Michael Kuehlwein

A test for the presence of precautionary saving

Abstract This paper tests for precautionary saving by deriving an explicit measure of consumer uncertainty: the expectational errors from a consumption Euler equation. Using data from the Panel Study of Income Dynamics, I estimate these errors and find, contrary to the theory, a negative correlation between consumer uncertainty and consumption growth.

Life-Cycle and Altruistic Theories of Saving with Lifetime Uncertainty

This paper examines testable implications of the life-cycle theory of saving with lifetime uncertainty. Theory sugges ts that persons facing lower mortality rates should exhibit greater consumption growth. Nonparametric tests, using the Retirement Histor y Survey, provide mixed support for the theory. A parameterized model allowing for altruism provides more support. Estimates of a bequest parameter indicate that elderly households value contributions to bequests as highly as contributions to their own consumption. This i s equally true for households with and without children. Such a beques t motive would curtail the impact of lifetime uncertainty on consumpti on growth. Copyright 1993 by MIT Press.

Evidence on the substitutability between government purchases and consumer spending within specific spending categories

Abstract This paper examines the response of consumer spending to government purchases within four spending categories: education, health, housing, and transportation. Estimation suggests they are either complements or independent, and confidence intervals exclude large estimates of substitutability found in the literature.

Railways and Price Convergence in British India

The period 1861 to 1920 witnessed sharp price convergence in British Indian grain markets. Previous research attributed this to the construction of railways. But tests examining price differences between districts provide surprisingly weak support for that hypothesis. Railways mattered, but seem capable of explaining only about 20% of the decline in price dispersion. One explanation may be that India was a partially integrated economy at the time of railroad expansion. Lines connecting districts on pre-existing trade routes had very small price effects. There is also some evidence of a “border effect” on lines between British India and princely states.

The non-equalization of true gift and estate tax rates

Abstract Before 1976, the affluent transferred most of their wealth to their heirs through bequests, not gifts, even though gifts faced lower statutory tax rates. This suggests the affluent were not acting altruistically. However, bequests had the advantage that unrealized capital gains were forgiven at the moment of transfer. Taking this into account, I derive true marginal gift and estate tax rates. Contrary to previous research, I find that the affluent failed to equalize these true rates, both before and after 1976. This represents stronger evidence that the large transfers made by the affluent were not motivated by altruism.

The National Bank Note Controversy Reexamined

During the period 1888-1907, national banks proved reluctant to devote the maximum allowable fraction of their capital to the issue of national bank notes. John A. James (1976) attributes this to note issue being less profitable than direct loans. This paper demonstrates note issue was the more profitable investment. Their scarcity is instead attributed to the riskiness of the government bonds required to back them. Tests of a mean-variance model of bank note determination indicate national banks were concerned with both risk and return. Further tests reveal the variance of government bond returns significantly eclipsed that of direct loans. Copyright 1992 by Ohio State University Press.

Budget Deficits, Public Spending and Interest Rates in Thailand

Beginning in 1987, Thailand experienced lower real interest rates, an investment boom, and rapid economic growth. We investigate whether these lower real rates were caused by conservative fiscal policy. Using data from the years 1980–94, we test between the Keynesian theory that smaller budget deficits reduce real interest rates and the Neoclassical theory that lower government spending reduces those rates. We find support for the Neoclassical model. Cuts in both consumption and construction expenditures appear to lower real interest rates. Surprisingly, lower public equipment spending appears to raise real interest rates. We attribute this to three factors. First, equipment spending could significantly boost aggregate supply. Second, public equipment spending is somewhat countercyclical, which could generate a spurious negative correlation with procyclical real interest rates. Third, public equipment spending appears highly correlated with government net foreign borrowing, which would relieve pressure on interest rates to rise. The results imply that controlling public spending is crucial for maintaining low real interest rates, but also that prudent public sector investment partially externally financed need not raise real interest rates and could effectively promote domestic capital formation.

Reexamining Income Tax Overwithholding as a Response to Uncertainty

This article reexamines whether significant income tax overwithholding in the United States can be explained as rational risk-neutral taxpayers trying to avoid underwithholding penalties when faced with uncertain tax liabilities. Starting with the important model developed by Highfill, Thorson, and Weber, we add interest accumulated on underwithheld income, consistent boundary conditions, and nominal penalty and opportunity costs. We then incorporate a relevant tax rule into the model. Finally, we consider alternative distributions of taxable income. Under these modifications, penalty avoidance generates refund rates only a quarter to a half of those observed in the United States in the 1980s and the 2000s. This suggests that penalty avoidance in a risk-neutral framework is not sufficient to explain the puzzling overwithholding behavior of US taxpayers.