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)| false ( Kravis, Irving B., Alan Hestonand Robert Summers 1982), World Product and Income: International Comparisons of Real Gross Product, United Nations International Comparison Project Phase III, published for The World Bank by the Johns Hopkins University Press, Baltimore, MA.
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Work on this project started while Linda Tesar was a visiting scholar at the Fund’s Research Department. Comments and suggestions by Guillermo Calvo, Larry Christiano, Jeremy Greenwood, Ricardo Hausmann, Assaf Razin, and Alan Stockman are gratefully acknowledged.
If we denote the factor of labor augmenting technological change by Xt, where Xt+1/Xt = γ, the optimization problem that characterizes the model’s equilibrium can be re-defined in stationary form by deflating all variables, except leisure and labor supply, by Xt. To keep the notation simple, this adjustment is not explicitly noted in the paper, but it should be kept in mind when interpreting the variables of the model.
As in King, Plosser and Rebelo (1988), we interpret β=βγ1-σ where 1/B-1 is the rate of time preference.
All variables pertaining to Country 2 are identified by an asterisk.
Using a model of endogenous growth based on human capital accumulation, Razin and Yuen (1993) examine how cross-country differences in capital income tax rates may explain why there is convergence or divergence in growth across countries.
Recall that the model does not have a steady state in levels of the variables, but it does have a stationary equilibrium for variables deflated by the factor of labor-augmenting technological change.
We focus on a particular steady-state solution to the households’ portfolio allocation problem, which is in general indeterminate, by imposing the condition that the ratio of Country 1 to Country 2 wealth is equal to the ratio of post-tax factor incomes.
This may actually underestimate the value of α because it does not include proprietor’s income.
The equilibrium relative price of nontradables in the model is the one that equates the marginal rate of substitution in consumption of tradables and nontradables with the ratio of the real wages paid in each industry. Along the balanced-growth path, this equilibrium relative price can be expressed in reduced form as a function of the labor shares and the capital output ratio in the tradables industry.
For France, Germany, and Italy, they obtained ratios of tradables to nontradables output between 1.14 and 1.27, and for the United States they obtained a ratio of 1.35.
Note that while this policy is an improvement over the benchmark equilibrium that does not require lump-sum taxation and is designed to satisfy the government’s budget constraint, is not necessarily a solution to the Ramsey optimal taxation problem (see Lucas (1990)).
We found that with a speed of adjustment of about 0.1, the Bernheim formula reproduces the costs of transitional dynamics that Cooley and Hansen (1992) obtained.
In Country 2 there are no sectoral changes in the distribution of output across tradables and nontradables, so changes in the net exports-output ratio are a better measure of how changes in government expenditures affect trade via changes in the relative income and wealth positions of the two countries.
Following the figures reported in p. 37 of International Monetary Fund (1993), we estimate that if the public debt convergence criterion is met, given 1992 public debt ratios and a Maastricht-level long-term interest rate of 11 percent, Italy would need to reduce public debt interest payments from 14.2 percent of GDP to 6.6 percent of GDP. In the model, this would imply an increase in the long-term ratio of transfers to GDP of 7.6 percentage points.