Vincenzo Quadrini

Politico-economic equilibrium and economic growth

Abstract We propose a notion of dynamic politico-economic equilibrium which builds on two key assumptions: policies are determined sequentially, and agents are fully rational in their roles as both consumers and voters. We examine a simple model of endogenous growth and infinitely-lived agents, where taxes on income are endogenous and where growth critically depends on the initial distribution of asset holdings. We relate our equilibrium definition and results to existing literature on time consistency and on political economy and growth. We show that our equilibria are time-consistent and we argue that the choice of equilibrium concept might have important quantitative implications.

A neoclassical model of the Phillips curve relation

This paper integrates the modern theory of unemployment with a limited participation model of money and asks whether such a framework can produce correlations like those associated with the Phillips curve as well as realistic labor market dynamics. The model incorporates both monetary and real shocks. The response of the economy to monetary policy shocks is consistent with recent evidence about the impact of these shocks on the economy.

Are consumption taxes really better than income taxes

Abstract We use political-equilibrium theory and the neoclassical growth model to compare consumption and income tax systems. If government outlays are used for redistribution through transfers, then steady-state equilibria in societies that use income taxes are not necessarily worse in welfare terms, and may even be better. Income taxes are attractive precisely because they are more distortionary, since this implies low equilibrium transfer levels. We also find that switching tax systems typically does not benefit the median voter; moreover, a change from income to consumption taxes may make everybody worse off.

Public Employment and the Business Cycle

We add a public employment sector to the basic search and matching model in order to study the business cycle impact of public wage and employment policies. The government is assumed to follow exogenous rules for public wages and employment calibrated to match some cyclical features of US policies. These features include a positive public wage premium and mildly procyclical public wages and employment. We find that the presence of the public sector increases the volatility of employment and output.

Financial globalization, inequality, and the raising of public debt

During the last three decades, the stock of government debt has increased in most developed countries. During the same period, we also observe a significant liberalization of international financial markets and an increase in income inequality in several industrialized countries. In this paper we propose a multicountry political economy model with incomplete markets and endogenous government borrowing and show that governments choose higher levels of public debt when financial markets become internationally integrated and inequality increases. We also conduct an empirical analysis using OECD data and find that the predictions of the theoretical model are supported by the empirical results.

Common Currencies vs. Monetary Independence

We study the optimal monetary policy in a two-country open-economy model under two monetary arrangements: (a) multiple currencies controlled by independent policy-makers; (b) common currencies controlled by a centralized policy-maker. Our findings suggest that: (i) Monetary policy competition leads to higher long-term inflation and interest rates with large welfare losses; (ii) The inflation bias and the consequent losses are larger when countries are unable to commit to future policies; (iii) in both cases, the welfare losses from higher in ation dominates the welfare costs of losing the ability to react optimally to business cycle shocks. Therefore, the coordination of policies implicit in the adoption of a common currency or dollarization has positive welfare consequences.

Optimal Time-Consistent Taxation with International Mobility Of Capital

The United States relies for its government revenues more on the taxation of capital relative to the taxation of labor than countries in continental Europe do. In this paper we ask what can account for this. Our approach is to look at Markov perfect equilibria of a two-country growth model where both governments use labor, capital and corporate taxes to finance exogenously given streams of public expenditure under period-by-period balanced budget constraints. There is no commitment technology and the equilibrium policies are time-consistent. We find that differences in productivity, size, and government spending can account for the heavy American reliance on capital taxation.

The Costs of Losing Monetary Independence: The Case of Mexico

This paper develops a two-country monetary model calibrated to data from the United States and Mexico to address the question of whether dollarization is welfare improving for the two countries. Our findings suggest that dollarization is not necessarily Pareto superior to monetary independence for Mexico.

Optimal monetary policy in a Phillips-curve world

Abstract In this paper, we study optimal monetary policy in a model that integrates the modern theory of unemployment with a liquidity model of monetary transmission. Two policy environments are considered: period-by-period optimization (time consistency) and full commitment (Ramsey allocation). When the economy is subject to productivity shocks, the optimal policy is pro-cyclical. We also characterize the long-term properties of monetary policy and show that with commitment the optimal inflation rate is inversely related to the bargaining power of workers. Both results find empirical support in the data.

Inequality in macroeconomics

Abstract We revise some of the main ways in which the study of aggregate performance of an economy overlaps with the study of inequality.