On Impatience and Policy Effectiveness
International Monetary Fund, Jan 1, 2009 - Business & Economics - 28 pages
An increasing body of evidence suggests that the behavior of the economy has changed in many fundamental ways over the last decades. In particular, greater financial deregulation, larger wealth accumulation, and better policies might have helped lower uncertainty about future income and lengthen private sectors'' planning horizon. In an overlapping-generations model, in which individuals discount the future more rapidly than implied by the market rate of interest, we find indeed evidence of a falling degree of impatience, providing empirical support for this hypothesis. The degree of persistence of "windfall" shocks to disposable income also appears to have varied over time. Shifts of this kind are shown to have a key impact on the average marginal propensity to consume and on the size of policy multipliers.
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aggregate income aggregate labor income analysis assumed Bayoumi and Sgherri cents changes in income cohort cointegrating consumption and aggregate Consumption equation consumption function corresponding Cr+i Critical values denoted deterministic trend discount rate discount the future discount wedge disposable income effectiveness of income Eigenvalue estimated F+)t financial wealth fiscal policy fiscal shocks ﬂy future more rapidly govemment government’s budget constraint households hypothesis impatience implied coefficients income and fiscal income and policy increase individual inﬂation Interest rate equation INTERNATIONAL MONETARY FUND intertemporal lengthening monetary and fiscal moves each period Ng-Perron percent planning horizon policy effectiveness policy multipliers policy shock private consumption private sector behavior progressive tax public spending random walk rational expectations real interest rate restrictions Ricardian equivalence sample shocks to disposable stationary autoregressive process stochastic stochastic process t-statistic tax and transfer tax cut tax rate equation U(Cz+i unit root unrestricted model w/fitted persistence Wald test walk with drift