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In general we allow for the possibility that agents may be more myopic than what would be suggested by a planning horizon based on a biological probability of death.
For flexible model calibration we allow for the possibility that OLG households attach a different weight nOLG to consumption than liquidity constrained households. This allows us to model both groups as working during an equal share of their time endowment in steady state, while OLG households have much higher consumption due to their accumulated wealth.
Except for the special case of lump-sum taxation.
Multiplied by the aggregate technology growth rate.
The turnover in the population is assumed to be large enough that the income receipts of the insurance companies exactly equal their payouts.
Without this assumption consumption tax revenue could become too volatile in the short run.
We adopt the convention throughout the paper that all nominal price level variables are written in upper case letters, and that all relative price variables are written in lower case letters.
There are also some small sales of aggregate manufacturing output back to manufacturing firms, related to manufacturers’ need for resources to pay for adjustment costs.
Note that, for the sake of clarity, we make a notational distinction between two types of elasticities of substitution. Elasticities between continua of goods varieties, which give rise to market and pricing power, are denoted by a σ subscripted by the respective sectorial indicator. Elasticities between factors of production, both in manufacturing and in final goods distribution, are denoted by a ξ subscripted by the respective sectorial indicator.
The factor T is a constant that can be set different from one to obtain different levels of GDP per capita across countries.
Note that the last term assumes that the depreciation allowance for capital income taxation purposes is evaluated at current market prices of installed capital
Home bias in tradables use depends on the parameter αTHand on a similar parameter αTH at the level of final goods imports.
The presence of the growth terms in (100) ensure that adjustment costs are zero along the balanced growth path.
In this more general form of the rule, Chile’s recent stimulus package could be reinterpreted in terms of the rule as a more aggressive countercyclical behavior dtax > 1, rather than as a temporary reduction in the structural surplus target gsrat*.
As discussed by Chang and Kim (2005), a very low Frisch elasticity makes it difficult to explain cyclical fluctuations in hours worked, and they present a heterogenous agent model in which aggregate labor supply is considerably more elastic than individual labor supply.
For simplicity we ignore money given the cashless limit assumption.
Take the example of bonds held by those of age 0 at time t – 1. Only θ of those agents survive into period t, but those that do survive obtain 1/θ units of currency for every unit they held in t – 1. Their weight in period t bonds aggregation is therefore