Browsing by Author "Narajabad, Borghan N."

Now showing 1 - 3 of 3
  • Thumbnail Image
    Item
    Income Variability: Effects on U.S. Income Inequality and Tax Progressivity
    (2012-09-05) Splinter, David; Zodrow, George R.; Diamond, John W.; Narajabad, Borghan N.; Ostdiek, Barbara
    Income variability explains a significant fraction of the increase in annual income inequality. Chapter 1 considers the impact of variability on tax unit inequality. Using income tax return panel data, I estimate that between a tenth and a quarter of the increase in top one percent income shares between the early 1980s and 2000s was caused by variability. Increased income variability over this period resulted from mean-reverting fluctuations in the bottom quintile and top one percent. Variability in the top of the distribution seems partly driven by permanent income shifting in response to the Tax Reform Act of 1986. Chapter 2 examines the individual earnings distribution. Using Social Security Administration earnings panel data, I estimate that variability explains half of the increase in annual inequality in the bottom half of the distribution between 1973 and 1985. When workers with years of zero earnings are included, increasing earnings variability explains almost all of this group's increase in inequality. The increase in earnings variability appears to be explained by an increased fraction of working age men with years of zero earnings. Annual individual earnings inequality in the bottom half of the distribution not only increased with variability in the 1970s and 1980s, but also fell with variability in the 1950s and early 1960s. This suggests that the U-shaped trend in income inequality observed over these four decades was partly caused by first a fall and then a rise in earnings variability. Between 1985 and 2000, falling variability caused most of the decline in annual earnings inequality within the bottom half of the distribution. Within the top of the distribution, earnings inequality increased over this period because of changes in permanent earnings and not increasing variability. Income variability means that in a progressive tax system annual and lifetime federal tax rates can diverge. Chapter 3 shows that on an annual basis, those at the bottom of the distribution pay little or no federal income taxes, while on a lifetime basis they pay average tax rates about five percentage points higher. Income variability also means there is a trade-off between vertical and horizontal equity.
  • Thumbnail Image
    Item
    Oil and Macroeconomy
    (2013-09-16) Rizvanoghlu, Islam; Temzelides, Ted; Hartley, Peter R.; Ostdiek, Barbara; Narajabad, Borghan N.; Medlock, Kenneth B., III
    Traditional literature on energy economics gives a central role to exogenous political events (supply shocks) or to global economic growth (aggregate demand shock) in modeling the oil market. However, more recent literature claims that the increased precautionary demand for oil triggered by increased uncertainty about a future oil supply shortfall is also driving the price of oil. Based on this motivation, in the first chapter, we propose to build a DSGE model to explore macroeconomic consequences of precautionary demand motives in the crude oil market. The intuition behind the precautionary demand is that since firms, using oil as an input in their production process, are concerned about the future oil prices, it is reasonable to think that in the case of uncertainty about future oil supply (such as a highly expected war in the Middle East), they will buy futures and/or forward contracts to guarantee a future price and quantity. We simulate the effects of demand shocks in the oil market on macroeconomic variables, such as GDP and inflation. We find that under baseline Taylor-type interest rate rule, real oil price, inflation and output loss overshoot and go down below steady state at the next period if uncertainties are not realized. However, if the shock is realized, i.e. followed by an actual supply shock, the effect on inflation and output loss is high and persistent. Second chapter analyzes the effect of storage market on the monetary policy formulation as a response to an oil price shock. Some recent literature suggests that although high oil prices contributed to recessions, they have never had a pivotal role in the creation of those economic downturns. A general consensus is that the decline in output and employment was due to the rise in interest rates, resulting from the Fed’s endogenous response to the higher inflation induced by oil price shocks. However, traditional literature assumes that oil price shocks are exogenous to the U.S economy and they ignore the storage market for the crude oil. In this regard, a model with an endogenous (demand shock) or exogenous (supply shock) price shock may produce a totally different monetary policy proposal when there exists a market for storage for the crude oil. The rationale behind this idea is that when goods’ prices are sticky in the economy, the monetary authority can effect the level of inventories through the changes in the real interest rates. Thus, lower interest rate rules, as proposed in the literature, will cause additional oil supply scarcity in the spot market. Therefore, an optimal monetary policy that maximizes the welfare in the economy should consider the adverse affect of low interest rates on the crude oil market.
  • Thumbnail Image
    Item
    Three Essays on Sovereign Default and Robust Policy Design
    (2014-04-23) Li, Xin; Loch-Temzelides, Ted; Narajabad, Borghan N.; El-Gamal, Mahmoud A.; Fang, Songying
    Chapter 1 discusses the optimal fiscal response of a small open economy to business cycle fluctuations at the presence of sovereign default risks. The most recent sovereign debt crisis in Europe has demonstrated that the risk of sovereign default is not a problem in developing economies only. However, empirical studies show that fiscal policy tends to be countercyclical or acyclical in developed small open economies and procyclical in developing countries. This chapter presents a general equilibrium model with endogenous government spending, external debt financing, and sovereign default decisions for a small open economy. The model shows that developed countries’ acyclical fiscal response to productivity fluctuations can be motivated by their larger size of public sectors, lower demand elasticity of public goods, and lower volatilities of domestic investments relative to foreign investments, compared to their developing counterparts. Along this line, the recently observed fiscal policy graduation in some Latin American countries can be rationalized by the shifts in the characteristics of their public sectors towards developed countries. The model also implies that fiscal austerity is always optimal for countries with sufficiently high debt-to-output ratio, and the optimal consolidation consists of tax hikes, cuts in public consumption but not in public investment. Based on Chapman, Fang, Li and Stone (2013), Chapter 2 studies the effect of new official bailouts on capital markets when borrowing countries economic state is private information. We first analyze a game-theoretical model of crisis lending that incorporates bargaining, compliance and enforcement. The presence of asymmet- ric information yields two interesting scenarios. There are conditions under which lending reduces the risk of a deepening crisis and reduces the risk premium demanded by market actors. On the other hand, the political interests that make lenders willing to lend weaken the credibility of commitments to reform, and the act of accepting an agreement reveals unfavorable information about the state of the borrower’s economy. The net “catalytic” effect on the price of private borrowing depends on whether these effects dominate the beneficial effects of the liquidity the loan provides. Decomposing the contradictory effects of crisis lending provides an explanation for the discrepant empirical findings about market reactions, especially with regard to IMF programs. We test the implications of our theory by examining how sovereign bond yields are affected by IMF program announcements, loan size, the scope of conditions attached to loans, and measures of the geopolitical interests of the United States, a key IMF principal. Based on Li, Narajabad, and Temzelides (2013), Chapter 3 turns to the study of robust policy design when decision makers are concerned about model uncertainty. We study a dynamic stochastic general equilibrium model where agents are concerned about model uncertainty regarding climate change. An externality from greenhouse gas emissions adversely affects the economy’s capital stock. We assume that the mapping from climate change to damages is subject to uncertainty, and we adapt and use techniques from robust control theory in order to study efficiency and optimal policy. We obtain a sharp analytical solution for the implied environmental externality, and we characterize dynamic optimal taxation. A small increase in the concern about model uncertainty can cause a significant drop in optimal energy extraction. The optimal tax which restores the social optimal allocation is Pigouvian. Under more general assumptions, we develop a recursive method and solve the model computationally. We find that the introduction of uncertainty matters qualitatively and quantitatively. We study optimal output growth in the presence and in the absence of concerns about uncertainty and find that these can lead to substantially different conclusions.