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Essays in Macroeconomics with Heterogeneous Agents and Portfolio Choice
Bakota, Ivo ; Slavík, Ctirad (vedoucí práce) ; Karabarbounis, Marios (oponent) ; Krueger, Dirk (oponent)
Dissertation Abstract Essays in Macroeconomics with Heterogeneous Agents and Portfolio Choice Ivo Bakota This thesis studies how the asset portfolio heterogeneity of households influences wealth inequality and macroeconomic outcomes in macroeconomic models. Specifically, it analyses the implications of a change in firm leverage and differential asset taxation on inequality and other macroeconomic variables, and how to compute the macroeconomic models used to study these implications more efficiently. Chapter 1 studies the effects of a change in firm leverage on wealth inequality and macroeconomic aggregates. The effects are studied in a general equilibrium model with a continuum of heterogeneous agents, life-cycle, incomplete markets, and idiosyncratic and aggregate risk. In the benchmark model, an increase in firm leverage leads to an increase in capital accumulation, and a decrease in wealth inequality and government revenue. Furthermore, I show that if the model abstracts from capital income taxation, the change in leverage has only minor effects on macro aggregates and inequality, despite having significant implications for asset prices. Chapter 2 analyzes the redistributional and macroeconomic effects of differential taxation of financial assets with a different risk. Poor households in the US...
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Capital income taxation with portfolio choice
Bakota, Ivo
This paper analyzes redistributional and macroeconomic effects of differential taxation of financial assets with a different risk levels. The redistributive effect stems from the fact that various households hold portfolios with a starkly different risk levels. In particular, poor households primarily save in safe assets, while rich households often invest a substantially higher share of their wealth in (risky) equity. At the same time, equity and safe assets are often taxed at different rates in many tax codes. This is primarily because investments in equity (which are relatively riskier) are taxed both as corporate and personal income, unlike debt, which is tax deductible for corporations. This paper firstly builds a simple theoretical two-period model which shows that the optimal tax wedge between risky and safe assets is increasing in the underlying wealth inequality. Furthermore, I build a quantitative model with a continuum of heterogeneous agents, parsimonious life-cycle, borrowing constraint, aggregate shocks and uninsurable idiosyncratic shocks, in which the government raises revenue by using linear taxes on risky and safe assets. Simulations of quantitative models shows that elimination of differential asset taxation leads to a welfare loss equivalent to a 0.3% permanent reduction in consumption. I find that the optimal tax wedge between taxes on equity and debt is higher than the one in the U.S. tax code.\n
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Essays in Macroeconomics with Heterogeneous Agents and Portfolio Choice
Bakota, Ivo ; Slavík, Ctirad (vedoucí práce) ; Karabarbounis, Marios (oponent) ; Krueger, Dirk (oponent)
Dissertation Abstract Essays in Macroeconomics with Heterogeneous Agents and Portfolio Choice Ivo Bakota This thesis studies how the asset portfolio heterogeneity of households influences wealth inequality and macroeconomic outcomes in macroeconomic models. Specifically, it analyses the implications of a change in firm leverage and differential asset taxation on inequality and other macroeconomic variables, and how to compute the macroeconomic models used to study these implications more efficiently. Chapter 1 studies the effects of a change in firm leverage on wealth inequality and macroeconomic aggregates. The effects are studied in a general equilibrium model with a continuum of heterogeneous agents, life-cycle, incomplete markets, and idiosyncratic and aggregate risk. In the benchmark model, an increase in firm leverage leads to an increase in capital accumulation, and a decrease in wealth inequality and government revenue. Furthermore, I show that if the model abstracts from capital income taxation, the change in leverage has only minor effects on macro aggregates and inequality, despite having significant implications for asset prices. Chapter 2 analyzes the redistributional and macroeconomic effects of differential taxation of financial assets with a different risk. Poor households in the US...
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Avoiding root-finding in the Krusell-Smith algorithm simulation
Bakota, Ivo
This paper proposes a novel method to compute the simulation part of the Krusell-Smith (1997, 1998) algorithm when the agents can trade in more than one asset (for example, capital and bonds). The Krusell-Smith algorithm is used to solve general equilibrium models with both aggregate and uninsurable idiosyncratic risk and can be used to solve bounded rationality equilibria and to approximate rational expectations equilibria. When applied to solve a model with more than one financial asset, in the simulation, the standard algorithm has to impose equilibria for each additional asset (find the market-clearing price), for each period simulated. This procedure entails root-finding for each period, which is computationally very expensive. I show that it is possible to avoid this rootfinding by not imposing the equilibria each period, but instead by simulating the model without market clearing. The method updates the law of motion for asset prices by using Newton-like methods (Broyden’s method) on the simulated excess demand, instead of imposing equilibrium for each period and running regressions on the clearing prices. Since the method avoids the root-finding for each time period simulated, it leads to a significant reduction in computation time. In the example model, the proposed version of the algorithm leads to a 32% decrease in computational time, even when measured conservatively. This method could be especially useful in computing asset pricing models (for example, models with risky and safe assets) with both aggregate and uninsurable idiosyncratic risk since methods which use linearization in the neighborhood of the aggregate steady state are considered to be less accurate than global solution methods for these particular types of models.
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Firm leverage and wealth inequality
Bakota, Ivo
This paper studies the effects of a change in firm leverage on wealth inequality and macroeconomic aggregates. The question is studied in a general equilibrium model with a continuum of heterogeneous agents, life-cycle, incomplete markets, and idiosyncratic and aggregate risk. The analysis focuses on the particular change in firm leverage that occurred in the U.S. during the 1980s, when firm leverage increased significantly, and subsequently has been dropping since the early 1990s. In the benchmark model, an increase in firm leverage of the size that occurred during the 1980s increases capital accumulation by 5.38%, decreases wealth inequality by 1.07 Gini points and decreases government revenues by 0.11% of output. An increase in firm leverage increases average after-tax returns on savings, as firm debt has beneficial tax treatment. This increases the saving rates of all households, and disproportionately increases the saving rates of relatively poorer households. Consequently, the model implies that the increase in firm leverage did not contribute to rising inequality in the U.S. in the 1980s, but rather the opposite, that the reduction in leverage from the early 1990s to 2008 has contributed to rising wealth inequality. Furthermore, I show that if the model abstracts from beneficial tax treatment of corporate debt, the change in leverage has only minor effects on macro aggregates and inequality, despite having significant implications for asset prices. This is consistent with the previous result in the literature showing that the Modigliani-Miller theorem approximately holds in the heterogeneous agents model with imperfect markets.
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