Creator: Chari, V. V., Nicolini, Juan Pablo, and Teles, Pedro Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 752 Abstract:
We revisit the question of how capital should be taxed, arguing that if governments are allowed to use the kinds of tax instruments widely used in practice, for preferences that are standard in the macroeconomic literature, the optimal approach is to never distort capital accumulation. We show that the results in the literature that lead to the presumption that capital ought to be taxed for some time arise because of the initial confiscation of wealth and because the tax system is restricted.
Keyword: Long run, Capital income tax, and Uniform taxation Subject (JEL): E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General, E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination, and E62 - Fiscal Policy
Creator: Chari, V. V., Nicolini, Juan Pablo, and Teles, Pedro Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 745 Abstract:
We study cooperative optimal Ramsey equilibria in the open economy addressing classic policy questions: Should restrictions be placed to free trade and capital mobility? Should capital income be taxed? Should goods be taxed based on origin or destination? What are desirable border adjustments? How can a Ramsey allocation be implemented with residence-based taxes on assets? We characterize optimal wedges and analyze alternative policy implementations.
Keyword: Capital income tax, Border adjustment, Value-added taxes, Origin- and destination-based taxation, Free trade, and Production efficiency Subject (JEL): E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General, E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination, and E62 - Fiscal Policy
Creator: Hevia, Constantino and Nicolini, Juan Pablo Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 744 Abstract:
In this paper, we use a simple model of money demand to characterize the behavior of monetary aggregates in the United States from 1960 to 2016. We argue that the demand for the currency component of the monetary base has been remarkably stable during this period. We use the model to make projections of the nominal quantity of cash in circulation under alternative future paths for the federal funds rate. Our calculations suggest that if the federal funds rate is lifted up as suggested by the survey of economic projections made by the members of the Federal Open Market Committee (FOMC), the fall in total currency demanded in the next two years ranges between 50 and 200 billion. Our discussion suggests that specific measures by the Federal Reserve to absorb that cash could be worth considering to make the future path of the price level consistent with the price stability mandate.
Keyword: Money demand, Inflation, and Currency in circulation Subject (JEL): E51 - Money Supply; Credit; Money Multipliers, E41 - Demand for Money, and E31 - Price Level; Inflation; Deflation
Creator: Hevia, Constantino and Nicolini, Juan Pablo Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 726 Abstract:
We study a model of a small open economy that specializes in the production of commodities and that exhibits frictions in the setting of both prices and wages. We study the optimal response of monetary and exchange rate policy following a positive (negative) shock to the price of the exportable that generates an appreciation (depreciation) of the local currency. According to the calibrated version of the model, deviations from full price stability can generate welfare gains that are equivalent to almost 0.5% of lifetime consumption, as long as there is a significant degree of rigidity in nominal wages. On the other hand, if the rigidity is concentrated in prices, the welfare gains can be at most 0.1% of lifetime consumption. We also show that a rule - formally defined in the paper - that resembles a "dirty floating" regime can approximate the optimal policy remarkably well.
Keyword: Dutch disease, Foreign exchange intervention, and Inflation targeting Subject (JEL): F31 - Foreign Exchange and F41 - Open Economy Macroeconomics
Creator: Adam, Klaus, Marcet, Albert, and Nicolini, Juan Pablo Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 720 Abstract:
Consumption-based asset pricing models with time-separable preferences can generate realistic amounts of stock price volatility if one allows for small deviations from rational expectations. We consider rational investors who entertain subjective prior beliefs about price behavior that are not equal but close to rational expectations. Optimal behavior then dictates that investors learn about price behavior from past price observations. We show that this imparts momentum and mean reversion into the equilibrium behavior of the price-dividend ratio, similar to what can be observed in the data. When estimating the model on U.S. stock price data using the method of simulated moments, we find that it can quantitatively account for the observed volatility of returns, the volatility and persistence of the price-dividend ratio, and the predictability of long-horizon returns. For reasonable degrees of risk aversion, the model generates up to one-half of the equity premium observed in the data. It also passes a formal statistical test for the overall goodness of fit, provided one excludes the equity premium from the set of moments to be matched.
Keyword: Subjective beliefs, Asset pricing, Learning, and Internal rationality Subject (JEL): E44 - Financial Markets and the Macroeconomy and G12 - Asset Pricing; Trading Volume; Bond Interest Rates
Creator: Lucas, Jr., Robert E. and Nicolini, Juan Pablo Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 718 Abstract:
We show that regulatory changes that occurred in the banking sector in the early eighties, which considerably weakened Regulation Q, can explain the apparent instability of money demand during the same period. We evaluate the effects of the regulatory changes using a model that goes beyond aggregates as M1 and treats currency and different deposit types as alternative means of payments. We use the model to construct a new monetary aggregate that performs remarkably well for the entire period 1915-2012.
Keyword: Money demand and Monetary base Subject (JEL): E41 - Demand for Money and E40 - Money and Interest Rates: General
Creator: Buera, Francisco and Nicolini, Juan Pablo Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 714 Abstract:
We study a model with heterogeneous producers that face collateral and cash-in-advance constraints. These two frictions give rise to a nontrivial financial market in a monetary economy. A tightening of the collateral constraint results in a recession generated by a credit crunch. The model can be used to study the effects on the main macroeconomic variables, and on the welfare of each individual of alternative monetary and fiscal policies following the credit crunch. The model reproduces several features of the recent financial crisis, such as the persistent negative real interest rates, the prolonged period at the zero bound for the nominal interest rate, and the collapse in investment and low inflation in spite of the very large increases in liquidity adopted by the government. The policy implications are in sharp contrast to the prevalent view in most central banks, which is based on the New Keynesian explanation of the liquidity trap.
Keyword: Credit crunch, Ricardian equivalence, Collateral constraints, Monetary policy, and Liquidity trap Subject (JEL): E44 - Financial Markets and the Macroeconomy, E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy, E58 - Central Banks and Their Policies, and E52 - Monetary Policy
Creator: Fitzgerald, Terry J. and Nicolini, Juan Pablo Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 713 Abstract:
This paper makes two straightforward points that we argue are central to understanding the literature and debate surrounding the stability of the Phillips curve. First, the endogeneity of monetary policy implies that aggregate data are largely uninformative as to the existence of a stable relationship between unemployment and future inflation. Second, if the NAIRU model is assumed to be true, regional data can be used to identify the structural relationship between unemployment and future inflation. We find that a 1 percentage point increase in the unemployment rate is associated with a roughly 0.3 percentage point decline in inflation over the next year.
Keyword: Stability of the Phillips curve and Endogenous monetary policy Subject (JEL): E58 - Central Banks and Their Policies and E52 - Monetary Policy