S. Rao Aiyagari

Uninsured Idiosyncratic Risk and Aggregate Saving

We present a qualitative and quantitative analysis of the standard growth model modified to include precautionary saving motives and liquidity constraints. We address the impact on the aggregate saving rate, the importance of asset trading to individuals, and the relative inequality of wealth and income distributions.

Optimal Capital Income Taxation with Incomplete Markets, Borrowing Constraints, and Constant Discounting

For a wide class of infinitely lived agent models, Chamley has shown that the optimal capital income tax rate is zero in the long run. Lucas has argued that for the U.S. economy, there is a significant welfare gain from switching to this policy. This paper shows that for the Bewley class of models with incomplete insurance markets and borrowing constraints, the optimal tax rate on capital income is positive, even in the long run. Therefore, cutting the capital income tax to zero may well lead to welfare losses.

Asset returns with transactions costs and uninsured individual risk

(iii) Transaction velocities are much higher for liquid assets than for stocks, specifically, we explore the extent to which incorporating an explicit motive for holding liquid assets can explain the above observations. We introduce a demand for liquid assets by adding uninsured individual risk together with differential costs of trading securities. We then parameterize a class of such models and compute the stationary equilibria. The simulations indicate that attempting to match the return data generates a ratio of liquid assets to income considerably be low observed levels. We then explore some possible reasons for this discrepancy. (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.)

The output, employment, and interest rate effects of government consumption

This paper investigates the impact on aggregate variables of changes in government consumption in the context of a stochastic, neoclassical growth model. We show, theoretically, that the impact on output and employment of a persistent change in government consumption exceeds that of a temporary change. We also show that, in principle, there can be an analog to the Keynesian multiplier in the neoclassical growth model. Finally, in an empirically plausible version of the model, we show that the interest rate impact of a persistent government consumption shock exceeds that of a temporary one. Our results provide counter examples to existing claims in the literature.

On the State of the Union

An overlapping generations model of marriage and divorce is constructed to analyze family structure and intergenerational mobility. Agents differ by sex, marital status, and human capital. Single agents meet in a marriage market and decide whether to accept or reject proposals to wed. Married couples must decide whether to separate or not. Parents invest in their children depending on their wherewithal. A simulated version of the theoretical prototype can generate an equilibrium with a significant number of female‐headed families and a high degree of persistence in income across generations. To illustrate the models mechanics, the effects of two antipoverty policies, namely child support and welfare, are investigated.

Coexistence of money and interest-bearing securities

A random matching model with money is used to study the nominal yield on small denomination, bearer, safe, discount securities issued by the government. There is always one steady state with matured securities circulating at par and, for some parameters, another with them circulating at a discount. In the former, a necessary and sufficient condition for a positive nominal yield on not-yet-matured securities is exogenous discriminatory treatment of them by the government. In the latter, the post-maturity discount on securities induces a deeper pre-maturity discount even without such discriminatory treatment.

Transaction Services, Inflation, and Welfare

This paper is motivated by empirical observations on the comovements of currency velocity, inflation, and the relative size of the credit services sector. We document these comovements and incorporate into a monetary growth model a credit services sector that provides services that help people economize on money. Our model makes two new contributions. First, we show that direct evidence on the appropriately defined credit service sector for the United States is consistent with the welfare cost measured using an estimated money demand schedule. Second, we provide estimates of the welfare cost of inflation that have some new features.

The backing of government bonds and monetarism

Abstract This paper examines the implications of the fiscal backing of government bonds for the effects of conventional macroeconomic policies and, in particular, for certain monetarist propositions. It shows that the validity of some basic monetarist hypotheses requires a considerable degree of accommodation by the fiscal authority, relative to the central bank. Otherwise, government bonds may matter in a manner as described in the traditional literature [e.g., Mundell, 1971 , Patinkin, 1965 ], though some differences arise. Of perhaps independent interest, the framework developed in the analysis is an intertemporal general equilibrium model with all the descriptive features of the conventional flexible price IS/LM model.

Existence of Steady States with Positive Consumption in the Kiyotaki-Wright Model

We prove the general existence of steady states with positive consumption in an N goods and fiat money version of the Kiyotaki-Wright model by admitting mixed strategies. We also show that there always exists a steady state in which everyone accepts a least costly-to-store object. In particular, if fiat money is one such object, then there always exists a monetary steady state. We also establish some other properties of steady states and comment on the relationship between steady states and (incentive) feasible allocations.

Money and Dynamic Credit Arrangements with Private Information

We construct a model with private information in which consumers write dynamic contracts with financial intermediaries. A role for money arises due to random limited participation of consumers in the financial market. Without defection constraints, a Friedman rule is optimal, the mean and variability of wealth tend to fall in the steady state, and the welfare effects of inflation are very small. With defection constraints, it is optimal to eliminate currency entirely, the variability of wealth tends to rise with inflation, and the welfare effects of inflation are large.