Creator: Chari, V. V. and Cole, Harold Linh, 1957- Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 156 Abstract:
In this paper we present a formal model of vote trading within a legislature. The model captures the conventional wisdom that if projects with concentrated benefits are financed by universal taxation, then majority rule leads to excessive spending. This occurs because the proponent of a particular bill only needs to acquire the votes of half the legislature and hence internalizes the costs to only half the representatives. We show that Pareto superior allocations are difficult to sustain because of a free rider problem among the representatives. We show that alternative voting rules, such as unanimity, eliminate excessive spending on concentrated benefit projects but lead to underfunding of global public goods.
Creator: Cole, Harold Linh, 1957- and Kocherlakota, Narayana Rao, 1963- Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 577 Abstract:
We consider a simple environment in which individuals receive income shocks that are unobservable to others and can privately store resources. We show that this ability to privately store can undercut the ability to shift resources across individuals to the extent that the efficient allocation only involves consumption smoothing over time, as opposed to insurance (consumption smoothing over states) if the rate of return on savings is not too far below the rate of time preference, or, alternatively, if the worst possible outcome is sufficiently dire. We also show that unlike environments without unobservable storage, the symmetric efficient allocation is decentralizable through a competitive asset market in which individuals trade risk-free bonds among themselves.
Creator: Cole, Harold Linh, 1957- and Kehoe, Timothy Jerome, 1953- Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 210 Abstract:
This paper explores the extent to which the Mexican government's inability to roll over its debt during December 1994 and January 1995 can be modeled as a self-fulfilling debt crisis. In the model there is a crucial interval of debt for which the government, although it finds it optimal to repay old debt if it can sell new debt, finds it optimal to default if it cannot sell new debt. If government debt is in this interval, which we call the crisis zone, then we can construct equilibria in which a crisis can occur stochastically, depending on the realization of a sunspot variable. The size of this zone depends on the average length of maturity of government debt. Our analysis suggests that for a country, like Mexico, with a very short maturity structure of debt, the crisis zone is large and includes levels of debt as low as that in Mexico before the crisis.
Keyword: Sunspot, Debt crisis, and Mexico Subject (JEL): E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General, H63 - National Debt; Debt Management; Sovereign Debt, and F34 - International Lending and Debt Problems
Creator: Cole, Harold Linh, 1957- and Rogerson, Richard Donald Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 224 Abstract:
We examine whether the Mortensen-Pissarides matching model can account for the business cycle facts on employment, job creation, and job destruction. A novel feature of our analysis is its emphasis on the reduced-form implications of the matching model. Our main finding is that the model can account for the business cycle facts, but only if the average duration of a nonemployment spell is relatively high—about nine months or longer.
Creator: Cole, Harold Linh, 1957-, Mailath, George Joseph, and Postlewaite, A. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 213 Abstract:
We analyze a model in which there is socially inefficient competition among people. In this model, self-enforcing social norms can potentially control the inefficient competition. However, the inefficient behavior often cannot be suppressed in equilibrium among those with the lowest income due to the ineffectiveness of sanctions against those in the society with the least to lose. We demonstrate that in such cases, it may be possible for society to be divided into distinct classes, with inefficient behavior suppressed in the upper classes but not in the lower.
Keyword: Growth, Social competition, Social norms, Class, and Efficiency Subject (JEL): C73 - Stochastic and Dynamic Games; Evolutionary Games; Repeated Games, D90 - Micro-Based Behavioral Economics: General, B40 - Economic Methodology: General, D31 - Personal Income, Wealth, and Their Distributions, and A10 - General Economics: General
Creator: Cole, Harold Linh, 1957-, Dow, James, 1961-, and English, William B. (William Berkeley), 1960- Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 180 Abstract:
This paper develops a simple model of sovereign debt in which defaulting nations are excluded from capital markets and regain access by making partial repayments. This is consistent with the historical evidence that defaulting countries return to international loan markets soon after a settlement, but after varying periods of exclusion.
Creator: Cole, Harold Linh, 1957-, Leung, Ron, and Ohanian, Lee E. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 356 Abstract:
This paper presents a dynamic, stochastic general equilibrium study of the causes of the international Great Depression. We use a fully articulated model to assess the relative contributions of deflation/monetary shocks, which are the most commonly cited shocks for the Depression, and productivity shocks. We find that productivity is the dominant shock, accounting for about 2/3 of the Depression, with the monetary shock accounting for about 1/3. The main reason deflation doesn’t account for more of the Depression is because there is no systematic relationship between deflation and output during this period. Our finding that a persistent productivity shock is the key factor stands in contrast to the conventional view that a continuing sequence of unexpected deflation shocks was the major cause of the Depression. We also explore what factors might be causing the productivity shocks. We find some evidence that they are largely related to industrial activity, rather than agricultural activity, and that they are correlated with real exchange rates and non-deflationary shocks to the financial sector.
Keyword: Productivity Shocks, Great Depression, Deflation, and Monetary Shocks Subject (JEL): E30 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data) and F40 - Macroeconomic Aspects of International Trade and Finance: General
Creator: Cole, Harold Linh, 1957- and Kocherlakota, Narayana Rao, 1963- Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 583 Abstract:
We consider the large class of dynamic games in which each player’s actions are unobservable to the other players, and each player’s actions can influence a state variable that is unobservable to the other players. We develop an algorithm that solves for the subset of sequential equilibria in which equilibrium strategies are Markov in the privately observed state.
Subject (JEL): C63 - Computational Techniques; Simulation Modeling and C73 - Stochastic and Dynamic Games; Evolutionary Games; Repeated Games