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Catching up with the Keynesians

Listed author(s):
  • Ljungqvist, L.
  • Uhlig, H.F.H.V.S.

    (Tilburg University, Center For Economic Research)

This paper examines the role for tax policies in productivity-shock driven economies with \catching-up-with-the-Joneses" utility functions.The optimal tax policy is shown to a ect the economy countercyclically via procyclical taxes, i.e., \cooling down" the economy with higher taxes when it is \overheating" in booms and \stimulating" the economy with lower taxes in recessions to keep consumption up.Thus, models with catching-up-with-the-Joneses utility functions call for traditional Keynesian demand management policies.Parameter values from Campbell and Cochrane (1995) are also used to illustrate that the necessary labor taxes can be very high, in the order of 50 percent.However, Campbell and Cochrane's nonlinear version of the aspiration level in the catching-up-with-the-Joneses preferences has the additional implication that consumption bunching can be welfare enhancing.

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File URL: https://pure.uvt.nl/portal/files/525512/96.pdf
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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 1996-96.

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Date of creation: 1996
Handle: RePEc:tiu:tiucen:f678c765-1782-4a88-8b02-c02cf5dbf264
Contact details of provider: Web page: http://center.uvt.nl

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  1. Michele Boldrin & Lawrence J. Christiano & Jonas D.M. Fisher, 1995. "Asset Pricing Lessons for Modeling Business Cycles," NBER Working Papers 5262, National Bureau of Economic Research, Inc.
  2. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  3. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
  4. Abel, Andrew B, 1990. "Asset Prices under Habit Formation and Catching Up with the Joneses," American Economic Review, American Economic Association, vol. 80(2), pages 38-42, May.
  5. Michael J. Boskin & Eytan Sheshinski, 1978. "Optimal Redistributive Taxation When Individual Welfare Depends upon Relative Income," The Quarterly Journal of Economics, Oxford University Press, vol. 92(4), pages 589-601.
  6. John Y. Campbell & John H. Cochrane, 1994. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," CRSP working papers 412, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  7. Gali, Jordi, 1994. "Keeping Up with the Joneses: Consumption Externalities, Portfolio Choice, and Asset Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(1), pages 1-8, February.
  8. Kevin M. Murphy & Andrei Shleifer & Robert W. Vishny, 1989. "Building Blocks of Market Clearing Business Cycle Models," NBER Chapters,in: NBER Macroeconomics Annual 1989, Volume 4, pages 247-302 National Bureau of Economic Research, Inc.
  9. Constantinides, George M, 1990. "Habit Formation: A Resolution of the Equity Premium Puzzle," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 519-543, June.
  10. repec:dgr:kubcen:199554 is not listed on IDEAS
  11. Persson, Mats, 1995. " Why Are Taxes So High in Egalitarian Societies?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(4), pages 569-580, December.
  12. Martin Lettau & Harald Uhlig, 2000. "Can Habit Formation be Reconciled with Business Cycle Facts?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 79-99, January.
  13. Abel, Andrew B., 1999. "Risk premia and term premia in general equilibrium," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 3-33, February.
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