|
159 | 159 | "\n",
|
160 | 160 | "AMSS allow the government to issue only one-period risk-free debt each period.\n",
|
161 | 161 | "\n",
|
162 |
| - "Ruling out complete markets in this way is a step in the direction of making total tax collections behave more like that prescribed in [[Bar79]](https://python-programming.quantecon.org/zreferences.html#barro1979) than they do in [[LS83]](https://python-programming.quantecon.org/zreferences.html#lucasstokey1983)." |
| 162 | + "Ruling out complete markets in this way is a step in the direction of making total tax collections behave more like that prescribed in Robert Barro (1979) [[Bar79]](https://python-programming.quantecon.org/zreferences.html#barro1979) than they do in Lucas and Stokey (1983) [[LS83]](https://python-programming.quantecon.org/zreferences.html#lucasstokey1983)." |
163 | 163 | ]
|
164 | 164 | },
|
165 | 165 | {
|
|
186 | 186 | "$$\n",
|
187 | 187 | "\\begin{aligned}\n",
|
188 | 188 | "b_t(s^{t-1})\n",
|
189 |
| - " & = \\tau^n_t(s^t) n_t(s^t) - g_t(s_t) - T_t(s^t) +\n", |
| 189 | + " & = \\tau^n_t(s^t) n_t(s^t) - g(s_t) - T_t(s^t) +\n", |
190 | 190 | " {b_{t+1}(s^t) \\over R_t(s^t )}\n",
|
191 | 191 | " \\\\\n",
|
192 |
| - " & \\equiv z(s^t) + {b_{t+1}(s^t) \\over R_t(s^t )},\n", |
| 192 | + " & \\equiv z_t(s^t) + {b_{t+1}(s^t) \\over R_t(s^t )},\n", |
193 | 193 | "\\end{aligned} \\tag{4}\n",
|
194 | 194 | "$$\n",
|
195 | 195 | "\n",
|
196 |
| - "where $ z(s^t) $ is the net-of-interest government surplus.\n", |
| 196 | + "where $ z_t(s^t) $ is the net-of-interest government surplus.\n", |
197 | 197 | "\n",
|
198 | 198 | "To rule out Ponzi schemes, we assume that the government is subject to a **natural debt limit** (to be discussed in a forthcoming lecture).\n",
|
199 | 199 | "\n",
|
|
212 | 212 | "\n",
|
213 | 213 | "<a id='equation-ts-gov-wo2'></a>\n",
|
214 | 214 | "$$\n",
|
215 |
| - "b_t(s^{t-1}) = z(s^t) + \\beta \\sum_{s^{t+1}\\vert s^t} \\pi_{t+1}(s^{t+1} | s^t)\n", |
| 215 | + "b_t(s^{t-1}) = z_t(s^t) + \\beta \\sum_{s^{t+1}\\vert s^t} \\pi_{t+1}(s^{t+1} | s^t)\n", |
216 | 216 | " { u_c(s^{t+1}) \\over u_c(s^{t}) } \\; b_{t+1}(s^t) \\tag{5}\n",
|
217 | 217 | "$$\n",
|
218 | 218 | "\n",
|
219 |
| - "Components of $ z(s^t) $ on the right side depend on $ s^t $, but the left side is required to depend only\n", |
| 219 | + "Components of $ z_t(s^t) $ on the right side depend on $ s^t $, but the left side is required to depend only\n", |
220 | 220 | "on $ s^{t-1} $ .\n",
|
221 | 221 | "\n",
|
222 | 222 | "**This is what it means for one-period government debt to be risk-free**.\n",
|
223 | 223 | "\n",
|
224 |
| - "Therefore, the sum on the right side of equation [(5)](#equation-ts-gov-wo2) also has to depend only on $ s^{t-1} $.\n", |
| 224 | + "Therefore, the right side of equation [(5)](#equation-ts-gov-wo2) also has to depend only on $ s^{t-1} $.\n", |
225 | 225 | "\n",
|
226 | 226 | "This requirement will give rise to **measurability constraints** on the Ramsey allocation to be discussed soon.\n",
|
227 | 227 | "\n",
|
|
230 | 230 | "particular realization $ s_{t} $) we get\n",
|
231 | 231 | "\n",
|
232 | 232 | "$$\n",
|
233 |
| - "b_t(s^{t-1}) = z(s^t) + \\sum_{s^{t+1}\\vert s^t} \\beta \\pi_{t+1}(s^{t+1} | s^t)\n", |
| 233 | + "b_t(s^{t-1}) = z_t(s^t) + \\sum_{s^{t+1}\\vert s^t} \\beta \\pi_{t+1}(s^{t+1} | s^t)\n", |
234 | 234 | " { u_c(s^{t+1}) \\over u_c(s^{t}) }\n",
|
235 |
| - "\\, \\left[z(s^{t+1}) + {b_{t+2}(s^{t+1}) \\over R_{t+1}(s^{t+1})}\\right]\n", |
| 235 | + "\\, \\left[z_{t+1}(s^{t+1}) + {b_{t+2}(s^{t+1}) \\over R_{t+1}(s^{t+1})}\\right]\n", |
236 | 236 | "$$\n",
|
237 | 237 | "\n",
|
238 | 238 | "After making similar repeated substitutions for all future occurrences of\n",
|
239 |
| - "government indebtedness, and by invoking the natural debt limit, we\n", |
| 239 | + "government indebtedness, and by invoking a natural debt limit, we\n", |
240 | 240 | "arrive at:\n",
|
241 | 241 | "\n",
|
242 | 242 | "\n",
|
|
245 | 245 | "\\begin{aligned}\n",
|
246 | 246 | "b_t(s^{t-1})\n",
|
247 | 247 | " &= \\sum_{j=0}^\\infty \\sum_{s^{t+j} | s^t} \\beta^j \\pi_{t+j}(s^{t+j} | s^t)\n",
|
248 |
| - " { u_c(s^{t+j}) \\over u_c(s^{t}) } \\;z(s^{t+j})\n", |
| 248 | + " { u_c(s^{t+j}) \\over u_c(s^{t}) } \\;z_{t+j}(s^{t+j})\n", |
249 | 249 | " \\end{aligned} \\tag{6}\n",
|
250 | 250 | "$$\n",
|
251 | 251 | "\n",
|
|
258 | 258 | "- use the household’s first-order condition $ 1-\\tau^n_t(s^t)= u_{\\ell}(s^t) /u_c(s^t) $ to eliminate the labor tax rate \n",
|
259 | 259 | "\n",
|
260 | 260 | "\n",
|
261 |
| - "so that we can express the net-of-interest government surplus $ z(s^t) $ as\n", |
| 261 | + "so that we can express the net-of-interest government surplus $ z_t(s^t) $ as\n", |
262 | 262 | "\n",
|
263 | 263 | "\n",
|
264 | 264 | "<a id='equation-amss-44-2'></a>\n",
|
265 | 265 | "$$\n",
|
266 |
| - "z(s^t)\n", |
267 |
| - " = \\left[1 - {u_{\\ell}(s^t) \\over u_c(s^t)}\\right] \\left[c_t(s^t)+g_t(s_t)\\right]\n", |
268 |
| - " -g_t(s_t) - T_t(s^t)\\,. \\tag{7}\n", |
| 266 | + "z_t(s^t)\n", |
| 267 | + " = \\left[1 - {u_{\\ell}(s^t) \\over u_c(s^t)}\\right] \\left[c_t(s^t)+g(s_t)\\right]\n", |
| 268 | + " -g(s_t) - T_t(s^t)\\,. \\tag{7}\n", |
269 | 269 | "$$\n",
|
270 | 270 | "\n",
|
271 |
| - "If we substitute appropriate versions of the right side of [(7)](#equation-amss-44-2) for $ z(s^{t+j}) $ into equation [(6)](#equation-ts-gov-wo3),\n", |
| 271 | + "If we substitute appropriate versions of the right side of [(7)](#equation-amss-44-2) for $ z_{t+j}(s^{t+j}) $ into equation [(6)](#equation-ts-gov-wo3),\n", |
272 | 272 | "we obtain a sequence of *implementability constraints* on a Ramsey allocation in an AMSS economy.\n",
|
273 | 273 | "\n",
|
274 | 274 | "Expression [(6)](#equation-ts-gov-wo3) at time $ t=0 $ and initial state $ s^0 $\n",
|
|
278 | 278 | "<a id='equation-ts-gov-wo4'></a>\n",
|
279 | 279 | "$$\n",
|
280 | 280 | "b_0(s^{-1}) = \\mathbb E_0 \\sum_{j=0}^\\infty \\beta^j\n",
|
281 |
| - " { u_c(s^{j}) \\over u_c(s^{0}) } \\;z(s^{j}) \\tag{8}\n", |
| 281 | + " { u_c(s^{j}) \\over u_c(s^{0}) } \\;z_j(s^{j}) \\tag{8}\n", |
282 | 282 | "$$\n",
|
283 | 283 | "\n",
|
284 | 284 | "Indeed, it was the *only* implementability constraint there.\n",
|
|
289 | 289 | "<a id='equation-ts-gov-wo4a'></a>\n",
|
290 | 290 | "$$\n",
|
291 | 291 | "b_t(s^{t-1}) = \\mathbb E_t \\sum_{j=0}^\\infty \\beta^j\n",
|
292 |
| - " { u_c(s^{t+j}) \\over u_c(s^{t}) } \\;z(s^{t+j}) \\tag{9}\n", |
| 292 | + " { u_c(s^{t+j}) \\over u_c(s^{t}) } \\;z_{t+j}(s^{t+j}) \\tag{9}\n", |
293 | 293 | "$$\n",
|
294 | 294 | "\n",
|
295 | 295 | "Equation [(9)](#equation-ts-gov-wo4a) must hold for each $ s^t $ for each $ t \\geq 1 $."
|
|
321 | 321 | "$$\n",
|
322 | 322 | "\\max_{\\{c_t(s^t),b_{t+1}(s^t)\\}}\n",
|
323 | 323 | "\\mathbb E_0 \\sum_{t=0}^\\infty \\beta^t\n",
|
324 |
| - " u\\left(c_t(s^t),1-c_t(s^t)-g_t(s_t)\\right)\n", |
| 324 | + " u\\left(c_t(s^t),1-c_t(s^t)-g(s_t)\\right)\n", |
325 | 325 | "$$\n",
|
326 | 326 | "\n",
|
327 | 327 | "where the maximization is subject to\n",
|
|
330 | 330 | "<a id='equation-amss-44'></a>\n",
|
331 | 331 | "$$\n",
|
332 | 332 | "\\mathbb E_{0} \\sum_{j=0}^\\infty \\beta^j\n",
|
333 |
| - " { u_c(s^{j}) \\over u_c(s^{0}) } \\;z(s^{j}) \\geq b_0(s^{-1}) \\tag{10}\n", |
| 333 | + " { u_c(s^{j}) \\over u_c(s^{0}) } \\;z_j(s^{j}) \\geq b_0(s^{-1}) \\tag{10}\n", |
334 | 334 | "$$\n",
|
335 | 335 | "\n",
|
336 | 336 | "and\n",
|
|
340 | 340 | "$$\n",
|
341 | 341 | "\\mathbb E_{t} \\sum_{j=0}^\\infty \\beta^j\n",
|
342 | 342 | " { u_c(s^{t+j}) \\over u_c(s^{t}) } \\;\n",
|
343 |
| - " z(s^{t+j}) = b_t(s^{t-1})\n", |
| 343 | + " z_{t+j}(s^{t+j}) = b_t(s^{t-1})\n", |
344 | 344 | " \\quad \\forall \\, t, s^t \\tag{11}\n",
|
345 | 345 | "$$\n",
|
346 | 346 | "\n",
|
|
369 | 369 | " &\\;\\geq\\; (\\leq)\\;\\, 0 \\quad \\text{if the constraint binds in the following direction }\n",
|
370 | 370 | " \\\\\n",
|
371 | 371 | " & \\mathbb E_{t} \\sum_{j=0}^\\infty \\beta^j\n",
|
372 |
| - " { u_c(s^{t+j}) \\over u_c(s^{t}) } \\;z(s^{t+j}) \\;\\geq \\;(\\leq)\\;\\, b_t(s^{t-1})\n", |
| 372 | + " { u_c(s^{t+j}) \\over u_c(s^{t}) } \\;z_{t+j}(s^{t+j}) \\;\\geq \\;(\\leq)\\;\\, b_t(s^{t-1})\n", |
373 | 373 | "\\end{aligned}\n",
|
374 | 374 | "$$\n",
|
375 | 375 | "\n",
|
|
399 | 399 | "$$\n",
|
400 | 400 | "\\begin{aligned}\n",
|
401 | 401 | " J &= \\mathbb E_{0} \\sum_{t=0}^\\infty \\beta^t\n",
|
402 |
| - " \\biggl\\{ u\\left(c_t(s^t), 1-c_t(s^t)-g_t(s_t)\\right)\\\\\n", |
| 402 | + " \\biggl\\{ u\\left(c_t(s^t), 1-c_t(s^t)-g(s_t)\\right)\\\\\n", |
403 | 403 | " & \\qquad + \\gamma_t(s^t) \\Bigl[ \\mathbb E_{t} \\sum_{j=0}^\\infty \\beta^j\n",
|
404 |
| - " u_c(s^{t+j}) \\,z(s^{t+j}) - u_c(s^{t}) \\,b_t(s^{t-1}) \\biggr\\}\n", |
| 404 | + " u_c(s^{t+j}) \\,z_{t+j}(s^{t+j}) - u_c(s^{t}) \\,b_t(s^{t-1}) \\biggr\\}\n", |
405 | 405 | " \\\\\n",
|
406 | 406 | " &= \\mathbb E_{0} \\sum_{t=0}^\\infty \\beta^t\n",
|
407 |
| - " \\biggl\\{ u\\left(c_t(s^t), 1-c_t(s^t)-g_t(s_t)\\right)\n", |
| 407 | + " \\biggl\\{ u\\left(c_t(s^t), 1-c_t(s^t)-g(s_t)\\right)\n", |
408 | 408 | " \\\\\n",
|
409 |
| - " & \\qquad + \\Psi_t(s^t)\\, u_c(s^{t}) \\,z(s^{t}) -\n", |
| 409 | + " & \\qquad + \\Psi_t(s^t)\\, u_c(s^{t}) \\,z_t(s^{t}) -\n", |
410 | 410 | " \\gamma_t(s^t)\\, u_c(s^{t}) \\, b_t(s^{t-1}) \\biggr\\}\n",
|
411 | 411 | "\\end{aligned} \\tag{12}\n",
|
412 | 412 | "$$\n",
|
|
433 | 433 | "$$\n",
|
434 | 434 | "\\begin{aligned}\n",
|
435 | 435 | " u_c(s^t)-u_{\\ell}(s^t) &+ \\Psi_t(s^t)\\left\\{ \\left[\n",
|
436 |
| - " u_{cc}(s^t) - u_{c\\ell}(s^{t})\\right]z(s^{t}) +\n", |
| 436 | + " u_{cc}(s^t) - u_{c\\ell}(s^{t})\\right]z_t(s^{t}) +\n", |
437 | 437 | " u_{c}(s^{t})\\,z_c(s^{t}) \\right\\}\n",
|
438 | 438 | " \\\\\n",
|
439 | 439 | " & \\hspace{35mm} - \\gamma_t(s^t)\\left[\n",
|
|
449 | 449 | "\\mathbb E_{t} \\left[\\gamma_{t+1}(s^{t+1})\\,u_c(s^{t+1})\\right] = 0 \\tag{15}\n",
|
450 | 450 | "$$\n",
|
451 | 451 | "\n",
|
452 |
| - "If we substitute $ z(s^t) $ from [(7)](#equation-amss-44-2) and its derivative\n", |
| 452 | + "If we substitute $ z_t(s^t) $ from [(7)](#equation-amss-44-2) and its derivative\n", |
453 | 453 | "$ z_c(s^t) $ into the first-order condition [(14)](#equation-amss-foc-a), we find two\n",
|
454 | 454 | "differences from the corresponding condition for the optimal allocation\n",
|
455 | 455 | "in a Lucas-Stokey economy with state-contingent government debt.\n",
|
|
686 | 686 | "where $ R_t(s^t) $ is the gross risk-free rate of interest between $ t $\n",
|
687 | 687 | "and $ t+1 $ at history $ s^t $ and $ T_t(s^t) $ are non-negative transfers.\n",
|
688 | 688 | "\n",
|
689 |
| - "Throughout this lecture, we shall set transfers to zero (for some issues about the limiting behavior of debt, this makes a possibly\n", |
690 |
| - "important difference from AMSS [[AMSSeppala02]](https://python-programming.quantecon.org/zreferences.html#aiyagari2002optimal), who restricted transfers\n", |
| 689 | + "Throughout this lecture, we shall set transfers to zero (for some issues about the limiting behavior of debt, this is possibly an important difference from AMSS [[AMSSeppala02]](https://python-programming.quantecon.org/zreferences.html#aiyagari2002optimal), who restricted transfers\n", |
691 | 690 | "to be non-negative).\n",
|
692 | 691 | "\n",
|
693 | 692 | "In this case, the household faces a sequence of budget constraints\n",
|
|
849 | 848 | "\\beta V_x(x(s),s) = \\mu(s|s_-) \\tag{26}\n",
|
850 | 849 | "$$\n",
|
851 | 850 | "\n",
|
852 |
| - "Applying the envelope theorem to Bellman equation [(22)](#equation-eqn-amssapp5) gives\n", |
| 851 | + "Applying an envelope theorem to Bellman equation [(22)](#equation-eqn-amssapp5) gives\n", |
853 | 852 | "\n",
|
854 | 853 | "\n",
|
855 | 854 | "<a id='equation-eqn-amssapp8'></a>\n",
|
|
864 | 863 | "<a id='equation-eqn-amssapp9'></a>\n",
|
865 | 864 | "$$\n",
|
866 | 865 | "V_x(x_-, s_-) = \\sum_{s} \\left( \\Pi(s|s_-) {\\frac{u_c(s)}{\\sum_{\\tilde s}\n",
|
867 |
| - "\\Pi(\\tilde s| s_-) u_c(\\tilde s)}} \\right) V_x(x(s), s) \\tag{28}\n", |
| 866 | + "\\Pi(\\tilde s| s_-) u_c(\\tilde s)}} \\right) V_x(x, s) \\tag{28}\n", |
868 | 867 | "$$\n",
|
869 | 868 | "\n",
|
870 | 869 | "Equation [(28)](#equation-eqn-amssapp9) states that $ V_x(x, s) $ is a *risk-adjusted martingale*.\n",
|
|
899 | 898 | "- a counterpart to $ V_x(x,s) $ is time-invariant and equal to\n",
|
900 | 899 | " the Lagrange multiplier on the Lucas-Stokey implementability constraint \n",
|
901 | 900 | "- time invariance of $ V_x(x,s) $ is the source of a key\n",
|
902 |
| - " feature of the Lucas-Stokey model, namely, **state variable degeneracy** in which $ x_t $ is an exact time-invariant function of $ s_t $) \n", |
| 901 | + " feature of the Lucas-Stokey model, namely, **state variable degeneracy** in which $ x_t $ is an exact time-invariant function of $ s_t $. \n", |
903 | 902 | "\n",
|
904 | 903 | "\n",
|
905 | 904 | "That $ V_x(x,s) $ varies over time according to a twisted martingale\n",
|
|
1374 | 1373 | ">For convenience in matching our computer code, we have expressed\n",
|
1375 | 1374 | "utility as a function of $ n $ rather than leisure $ l $.\n",
|
1376 | 1375 | "\n",
|
1377 |
| - "We consider the same government expenditure process studied in the lecture on\n", |
| 1376 | + "We first consider a government expenditure process that we studied earlier in a lecture on\n", |
1378 | 1377 | "[optimal taxation with state-contingent debt](https://python-programming.quantecon.org/opt_tax_recur.html).\n",
|
1379 | 1378 | "\n",
|
1380 | 1379 | "Government expenditures are known for sure in all periods except one.\n",
|
|
1470 | 1469 | "cell_type": "markdown",
|
1471 | 1470 | "metadata": {},
|
1472 | 1471 | "source": [
|
1473 |
| - "The following figure plots the Ramsey plan under both complete and incomplete\n", |
| 1472 | + "The following figure plots Ramsey plans under complete and incomplete\n", |
1474 | 1473 | "markets for both possible realizations of the state at time $ t=3 $.\n",
|
1475 | 1474 | "\n",
|
1476 |
| - "Optimal policies when the government has access to state-contingent debt are\n", |
1477 |
| - "represented by black lines, while the optimal policies when there is only a risk-free bond are in red.\n", |
| 1475 | + "Ramsey outcomes and policies when the government has access to state-contingent debt are\n", |
| 1476 | + "represented by black lines and by red lines when there is only a risk-free bond.\n", |
1478 | 1477 | "\n",
|
1479 | 1478 | "Paths with circles are histories in which there is peace, while those with\n",
|
1480 | 1479 | "triangle denote war."
|
|
1553 | 1552 | "\n",
|
1554 | 1553 | "If it is able to trade state-contingent debt, then at time $ t=2 $\n",
|
1555 | 1554 | "\n",
|
1556 |
| - "- the government purchases an Arrow security that pays off when $ g_3 = g_h $ \n", |
1557 |
| - "- the government sells an Arrow security that pays off when $ g_3 = g_l $ \n", |
1558 |
| - "- these purchases are designed in such a way that regardless of whether or not there is a war at $ t=3 $, the government will begin period $ t=4 $ with the *same* government debt \n", |
| 1555 | + "- the government **purchases** an Arrow security that pays off when $ g_3 = g_h $ \n", |
| 1556 | + "- the government **sells** an Arrow security that pays off when $ g_3 = g_l $ \n", |
| 1557 | + "- the Ramsey planner designs these purchases and sales designed so that, regardless of whether or not there is a war at $ t=3 $, the government begins period $ t=4 $ with the *same* government debt \n", |
1559 | 1558 | "\n",
|
1560 | 1559 | "\n",
|
1561 | 1560 | "This pattern facilities smoothing tax rates across states.\n",
|
|
1564 | 1563 | "\n",
|
1565 | 1564 | "Instead, it must enter time $ t=3 $ with the same level of debt falling due whether there is peace or war at $ t=3 $.\n",
|
1566 | 1565 | "\n",
|
1567 |
| - "It responds to this constraint by smoothing tax rates across time.\n", |
| 1566 | + "The risk-free rate between time $ 2 $ and time $ 3 $ is unusually **low** because at time $ 2 $ consumption at time $ 3 $ is expected to be unusually **low**.\n", |
1568 | 1567 | "\n",
|
1569 |
| - "To finance a war it raises taxes and issues more debt.\n", |
| 1568 | + "A **low** risk-free rate of return on government debt between time $ 2 $ and time $ 3 $ allows the government to enter period $ 3 $ with **lower** government debt than it entered period $ 2 $.\n", |
| 1569 | + "\n", |
| 1570 | + "To finance a war at time $ 3 $ it raises taxes and issues more debt to carry into perpetual peace that begins in period $ 4 $.\n", |
1570 | 1571 | "\n",
|
1571 | 1572 | "To service the additional debt burden, it raises taxes in all future periods.\n",
|
1572 | 1573 | "\n",
|
|
1786 | 1787 | }
|
1787 | 1788 | ],
|
1788 | 1789 | "metadata": {
|
1789 |
| - "date": 1619402673.1077754, |
| 1790 | + "date": 1619661941.0074658, |
1790 | 1791 | "filename": "amss.rst",
|
1791 | 1792 | "kernelspec": {
|
1792 | 1793 | "display_name": "Python",
|
|
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