The Effectiveness of Consumption Taxes and Transfers as Insurance against Idiosyncratic Risk

Tomoyuki Nakajima and Shuhei Takahashi

No 933, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: We quantitatively evaluate the effectiveness of a consumption tax and transfer program as insurance against idiosyncratic earnings risk. Our framework is a heterogeneous-agent, incomplete-market model with idiosyncratic wage risk and indivisible labor. The model is calibrated to the U.S. economy. We find a weak insurance effect of the transfer program. Extending the transfer system from the current scale raises consumption uncertainty, which increases aggregate savings and reduces the interest rate. Furthermore, consumption inequality shows a small decrease.

Keywords: Consumption taxes; Transfers; Risk sharing; Consumption inequality; Indivisible labor; Incomplete markets (search for similar items in EconPapers)
JEL-codes: C68 D31 E62 J22 (search for similar items in EconPapers)
Pages: 43pages
Date: 2016-02
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:kyo:wpaper:933

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