Studies in Aggregate Analyses

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Prop ID: 0319050 P I: Prescott, Edward C. Organization: University of Minnesota-Twin Cities Title: Studies in Aggregate Analyses This project supports two sets of studies related to aggregate analyses. The first set of studies uses the macro growth model with productivity and tax rates to analyze some important problems. One of these studies determines how much of the differences in labor supply of the major rich industrial countries are accounted for by different tax rates. Another study deals with the evolution of international income levels to account for differences in income levels at a point in time. The third study, which is joint with Fumio Hayashi, examines the pre-war Japanese economy. At the turn of the twentieth century, Japan with its highly educated work force and a strong non-interventionist government seemed to be poised to catch up with the United States. This did not happen prior to World War II and the question is why. A policy that Hayashi and Prescott conjecture was important in suppressing productivity growth in this period, and therefore blocking catching up, was the policy of keeping excessive population in rural areas. A related study will address the question: what is the connection between financial system problems and productivity? In particular the study will determine if the reason for the empirical association between poor productivity performance and government intervention in the financial system is that the financial system is used to subsidize inefficient production units in order to preserve jobs at these units. The second set of studies, which is joint with Ellen McGrattan, is concerned with using macro theory to study the behavior of stock prices and returns. One study continues the development and application of a new methodology for determining whether the stock market is overvalued or undervalued using an overlapping generation structure. The second study in this project determines the average returns that households realized on savings in the form of well-diversified debt and equity assets for the period 1880-2002. These average returns will be compared to the real return on capital, which can be computed from the national income accounts. These returns are net of tax and diversification-costs. Broader Impact : The research addresses a number of important policy issues, e.g., why the Japanese economy is currently depressed. The methodology developed will be useful in predicting the consequences of the proposed U.S. tax cut and the recent increase in tax rates in Germany. It also will be useful for forecasting the consequences of eliminating taxes on dividends for the stock market and for the consumption of people when retired by cohort. It will provide guidance to Western European countries as to how to increase their labor supplies and more importantly the welfare of their citizens. The software (Macrolab) developed under this project is used by undergraduates at the University of Minnesota and available over the internet without charge.