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Optimal Fiscal Policy in the Neoclassical Growth Model Revisited

With Martin Gervais

European Economic Review,Volume 73, January 2015, Pages 1–17.


This paper studies optimal taxation in a version of the neoclassical growth model in which investment becomes productive within the period, thereby making the supply of capital elastic in the short run. Because taxing capital is distortionary in the short run, the government's ability/desire to raise revenues through capital income taxation in the initial period or when the economy is hit with a bad shock is greatly curtailed. Our timing assumption also leads to tractable Ramsey and Markov-perfect specifications without state-contingent debt. We find that the cyclical properties of taxes are robust to the commitment assumptions.


Working Papers


Labour Force Composition and Aggregate Fluctuations

Latest version January 2016


Labour composition by gender, age, and education has undergone dramatic changes over the last half century in the United States. Furthermore, the volatility of total market hours differs systematically between genders, age, and education groups. Reduced form exercises and a large-scale business cycle model suggest that these demographic patterns account for between 15% and 30% of the observed changes in aggregate volatility over this period of time. Furthermore, these demographic changes are responsible for a considerable fraction of the average growth rate of GDP. To solve the model over this large transition, a new algorithm is developed which extends perturbation methods to the stochastic transition path and can be applied to a broad class of DSGE models.

Click here for a previous version which also included endogenous education and marriage decisions.


Liquid Accounts as a Store of Value

August 2016


This paper introduces a theory of money as a store of value through a search friction in the goods market. The novel microfoundation helps reconcile the observed amounts of liquidity holdings, with the presence of credit. It also implies a link between money demand, aggregate demand and equilibrium excess supply which explains the joint behaviour of monetary aggregates and real economic activity. In particular, the model implies an explanation of recessions consistent with the surge in liquidity holdings and drop in production capacity utilization, as documented for several recessions including the financial crisis.


Dynamic Perturbation

With Serhiy Stepanchuk

November 2016

We develop a new algorithm to solve large scale dynamic stochastic general equilibrium models over a large transition. The method consists of Taylor expanding the equilibrium conditions of the model not just around the steady state, but along the entire equilibrium path. The method can be applied to a broad class of models and is orders of magnitudes more accurate than solutions based on local perturbation of the steady state. Matlab code is available in the page Codes.


A Neoclassical Approach to the Paradox of Thrift

July 2013


A test of the paradox of thrift is conducted throughout the lens of a business cycle model. To this aim, a simple extension of the neoclassical framework with concave frontier is developed which leads to a dramatic improvement on the prediction of the saving rate. Then, it is possible to isolate periods when saving changes are not a consequence of technology shocks. A VAR identified through these episodes suggests that a 1% increase in the saving rate leads to half a percentage point decrease in output growth.


The role of curvature in the transformation frontier between consumption and investment

Latest version March 2014.

The vast majority of the business cycle literature assumes a linear transformation frontier between consumption and investment goods. This assumption neglects a relationship, present in the data, between the relative price of investments and total factor productivity. This assumption also leads to counterfactual saving rates. A simple extension of the real business cycle model is proposed where the transformation frontier can be concave. Alternative identification strategies lead to similar estimates of the curvature with a dramatic improvement of the prediction of the saving rate.


Work in Progress

Tax Evasion and Laffer Curves, with Spyros Galanis


Housing and the intergenerational welfare redistribution, with Chiara Forlati and Michael Hatcher


Job Finding Rates and Formal and Informal Search Channels, with Manolis Galenianos and Panagiotis Giannarakis

Interest Rates, Deficit and Debt over the Business Cycle, with Ramon Marimon

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