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

Tomoyuki Nakajima and Shuhei Takahashi

Journal of Money, Credit and Banking, 2020, vol. 52, issue 2-3, 505-530

Abstract: We quantitatively evaluate the effectiveness of a consumption tax and lump‐sum transfer program as insurance against idiosyncratic earnings risk. We use a heterogeneous agent, incomplete markets model in which households adjust savings and employment in each period in the presence of idiosyncratic productivity risk and a borrowing constraint. The model is calibrated to the U.S. economy. We find a weak insurance effect of the consumption tax and transfer program. Expanding the tax and transfer program from the current U.S. level increases the capital‐output ratio and reduces the interest rate. Consumption inequality also decreases only slightly.

Date: 2020
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https://doi.org/10.1111/jmcb.12597

Related works:
Working Paper: The Effectiveness of Consumption Taxes and Transfers as Insurance against Idiosyncratic Risk (2017)
Working Paper: The Effectiveness of Consumption Taxes and Transfers as Insurance against Idiosyncratic Risk (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:52:y:2020:i:2-3:p:505-530

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