10/18 Questions regarding PS4.

Q: Do we have to derive implementability condition for problem 1, part (ii) or can we just refer to PS3-P4-e?
A: Reference is enough.

Q: I guess there's one typo in PS 4. At the very end of page 1, on the right handside of the budget constraint, you typed a p_t which probably should not appear there.
A: It would work the way it is stated as well, r_t and w_t would be real interest rate and real wage instead of nominal as in our usual specification. Do whichever way you prefer.

Q: For part (viii) of problem 2, I think that the requirement for the solution to Ramsey problem is the two tax rates are equal from the 1st period, isn't it? I don't think the solution needs to satisfy the two tax rates equality in the first period as capital tax rate on ko and ho is just like lump-sum tax and whatever you want to tax depends on your goverment expenditure gt, so it's not very clear to me that these rates need to be equal in the first period. What do you think?
A: This is correct, as usually, we may just fix capital and human capital taxes in period 0. Now, you may want to think about the following: what if taxing capital and human capital at period 0 at 100% brings more revenue that needed to finance g_t. Then you will decrease these taxes and have no taxes from period 1 on. Will the taxes in period 0 then be the same or not? The answer is obvious, right?

10/14 Questions regarding PS4.

Q: On Problem 1 (iii), the expression at the last is not understandable. I guess that you might miss the equality between the two tau's. Is this correct?
A: Yes.

Q: On the second half part of Problem 2, you do not mention the number of consumers. I guess that there is only one representative agent. Is this correct?
A: Yes.

10/09 General comment regarding grading.

It is very probable that I overlook some errors, so the fact that you get full score on a problem does not necessarily imply that your solution is correct. This is of course more likely to happen of PS than exams, because I grade them more carefully. If you have doubts about your solution, we can discuss it. In case we discover a mistake that I didn't notice while grading, I will not subtract points.

10/09 Questions regarding PS3.

Q: In question 1, what does payments to capital means, it is vague and we couldn't find anything close to it.
A: Yeah, be reasonable, I don't want you to spend hours on looking for one data series. I guess it is hard to construct the series. Do something reasonable.
1. E.g. assuming that we are in the standard growth model with capital and labor then payments to capital will be output - payments to labor.
2. Or use that payments to capital are interest rate*capital, where you have to worry about what the interest rate is ... You may want to calibrate the interest rate as a marginal product of capital. Check what Tim Kehoe has to say: http://www.econ.umn.edu/%7Etkehoe/classes/calibration-05.pdf You may want to think about the data for capital as well. This is much longer that 1. so maybe don't do it.

Q: I've been able to find annual data for several countries, but quarterly has been more difficult. Do you have recomendations on where to look?
A: No, if you don't succeed, use yearly. Adjust the HP filter accordingly. Try to get at least some quarterly data.

Q: How strict is the 1950 rule? Or, more precisely, where can I find a set of 20 countries who have been collecting economic data since the 1950's? The OECD set starts at 1970. Or is finding a data source that has economic data back to the 1950's part of the excercise?
A: It is part of the Exercise, but we don't need to be that strict. OECD starting at 1970 is fine if you have quarterly data.

Q: How staunch are you on the "at least 50 years or so" and "preferably quarterly data" in Problem 1. Would 46 years of annual data suffice?
A: Sure.

Q: Should we define TDCE for each of these questions? or just refer to 4.a and how it would change?
A: This is exactly what I meant - you define the most general version and then the particular ones will have some taxes equal to 0.

Q: For HW #3 (e) of problem 4, I assume that we assume that the corresponding transversality conditions are satisfied, isn't it?
A: That is correct. You should worry about TVC in other problems as well.

10/09 Comments regarding PS2.

In question 2, the definition of SPP caused some trouble, so I will go over in at Recitation. In question 3, I didn't grade the part that wants you to discuss the significance of Thm. 4.6, but there were many wrong answers. Be aware of boundedness problems! In question 4, there is a typo in the solution guide to SLP. F is not strictly concave under the assumptions mentioned there. E.g. f can be linear on some segment and then we get concavity only. Thus A.4.7 is not satisfied. We would require f to be strictly concave. Of course, this is what I concentrated on - you are "allowed" to copy, but you should at least think about what you are copying.

10/03 The PS3 due date was changed.

Either bring it to class on October 12th or get it to my office by Friday October 13th, 18.00. Heller Hall 1069, if there is nobody there, slide it under the door.

09/30 Aggregation.

Q: On the first question of the aggregation problems, are we also to assume that the u^i's are strictly increasing in consumption and leisure?
A: This is a general answer. Make whatever assumptions you need if they are missing. State them clearly. In this case you may try to prove it without u^i's strictly increasing in consumption and leisure, but I am not sure whether it is going to work.

Q: Would you be willing to look over solutions to the aggregation handout Monday? Or perhaps post some suggested solutions once we all have the time to work on it ourselves.
A: Yes, we could discuss it on Monday in my OH. Suggested solutions - I will not type anything, but I can let you take a look at how I solved these problems last year. Alternatively, you may ask someone else from the second year.