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The Effectiveness of Consumption Taxes and Transfers as Insurance against Idiosyncratic Risk

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  • Tomoyuki Nakajima

    (Institute of Economic Research, Kyoto University)

  • Shuhei Takahashi

    (Institute of Economic Research, Kyoto University)

Abstract

We quantitatively evaluate the effectiveness of a consumption tax and transfer pro- gram as insurance against idiosyncratic earnings risk. Our framework is a heterogeneous- agent, incomplete-market model with idiosyncratic wage risk and indivisible labor. The model is calibrated to the U.S. economy. We find a weak insurance effect of the transfer program. Extending the transfer system from the current scale raises consumption un- certainty, which increases aggregate savings and reduces the interest rate. Furthermore, consumption inequality shows a small decrease.

Suggested Citation

  • Tomoyuki Nakajima & Shuhei Takahashi, 2017. "The Effectiveness of Consumption Taxes and Transfers as Insurance against Idiosyncratic Risk," UTokyo Price Project Working Paper Series 074, University of Tokyo, Graduate School of Economics.
  • Handle: RePEc:upd:utppwp:074
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    References listed on IDEAS

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    Cited by:

    1. Nakajima, Tomoyuki & Takahashi, Shuhei, 2017. "The optimum quantity of debt for Japan," Journal of the Japanese and International Economies, Elsevier, vol. 46(C), pages 17-26.

    More about this item

    Keywords

    Consumption taxes; Transfers; Risk sharing; Consumption inequality; Indivisible labor; Incomplete markets;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models

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