Bernardus Heijdra

GROWTH EFFECTS OF CONSUMPTION AND LABOR-INCOME TAXATION IN AN OVERLAPPING-GENERATIONS LIFE-CYCLE MODEL

We study labour-income and consumption taxation in an overlapping-generations model featuring endogenous growth due to inter-firm investment externalities. Consumption, saving, and labour supply display life-cycle features because mortality and labour productivity are age dependent and because annuity markets may be imperfect. The government’s method of revenue recycling critically affects the growth consequences of taxation. Purely consumptive government spending has a negative impact on growth. Redistribution of tax revenue from dissavers to savers may lead to an increase in growth due to beneficial intergenerational transfer effects.

Public investment and intergenerational distribution

Abstract We study the effects of public investment in a dynamic overlapping-generations model of a small open economy. Boosting public investment stimulates private capital formation, output, and wages in the long run. The impact effects depend critically on whether public capital is modelled as a stock or as a flow. The welfare benefits are unevenly distributed across generations because capital ownership rises with age and wages rise only gradually (under the stock interpretation). A suitable egalitarian bond policy ensures that everybody gains to the same extent. A simple modified golden rule for public investment is derived.

The Transitional Dynamics of Fiscal Policy in Small Open Economies

The paper studies the dynamic macroeconomic effects of fiscal shocks of various duration (permanent and temporary) under different financing methods (lump-sum tax and government debt). To this end, we develop an intertemporal macroeconomic model for a small open economy, featuring monopolistic competition in the intermediate goods market, endogenous (intertemporal) labor supply, and finitely lived households. Endogenous labor supply is crucial in generating cyclical adjustment paths and yields faster convergence to the new steady state compared with exogenous labor supply. The quantitative output effects and transitional dynamics of fiscal policy differ substantially from those of an infinitely lived representative agent model. In addition, government debt is key in making the timing of shocks matter, thus yielding permanent output effects of temporary fiscal shocks.

GROWTH, PENSIONS, AND THE AGING JONESES

We incorporate keeping-up-with-the-Joneses (KUJ) preferences into the Blanchard–Yaari framework and develop a model of balanced growth. In this context we investigate status preference, demographic shocks, and pension policy. We find that a higher degree of KUJ lowers economic growth, whereas, in contrast, a decrease in the fertility and mortality rates increase it. In the second part of the paper we extend the model by incorporating a pay-as-you-go (PAYG) pension system with a statutory retirement date. The latter implies that the growth rate is higher under PAYG. We also consider the implications of pension reform under both defined benefit and defined contribution schemes.

Taxing energy to improve the environment : Efficiency and distributional effects

We study the effects of environmental tax policy in a dynamic overlapping generations model of a small open economy with environmental quality incorporated as a durable consumption good. Raising the energy tax may yield an efficiency gain if agents care enough about the environment. The benefits are unevenly distributed across generations since capital ownership, and the capital loss induced by a tax increase, rises with age. A suitable egalitarian bond policy can be employed in order to ensure everybody gains to the same extent. With this additional instrument the optimal energy tax can be computed.

Optimal environmental policy in the presence of multiple equilibria and reversible hysteresis

We study optimal environmental policy in an economy-ecology model featuring multiple stable steady-state ecological equilibria. The policy instruments consist of public abatement and a tax on the polluting production input, which we assume to be the stock of capital. The isocline for the stock of pollution features two stable branches, a low-pollution (good) and a high-pollution (bad) one. Assuming that the ecology is initially located on the bad branch of the isocline, the ecological equilibrium is reversibly hysteretic and a suitably designed environmental policy can be used to steer the environment from the bad to the good equilibrium. We study both first-best and second-best social optima. We show that, compared to capital taxation, abatement constitutes a very cheap instrument of environmental policy.

Stimulating Annuity Markets

We study the short-, medium-, and long-run implications of stimulating annuity markets in a dynamic general-equilibrium overlapping-generations model. We find that beneficial partial-equilibrium effects of stimulating annuity markets are counteracted by negative general-equilibrium repercussions. Balancing the positive partial-equilibrium and negative general-equilibrium forces we show that there exists some intermediate level of annuitization such that long-run welfare is maximized. Studying the transition to the optimal degree of annuitization shows that currently middle-aged individuals stand to gain most from the stimulation of annuity markets.