Ps6macro2sp08 - 2 Assume that there is an income tax on dividends Specifically dividends are taxed at the rate τ t y t so that τ t units of the

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Econ 387L: Macro II Spring 2008, University of Texas Instructor: Dean Corbae Problem Set #6- Due 3/20/08 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 finite 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 financed by a lump sum tax τ t per household which is independent of the shares owned by the household. Calculate the
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Unformatted text preview: 2. Assume that there is an income tax on dividends. Specifically dividends are taxed at the rate τ t y t so that τ t units of the time t good are collected on dividends. Assume a balanced budget rule τ t = g t . Calculate the equilibrium share price function. 3. Assume an income like that in part 2, but assume a rule given by τ t = g t + b (1 − 1 /R t ) where b > is a permanent level of government borrowing. Calculate the equilibrium share price function. 4. In what sense are your results consistent with the claim that state contingent asset prices are independent of the tax strategy, given a stochastic process for per capita government expenditures? 1...
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This note was uploaded on 08/06/2008 for the course ECON 387 taught by Professor Corbae during the Spring '07 term at University of Texas at Austin.

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