Federal college financial aid imposes an implicit tax on asset accumulation, which reduces the incentive for families to save. Prior literature has found evidence of large reductions in asset accumulation as a result. This paper finds that these conclusions are over-estimated and are sensitive to the assumptions used in estimating the implicit tax rate. Additionally, the 1992 exemption of home ...

Stagnation as the new norm and fiscal policy are examined in a New Keynesian model with adaptive learning determining expectations. We impose inflation and consumption lower bounds, which can be relevant when agents are pessimistic. The inflation target is locally stable under learning. Pessimistic initial expectations may sink the economy into steady-state stagnation with deflation. The deflat...

This paper shows theoretically and empirically that an aggregate Euler equation relates the growth rate of per capita consumption to the real interest rate, the ratio of private wealth plus asset income to consumption, and the ratio of social security wealth to consumption. Using the estimated Euler equation, the paper then calculates the steady-state effects of social security reform. Reforms ...

This paper solves a realistically calibrated life-cycle model of consumption and portfolio choice with uninsurable labor income risk and borrowing constraints. Since labor income substitutes for riskless asset holdings the optimal share invested in equities is roughly decreasing over life. We compute a measure of the importance of non-tradable human capital for investment behavior to find that ...

I simulate a life-cycle model with preferences described by a utility function à la Gul and Pesendorfer (2001). I show that temptation to consume contributes to explain the saving, retirement consumption, and asset allocation puzzles. I perform two analyses, excluding or including Social Security protection, separately for the US and Italy. The pension replacement rate is endogenous in the mode...

Forward-looking agents care about expected future utility flows, and hence have higher current felicity if they are optimistic. This paper studies utility-based biases in beliefs by supposing that beliefs maximize average felicity, optimally balancing this benefit of optimism against the costs of worse decision making. A small optimistic bias in beliefs typically leads to first-order gains in a...

Using the standard real business cycle model with lump-sum taxes, we analyze the impact of fiscal policy when agents form expectations using adaptive learning rather than rational expectations (RE). The output multipliers for government purchases are significantly higher under learning, and fall within empirical bounds reported in the literature, which is in sharp contrast to the implausibly lo...

We examine the ability of the Expansionary Fiscal Contraction (EFC) hypothesis to explain the performance of of OECD economies during times of crisis. We ̄nd some limited evidence in its favour: if public consumption is reduced in response to a ̄scal crisis (as de ̄ned by a high level of debt), private consumption does seem to increase. However the size of the e®ect is smaller than that typicall...

The effect of wealth on consumption is an issue of longstanding interest to economists. Analysts believe that fluctuations in household wealth have driven major swings in economic activity. This paper considers so-called wealth effects—the impact of changes in wealth on household consumption and the overall macroeconomy. There is an extensive existing literature on wealth effects, but there are...

In the wake of emerging market turmoil, the role and welfare consequences of volatility have attracted renewed attention. An emerging consensus points to various types of volatility being both a consequence and a determinant of longerterm growth performance. The linkages appear to be context dependent. This paper employs classification tree analysis to explore determinants of consumption volati...