Essays on secular stagnation

• Author(s): Lancastre, Manuel Corrêa de Barros de
• Date: 2016
• Persistent ID: http://hdl.handle.net/10362/19651
• Origin: Repositório Institucional da UNL
• Subject(s): Domínio/Área Científica::Ciências Sociais
• Document Type: Doctoral thesis
• Language: English
• Advisor(s): Brinca, Pedro; Franco, Francesco
• Contributor(s): RUN

Description

Chapter 1: Increasing public spending, generating budget deficits, or raising the level of public debt, may not be options available for an economy trying to avoid a recession. Complementing recent work on Secular Stagnation and on fiscal policy during liquidity traps, we use an overlapping generations New Keynesian model with borrowing constraints to explore how distortionary taxes can be used to circumvent a persistent economic slump, by raising the full-employment equilibrium real interest rate so that it becomes achievable when the nominal interest rate zero lower bound is binding. We propose a wealth redistributive fiscal policy, by taxing labor income and reducing consumption or capital income taxes, leading to a contraction of savings that triggers an increase of the natural rate of interest1. We compare our results with an alternative approach in recent literature based on emulating in ation in consumer prices using an increasing path of consumption taxes, so that the intertemporal condition allows an achievable negative natural rate of interest to neutralize a liquidity trap. Chapter 2: Major age milestones like the age of first job, retirement age, or life expectancy, bounding relevant economic periods in a persons' life, have been changing substantially during the last decades. In parallel real interest rates have been significantly declining in relevant world economies, reaching stable negative levels in some cases. We propose an analytic approach to relate those two phenomena by using an overlapping multi-generations model to find expressions for real interest rate elasticities to age parameters. The model formal-izes the mechanisms supporting the relation between interest rates and age, sheds light on the relative importance of each age milestone in explaining changes of real interest rates, and how other factors like elasticity of inter-temporal substitution, population and productivity growth, inter-generational altruism, as well as a social security system, may mitigate or amplify those changes. Chapter 3: We explore the relation between income inequality and real interest rates based on the marginal borrowing and saving rates of an heterogeneous population with respect to life-time income. We use an overlapping generations New Keynesian model with borrowing constraints and a bequest motive, to show how an increase of income inequality may trigger a permanent reduction of the real interest rate, (i) via a contraction of aggregate borrowing, when the marginal borrowing rate of the wealthier is lower than the one of the poorer with respect to income. (ii) We then show how an increase of inequality may trigger an expansion of savings through the channel of a bequest motive where generosity towards the next generation increases endogenously with lifetime income, so that the marginal savings rate of the wealthier is higher than the poorer.