Gregory W. Huffman

Tax analysis in a real-business-cycle model: On measuring Harberger triangles and Okun gaps☆

A tax distorted real business cycle model is parameterized, calibrated, and solved numerically in an attempt to measure the size of Harberger Triangles relative to Okun Gaps. In particular, the model constructed is used to study, quantitatively, the impact of various distortional government tax and subsidy schemes. It is shown that the government can use tax policy to stabilize cyclical fluctuations, and this is done for the economy being studied. The benefits of implementing such a stabilization policy are calculated and compared with the size of the welfare gains realized from reducing various tax distortions.

The role of intratemporal adjustment costs in a multisector economy

Abstract In this paper we construct a multisector business cycle model which is capable of reproducing the procyclical behavior of cross-sector measures of capital, employment and output. We start by documenting the difficulty that a standard variant of a conventional real business cycle model has in accounting for these facts. We then show how the introduction of intratemporal adjustment costs for investment can significantly enhance the performance of such a model. These costs make it difficult to alter the composition of production of new capital goods. The presence of these costs eliminates many counterfactual observations of the model that would otherwise be present. The dynamic response of variables in the model is different from what one would observe in the standard one-sector model. We also examine the implications of imposing intratemporal adjustment costs for labor. The model can also account for the cross-sector behavior of employment observed in the data.

A Dynamic Equilibrium Model of Inflation and Unemployment

A stochastic general equilibrium model is constructed which is capable of examining the covariance properties between inflation and unemployment, both conditioned and unconditioned upon the state o ...

Inequality, inflation, and central bank independence

What can account for the different contemporaneous inflation experiences of various countries, and of the same country over time? We present an analysis of the determination of inflation from a political economy perspective. We document a positive correlation between income inequality and inflation and then present a theory of the determination of inflation outcomes in democratic societies that illustrates how greater inequality leads to greater inflation, owing to a desire by voters for wealth redistribution. We conclude by showing that democracies with more independent central banks tend to have better inflation outcomes for a given degree of inequality.

Endogenous tax determination and the distribution of wealth

Abstract In this paper a dynamic model is constructed in which labor and capital taxes are determined endogenously through majority voting. The wealth distribution of the economy is shown to influence the voting behavior and hence the equilibrium levels of the tax rates, which in turn affect the future distribution of wealth. It is shown that the economy exhibits a unique dynamic behavior. Because the tax rates are endogenously determined, asset prices, wealth distribution, and the tax rates can display persistent fluctuations or cycles in reaction to exogenous disturbances, or even due to initial conditions. “Tax smoothing” does not necessarily appear to arise naturally in such an environment. The features in the model that can produce these fluctuations are studied in detail.

On modelling the natural rate of unemployment with indivisible labour

This analysis investigates modeling the natural rate of unemployment in settings wh ere labors utilization has some lumpy aspect to it. Specifically, th e introduction of various nonconvexities into tastes and technology l ead to unemployment in general equilibrium. Equilibria can emerge whe re (1) those currently unemployed have higher probabilities of being unemployed in the future than those currently employed; (2) some agen ts are jobless while others work overtime; and (3) seniority rules se emingly arise whereby old workers cannot be laid off so long as eithe r new workers are being hired or some workers are doing overtime. The relative welfare levels of employed and unemployed agents are analyz ed.

An Equilibrium Analysis of Central Bank Independence and Inflation

A dynamic equilibrium model is constructed to analyze the implications of different degrees of central bank independence. In the main model, agents are permitted to vote on the desired inflation and labor taxes to finance government spending. Multiple perfect-foresight equilibria arise, and one of them exhibits fluctuations in output, investment, and the inflation rates as a result of permitting agents to vote. If, instead of having agents vote each period on these parameters, inflation and labor taxes in the model are set at fixed levels, these fluctuations do not arise, and a lower inflation rate can appear.

UNEMPLOYMENT AND WELFARE IMPLICATIONS OF THE CURRENT U.S. TAX TREATMENT OF EMPLOYER-PROVIDED MEDICAL INSURANCE

The U.S. tax system currently provides an incentive for individuals to obtain medical insurance through their employers. This unique tax treatment is widely excoriated as resulting in high costs and distorting consumption decisions. To study this issue, we develop a general equilibrium search model with endogenous health accumulation and a unique feature of the U.S. tax code, which exempts employer-provided medical benefits from taxation, to jointly account for the U.S. long-term unemployment rate and medical expenditure-to-aggregate consumption ratio. Through various counterfactual experiments, we find that (1) eliminating the employment-based tax subsidy lowers medical expenditure but, via a general equilibrium labor market effect, increases unemployment and lowers output, and contrary to conventional wisdom, lowers welfare; (2) having government raise taxes to finance the provision of medical care substantially increases the unemployment rate, while reducing income and welfare.

An alternative neo-classical growth model with closed-form decision rules

Abstract A version of a representative agent model is constructed in which closed-form decision rules are produced for rather general production technologies. Agents trade in capital, and the decision rules can be used to characterize the volume of this trade.

An Exploration Into the Effects of Dynamic Economic Stabilization

This paper analyzes the stochastic properties of a dynamic general equilibrium model under two government policies which might be interpreted as ‘countercyclical’ fiscal policies. In one case, we examine the effects on fluctuations of government spending on infrastructure investment in an economy in which public capital is an input to the aggregate production function. In the other, we examine the effects on aggregate business cycle fluctuations of a proportional tax on lay-offs. Our results find only weak evidence for the stabilizing effects of either policy.