Using dynamic programming to solve for the model’s micro behavior will also permit us to incorporate liquidity constraints in agents’ decision making. Liquidity constraints refer to limitations on agents’ ability to borrow. Liquidity constraints play an important role in considering certain Social Security privatization proposals. Take proposals that pay off the unfunded liability of the current system by levying a consumption tax. Such proposals would seem to benefit workers because they entail the elimination of the payroll tax and the substitution of a consumption tax that retirees would pay as well as workers.
But such proposals also entail compulsory contributions by workers to private saving accounts. Those workers who are liquidity constrained will find that even though they’ve effectively received a tax break, the requirement of contributing to a new saving account means, in light of their inability to borrow, being forced to lower their current consumption. Whether such workers would actually end up, on balance, worse off is one of the research questions to be addressed in this project. It’s possible that, in terms of their remaining lifetime utility levels, their reduced consumption in the short run would be more than offset by higher consumption in the long run.
Adding money to the A-К Model would represent a very important addition. Money creation and the seignorage associated with it is a potentially very important form of financing the government’s activities and thus represents an important branch of fiscal policy. As Hamann (1992)’s work on a simple version of our model showed, one can use the model to study how alternative combinations of monetary and fiscal policy will affect the economy’s real variables as well as its initial price level and time path of inflation.
Adding Housing and Other Goods
A longer term goal is to add housing and other final goods as well as intermediate goods to our model along the lines of Fullerton and Rogers (1993) work. Such an addition would permit us to consider differential commodity taxation as well as differential rates of taxation by industry of the use of capital and labor. Some of the goods that would be added would actually be bads, specifically pollution from the use of fossil fut With such an extended model, we could address a number of issues involving environmental policy along the lines of Bohringer, et. al. (1999). payday loans online same day
Adding Additional Countries
Currently, the A-К Model can be run either as a completely closed or a completely open economy.