The CBO Infinite-Horizon Model with Idiosyncratic Uncertainty and Borrowing Constraints

26 Pages Posted: 19 Nov 2009

See all articles by Marika Santoro

Marika Santoro

Government of the United States of America - Congressional Budget Office (CBO)

Date Written: October 1, 2009

Abstract

This paper describes the infinite-horizon general equilibrium model that, among other models, CBO uses for its analysis of the President’s budgetary proposals. Agents in the model live forever and face uninsurable, individual-specific working-ability shocks and borrowing constraints, and so they differ ex post in both income and wealth. The combination of idiosyncratic uncertainty and borrowing constraints affects household decisions about saving and working: households engage in precautionary saving to self-insure against uncertainty, and labor supply decisions are less elastic than in a standard infinite-horizon growth model. To show how the model behaves in an application, the paper analyzes a 10 percent reduction in income tax rates and compares the predictions under alternative assumptions about the level of uncertainty.

Keywords: factor taxation, heterogeneous agents, borrowing constraints

JEL Classification: E6, H2, H3

Suggested Citation

Santoro, Marika, The CBO Infinite-Horizon Model with Idiosyncratic Uncertainty and Borrowing Constraints (October 1, 2009). Congressional Budget Office 2009-3. Available at SSRN: https://ssrn.com/abstract=1508552 or http://dx.doi.org/10.2139/ssrn.1508552

Marika Santoro (Contact Author)

Government of the United States of America - Congressional Budget Office (CBO) ( email )

Ford House Office Building
2nd & D Streets, SW
Washington, DC 20515-6925
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
17
Abstract Views
232
PlumX Metrics