Essays on macroeconomic policy, capital accumulation, the market value of the firm and dynamics

Carlos Budnevich, University of Pennsylvania


Much of the economic literature on dynamics of capital accumulation and valuation of the firm has focused either on partial equilibrium models of efficient and frictionless economies, or general equilibrium models with trivial asset pricing. Below, we study variations of the equilibrium model of capital accumulation, to account for savings and corporate investment behavior in financially closed and open economies, to study bubbles and dynamic efficiency, and to evaluate the effects on investment of interacting transaction costs and corporate tax uncertainty. The first essay extends the overlapping generations model of accumulation to include adjustment costs to additions to capital. In closed economies, we are able to show the existence of a wide variety of dynamical behavior for asset prices and capital accumulation, including saddlepath stability, dampened oscillatory movements and cycles. In the event of opening the capital account, either overshooting or undershooting for external debt can occur. Opening to intertemporal trade creates transitional losers, eventhough steady state welfare is enhanced. By adopting an appropriate compensatory policy, we show that the country can achieve a Paretian welfare improvement. In the second essay, we explore the effects of having an infinitely-lived equity-financed value maximizer firm on the equilibrium structure of an intergenerational growth model. Depending upon the technology and preference structure, we can obtain either an efficient bubbleless transition or the bubbly golden rule path. As the bubbles may be associated to the stock value, the model can generate a Tobin's q greater than one, even without adjustment costs. Unlike previous models of bubbles and capital accumulation, indeterminacy of equilibrium paths, dynamic inefficiency, multiplicity of steady states and stock market crashes are ruled out. The third essay analyzes the impact on investment and market value of uncertain tax policies. In a model without frictions and no tax deductions, it is shown that corporate tax uncertainty only affects market value. With frictions into the model, we show that aggregate investment is relatively less responsive to Tobin's q than the neoclassical model, and that uncertainty influences investment. By extending the basic framework, we can show the existence of a no investment region, which is further amplified by more uncertain taxation.

Subject Area

Economics|Economic theory

Recommended Citation

Budnevich, Carlos, "Essays on macroeconomic policy, capital accumulation, the market value of the firm and dynamics" (1991). Dissertations available from ProQuest. AAI9200320.