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The Effectiveness of Consumption Taxes and Transfers as Insurance Against Idiosyncratic Risk
Author(s) -
NAKAJIMA TOMOYUKI,
TAKAHASHI SHUHEI
Publication year - 2019
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12597
Subject(s) - consumption (sociology) , economics , incomplete markets , earnings , productivity , constraint (computer aided design) , transfer (computing) , systematic risk , monetary economics , capital (architecture) , lump sum , inequality , labour economics , econometrics , microeconomics , macroeconomics , finance , payment , mechanical engineering , history , social science , archaeology , sociology , parallel computing , computer science , engineering , mathematical analysis , mathematics
We quantitatively evaluate the effectiveness of a consumption tax and lump‐sum transfer program as insurance against idiosyncratic earnings risk. We use a heterogeneous agent, incomplete markets model in which households adjust savings and employment in each period in the presence of idiosyncratic productivity risk and a borrowing constraint. The model is calibrated to the U.S. economy. We find a weak insurance effect of the consumption tax and transfer program. Expanding the tax and transfer program from the current U.S. level increases the capital‐output ratio and reduces the interest rate. Consumption inequality also decreases only slightly.