231 Forest Street
Babson Park MA 02457
Institutional Affiliation: Babson College
NBER Working Papers and Publications
|December 2017||Valuing Government Obligations When Markets are Incomplete|
with Laurence J. Kotlikoff: w24092
Determining how to value net government obligations is a long-standing and fundamental question in public finance. Its answer is critical to cost-benefit analysis, the assessment of fiscal sustainability, generational accounting, and other economic issues. This paper posits and simulates a ten-period overlapping generations model with aggregate shocks to price safe and risky government net obligations, including options. Agents can't trade with future generations to hedge the model's productivity and depreciation shocks. Nor can they invest in anything other than one-period bonds and risky capital. Our results are surprising. We find that the pricing of short- as well as long-dated riskless obligations is anchored to the prevailing one-period risk-free return. More surprising, the prices o...
Published: JASMINA HASANHODZIC & LAURENCE J. KOTLIKOFF, 2019. "Valuing Government Obligations When Markets Are Incomplete," Journal of Money, Credit and Banking, vol 51(7), pages 1815-1855.
|June 2013||Generational Risk - Is It a Big Deal?: Simulating an 80-Period OLG Model with Aggregate Shocks|
with Laurence J. Kotlikoff: w19179
The theoretical literature presumes generational risk is large enough to merit study and that such risk can be meaningfully shared via appropriate government policies. This paper assesses these propositions. It develops an 80-period OLG model to directly measure generational risk and the extent to which it can be mitigated via financial markets or Social Security. The model is trend stationary as is common in the literature. It features isoelastic preferences, moderate risk aversion, Cobb-Douglas technology, and shocks to both TFP and capital depreciation. Our computation method builds on Marcet (1988), Marcet and Marshall (1994), and Judd, Maliar, and Maliar (2009, 2011), who overcome the curse of dimensionality by limiting a model's state space to its ergodic set.
Our baseline calibrati...