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Optimal Savings Distortions with Recursive Preferences

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  • Emmanuel Farhi
  • Iván Werning

Abstract

This paper derives an intertemporal optimality condition for economies with private information, focusing on a class of recursive preferences. By comparing it to the situation where agents can freely save in a risk-free asset market, we derive the optimal savings distortions necessary for constrained optimality. Our recursive preferences are homogeneous and satisfy a balanced growth condition, while allowing us to separate the role of risk aversion and intertemporal elasticity of substitution. We perform some quantitative exercises that disentangle the respective roles played by these two parameters play in opt8imal distortions and the implied welfare gains.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13720.

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Date of creation: Jan 2008
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Publication status: published as Farhi, Emmanuel & Werning, Iván, 2008. "Optimal savings distortions with recursive preferences," Journal of Monetary Economics, Elsevier, vol. 55(1), pages 21-42, January.
Handle: RePEc:nbr:nberwo:13720

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  1. Emannauel Farhi & Ivan Werning, 2006. "Capital Taxation," 2006 Meeting Papers, Society for Economic Dynamics 455, Society for Economic Dynamics.
  2. Mikhail Golosov & Narayana Kocherlakota & Aleh Tsyvinski, 2003. "Optimal Indirect and Capital Taxation," Review of Economic Studies, Oxford University Press, vol. 70(3), pages 569-587.
  3. Ligon, Ethan, 1998. "Risk Sharing and Information in Village Economics," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 65(4), pages 847-64, October.
  4. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, Econometric Society, vol. 53(1), pages 69-76, January.
  5. P. A. Diamond & J. A. Mirrlees, 1977. "A Model of Social Insurance With Variable Retirement," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 210, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, Econometric Society, vol. 57(4), pages 937-69, July.
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Cited by:
  1. Koehne, Sebastian & Kuhn, Moritz, 2013. "Optimal capital taxation for time-nonseparable preferences," MPRA Paper 45203, University Library of Munich, Germany.
  2. Karantounias, Anastasios G., 2013. "Optimal fiscal policy with recursive preferences," Working Paper, Federal Reserve Bank of Atlanta 2013-07, Federal Reserve Bank of Atlanta.
  3. Anastasios G. Karantounias with Lars Peter Hansen & Thomas J. Sargent, 2009. "Managing expectations and fiscal policy," Working Paper, Federal Reserve Bank of Atlanta 2009-29, Federal Reserve Bank of Atlanta.
  4. Karantounias, Anastasios G., 2013. "Managing pessimistic expectations and fiscal policy," Theoretical Economics, Econometric Society, Econometric Society, vol. 8(1), January.

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