel Logit Regression Model to identify the factors that determine the adoption of Inflation-Targeting policy by countries around the world. We show that most of the explanatory variables that we use provide expected sign in the regression which leads to the correct direction in which they effect the Inflation Targeting decision. We conduct Pooled, Fixed effect and Random Effect regressions and compare their results. The Fixed effect model provides the best fit. Finally we test the presence of Country specific Fixed effect. We find evidence in favor of Fixed effect.
This paper attempts to generalize the results
obtained by Davig and Leeper (2007) by
introducing a third regime. The third regime can
be thought as a "Transitory State" through which
policy rule switches from "more active" regime
to "passive" regime. The third regime can also
be thought as a "highly implausible/unexpected"
short period yet very dramatic regime like
September 9/11 or world war II. An introduction
of the third regime generally reduces the
determinacy region. The more passive the third
regime is, the larger is the reduction.
Inflation volatility depends on the nature of
the third regime. With some modest
Abstract: Coming Soon
6. Government Spending and Consumption in the Presence of Borrowing Constraints: An Estimation of the DSGE Model using Bayesian Technique
Abstract: Coming Soon