Aditya Goenka

Fiscal Rules and Extrinsic Uncertainty

SummaryThis paper analyzes the effect of two fiscal policy regimes on the set of equilibria. A general equilibrium model with public goods is used to re-examine Friedmans [9] proposal for fiscal reform. The issue is whether a constraint upon fiscal policy requiring budget balance under all contingencies increases the stability of the economy. Stability is modelled in terms of neutralizing extrinsic uncertainty or sunspots. The government consists of bureaus providing public goods. The budgetary rules entail fixed shares of revenues and arrangements for budget balancing. Existence of equilibrium and properties of the equilibrium set are established. The Friedmanite rules permit extrinsic uncertainty to affect outcomes, while a policy that allows the bureaus greater discretion in the pursuit of their objectives neutralizes it.

Indeterminacy and labor augmenting externalities

We study a two-sector model of economic growth with labor augmenting external effects. Using general specifications of the technologies, we derive necessary and sufficient conditions for local indeterminacy. We show that, when the investment good sector is capital intensive at the private level, the necessary condition for the growth ray to be indeterminate is that the cost of forgoing consumption is not too high. When the consumption good sector is capital intensive, indeterminacy requires that the depreciation of the capital stock is not too low and that utility is not too concave.

When sunspots don't matter (*)

SummaryWe show that a finite, competitive economy isimmune to sunspots if (i) preferences are strictly convex, (ii) the set of feasible allocations is convex, and (iii) the contingent-claims market is perfect. The conditions (i)–(ii) cover some, but not all, economies with nonconvex technologies. Based on an indivisible-good example, we show that even economies with strictly convex preferences and full insurance arenot in general immune from sunspots. We also show that (1) the sufficient conditions (i)–(iii) are not necessary for sunspot immunity and (2)ex-ante efficiency is not necessary for immunity from sunspots.

Income redistributions without catastrophes

Abstract The idea that simple lump-sum taxes and transfers may encounters multiplicity and instability of equilibria and counter-intuitive utility changes has long been recognized. Using information about the equilibrium manifold, we construct a finite sequence of lump-sum taxes and transfers which avoids these problems. In addition, the equilibrium at each stage of the sequence changes continuously with changes in taxes and transfers. The income redistribution policies are constructed to avoid catastrophes (singularities) in the equilibrium manifold.

Existence of competitive equilibrium in an optimal growth model with heterogeneous agents and endogenous leisure

This paper proves the existence of competitive equilibrium in a single-sector dynamic economy with heterogeneous agents, elastic labor supply and complete assets markets. The method of proof relies on some recent results concerning the existence of Lagrange multipliers in in nite dimensional spaces and their representation as a summable sequence and a direct application of the inward boundary fixed point theorem.

Testing Habits in an Asset Pricing Model

We develop a model of asset pricing assuming that investors behavior is habit forming. The model predicts that the effect of consumption growth shocks on the risk premium depends on the business cycle phase of the economy. This empirical implication is tested with a Markovswitching VAR model on the US postwar economy. The results show that the response of the risk premium to shocks to consumption is not significantly different over the business cycle phases of the economy. We interpret this as evidence against the habit formation hypothesis of the investors behavior.

Testing External Habits in an Asset Pricing Model

The asset pricing model with external habit formation predicts that the equity premium depends on consumption changes relative to the habit level, implying a response that varies over the business cycle. We test this implication using a VAR model of the U.S. postwar economy whose time-varying parameters are estimated conditioning on Markov-switching regimes that shift according to the business cycle phases. This enables us to test whether the non-linear response predicted in the model is significant. The results show that the response of the equity premium to consumption shocks is insignificantly different over the business cycle. We interpret this as evidence against the external habit formation hypothesis.