Essays in incomplete markets

This thesis studies the macroeconomics of incomplete markets. Chapter 1 studies the effects of capital taxation in a dynamic heterogeneous-agent economy with uninsurable entrepreneurial risk. Unlike either the complete-markets paradigm or Bewley-type models where idiosyncratic risk impacts only labor income, here it is shown that capital taxation may actually stimulate capital accumulation. This possibility emerges because of the general-equilibrium effects of the insurance aspect of capital taxation. Chapter 2, which is joint work with George-Marios Angeletos, revisits the macroeconomic effects of government consumption in the neoclassical growth model augmented with idiosyncratic investment (or entrepreneurial) risk. Under complete markets, a permanent increase in government consumption has no long-run effect on the interest rate, the capital-labor ratio, and labor productivity, while it increases work hours due to the familiar negative wealth effect. Under incomplete markets, the very same negative wealth effect now causes a reduction in risk taking and investment. This in turn leads to a lower risk-free rate and, under certain conditions, also to a lower capital-labor ratio, lower productivity and lower wages. Chapter 3 uses annual Greek data to test the validity of the Permanent Income Hypothesis (PIH) versus the "Keynesian" view that consumption responds to current income. The PIH is rejected by all tests, and so is the simple excess sensitivity hypothesis with a constant marginal propensity to consume.

Department dc:contributor.department

Massachusetts Institute of Technology. Dept. of Economics.

Grantor dc:publisher

Massachusetts Institute of Technology

Year dc:date.issued

2008

Author dc:creator

• Panousi, Vasia

Advisor dc:contributor.advisor

• George-Marios Angeltos and Mikhail Golosov.

• Economics.

Statement dc:rights

• M.I.T. theses are protected by copyright. They may be viewed from this source for any purpose, but reproduction or distribution in any format is prohibited without written permission. See provided URL for inquiries about permission.

Licence dc:rights.uri

• http://dspace.mit.edu/handle/1721.1/7582

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/1721.1/43761

OAI identifier oai:identifier

oai:dspace.mit.edu:1721.1/43761