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Optimal savings distortions with recursive preferences

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  • Farhi, Emmanuel
  • Werning, Iván

Abstract

This paper derives an intertemporal optimality condition for economies with private information, focusing on a class of recursive preferences. By comparing it to the situation where agents can freely save in a risk-free asset market, we derive the optimal savings distortions necessary for constrained optimality. Our recursive preferences are homogeneous and satisfy a balanced-growth condition, while allowing us to separate the role of risk aversion and intertemporal elasticity of substitution. We perform some quantitative exercises that disentangle the respective roles played by these two parameters in optimal distortions and the implied welfare gains.

Suggested Citation

  • Farhi, Emmanuel & Werning, Iván, 2008. "Optimal savings distortions with recursive preferences," Journal of Monetary Economics, Elsevier, vol. 55(1), pages 21-42, January.
    • Handle: RePEc:eee:moneco:v:55:y:2008:i:1:p:21-42
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    Cited by:

    1. Grochulski, Borys & Kocherlakota, Narayana, 2010. "Nonseparable preferences and optimal social security systems," Journal of Economic Theory, Elsevier, vol. 145(6), pages 2055-2077, November.
    2. Koehne, Sebastian & Kuhn, Moritz, 2015. "Optimal taxation in a habit formation economy," Journal of Public Economics, Elsevier, vol. 122(C), pages 31-39.
    3. Ales, Laurence & Maziero, Pricila, 2016. "Non-exclusive dynamic contracts, competition, and the limits of insurance," Journal of Economic Theory, Elsevier, vol. 166(C), pages 362-395.
    4. Koehne, Sebastian & Kuhn, Moritz, 2013. "Optimal capital taxation for time-nonseparable preferences," MPRA Paper 45203, University Library of Munich, Germany.
    5. Tetsuo Ono, 2014. "Intergenerational Politics, Government Debt and Economic Growth," Discussion Papers in Economics and Business 14-23, Osaka University, Graduate School of Economics.
    6. Hengjie Ai & Ravi Bansal, 2016. "Risk Preferences and The Macro Announcement Premium," NBER Working Papers 22527, National Bureau of Economic Research, Inc.
    7. Lars Peter Hansen & Anastasios G. Karantounias & Thomas J. Sargent, 2009. "Managing expectations and fiscal policy," FRB Atlanta Working Paper 2009-29, Federal Reserve Bank of Atlanta.
    8. Anastasios G Karantounias, 2018. "Optimal Fiscal Policy with Recursive Preferences," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(4), pages 2283-2317.
    9. Guanlong Ren & John Stachurski, 2018. "Dynamic Programming with Recursive Preferences: Optimality and Applications," Papers 1812.05748, arXiv.org, revised Jun 2020.
    10. , G., 2013. "Managing pessimistic expectations and fiscal policy," Theoretical Economics, Econometric Society, vol. 8(1), January.

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