Frode Brevik

Welfare and Distribution Effects of Bank Secrecy Laws

We analyze an overlapping-generations world comprising two groups of small countries whose preferences for public spending differ. Key steady-state effects from introducing bank secrecy and a withholding tax in countries with low government spending are: a reduction of global capital and income, a shift of wealth towards bank-secrecy countries, and falling consumption, welfare and government spending despite rising tax rates in the rest of the world. Qualitative results are robust to changes in tax-payer honesty, the Leviathan effect (permitting governments to drive public spending higher than citizens prefer), and the fraction of withholding taxes repatriated to countries of residence.

Information Processing with Recursive Utility: Some Intriguing Results

We study information processing in a simple endowment economy where the mean consumption growth rate are governed by a hidden state variable and agents have recursive preferences. We show that for typical parameter values, there is a strong incentive to commit to ignoring future information on the state of the economy, but that such commitment raises time-inconsistency problems. We estimate the model on postwar US data and find that the representative consumer can achieve a utility gain equivalent to a 20% increase in lifetime consumption simply by not paying attention to the state of the economy.

Partisan Theory and the New Keynesian and Sticky-Information Phillips Curves

This paper attempts two things: First, to modernize partisan theory by merging the idea of partisan differences in macroeconomic preferences with recent, optimizing models of aggregate supply that account for sluggish nominal adjustment. This aids in resolving some puzzles posed by the current state of partisan theory research. Second, to exploit partisan patterns for a comparison of the empirical performance of the new Keynesian Phillips curve with that of a recent challenger, the sticky-information Phillips curve. It turns out that the sticky-information Phillips curve clearly outperforms its better established rival: in accounting for econometric estimates of partisan patterns in OECD countries, and in tracking post-war experience in the US.

Is Ignorance Bliss? The Cost of Business Cycle Uncertainty

We investigate the cost of business-cycle uncertainty (lack of firm knowledge about the prevailing state of the economy) in a setup where the economy switches between booms and recessions at random intervals. Calibrating an exchange economy model to match the properties of the postwar U.S. data, we find that giving consumers additional information beyond that already contained in the endowment growth rates yields only moderate gains. In a second stage, we investigate the effect of nonperfect information processing in this setting. Surprisingly, we find that opting for slow learning might yield large utility gains, especially for consumers with a strong preference for early resolution of uncertainty.

Teaching Real Business Cycles to Undergraduates

The authors review the graphical approach to teaching the real business cycle model introduced in Barro. They then look at where this approach cuts corners and suggest refinements. Finally, they compare graphical and exact models by means of impulse-response functions. The graphical models yield reliable qualitative results. Sizable quantitative differences exist, but these can partly be remedied by adding appropriate refinements when taught by experienced instructors. The graphical analysis of the real business cycle equips students with a first understanding of the economys supply side and generates dynamics that will survive closer scrutiny later in the curriculum.