Abstract
We study a small open economy with labor, capital accumulation, random death, taxation and a government budget balanced in the long run. We offer methods that provide ordinary differential equations for means and analytical expressions for densities. The latter is achieved by solving stochastic differential equations analytically and deriving the density from this solution. Starting from any distribution, the aggregate distribution converges, both on a transition path towards a steady state and on a transition path towards balanced growth, to a Pareto-distribution. We provide an intuitive economic interpretation for a stationary long-run density with an infinite mean in an economy on a balanced growth path. We also show how government tax policy can lead to non-monotonic links between the equilibrium growth rate of the economy and risk aversion of households.
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The authors Matthias Birkner, Niklas Scheuer and Klaus Wälde have no interests to declare.
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We would like to thank Danial Ali Akbari, Alberto Bisin, Thomas Fischer, Philip Sauré, John Stachurski, Damir Stijepic and seminar and workshop participants at Le Mans University, Lund University and Bielefeld University for discussions and comments. Special thanks for detailed comments and discussions are due to Jess Benhabib and Alberto Bisin. We also thank two anonymous referees and the associate editor of the journal for providing helpful comments, which significantly improved the paper.
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Birkner, M., Scheuer, N. & Wälde, K. The dynamics of Pareto distributed wealth in a small open economy. Econ Theory 76, 607–644 (2023). https://doi.org/10.1007/s00199-022-01471-z
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DOI: https://doi.org/10.1007/s00199-022-01471-z