ps7macro2sp06 - Econ 387L: Macro II Spring 2006, University...

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Econ 387L: Macro II Spring 2006, University of Texas Instructor: Dean Corbae Problem Set #7- Question I Due 3/10/06, II Due 3/21/06 I. Consider the following version of the Lucas asset pricing model. Preferences are given by U ( c t )=ln( c t ) . Each household is endowed with project that generates dividends y t D R ++ where D is a f nite set. The dividends follow a markov process with π ( y t +1 | y t )= prob ( y t +1 = y 0 | y t = y ) . The government spends amount g t = ε t y t per capita where ε t [0 , 1) which does not enter preferences. Government spending follows a markov process φ ( ε t +1 = ε 0 | ε t = ε ) . The only assets traded are shares (or titles) to trees. 1. Assume that all goverment expenditures are f nanced by a lump sum tax τ t per household which is independent of the shares owned by the household. Calculate the equilibrium share price function. 2. Assume that there is an income tax on dividends. Speci f cally dividends are taxed at the rate τ
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ps7macro2sp06 - Econ 387L: Macro II Spring 2006, University...

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