Résultats de recherche
Creator: Aiyagari, S. Rao and McGrattan, Ellen R. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 203_1 Abstract:
In this appendix, we describe the numerical methods used to compute an equilibrium in the economy with an inelastic labor supply and in the economy with an elastic labor supply (i.e., our benchmark economy). Although the economy with inelastically supplied labor is a special case of the benchmark economy, the equilibrium in the inelastic labor supply case is much easier to compute and is therefore treated separately. In each case, we start with the consumer's problem, assuming the consumer takes prices as given. We then show how the equilibrium prices are determined. To verify that the methods work well with our problem, we apply them to some related test problems that have known solutions.
Creator: Phelan, Christopher and Stacchetti, Ennio Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 258 Abstract:
This paper presents a full characterization of the equilibrium value set of a Ramsey tax model. More generally, it develops a dynamic programming method for a class of policy games between the government and a continuum of consumers. By selectively incorporating Euler conditions into a strategic dynamic programming framework, we wed two technologies that are usually considered competing alternatives, resulting in a dramatic simplification of the problem.
Creator: Phelan, Christopher and Stacchetti, Ennio Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 258_1 Abstract:
This paper presents a full characterization of the equilibrium value set of a Ramsey tax model. More generally, it develops a dynamic programming method for a class of policy games between the government and a continuum of consumers. By selectively incorporating Euler conditions into a strategic dynamic programming framework, we wed two technologies that are usually considered competing alternatives, resulting in a dramatic simplification of the problem.
Creator: Ayres, João, Hevia, Constantino, and Nicolini, Juan Pablo Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 584 Abstract:
In this paper, we show that there is substantial comovement between prices of primary commodities such as oil, aluminum, maize, or copper and real exchange rates between developed economies such as Germany, Japan, and the United Kingdom against the US dollar. We therefore explicitly consider the production of commodities in a two-country model of trade with productivity shocks and shocks to the supplies of commodities. We calibrate the model so as to reproduce the volatility and persistence of primary commodity prices and show that it delivers equilibrium real exchange rates that are as volatile and persistent as in the data. The model rationalizes an empirical strategy to identify the fraction of the variance of real exchange rates that can be accounted for by the underlying shocks, even if those are not observable. We use this strategy to argue that shocks that move primary commodity prices account for a large fraction of the volatility of real exchange rates in the data. Our analysis implies that existing models used to analyze real exchange rates between large economies that mostly focus on trade between differentiated final goods could benefit, in terms of matching the behavior of real exchange rates, by also considering trade in primary commodities.
Mot-clé: Real exchange rate disconnect puzzle and Primary commodity prices Assujettir: F41 - Open Economy Macroeconomics and F31 - Foreign Exchange
Creator: Conesa, Juan Carlos, Kehoe, Timothy Jerome, 1953-, Nygaard, Vegard M., and Raveendranathan, Gajendran Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 583 Abstract:
We develop and calibrate an overlapping generations general equilibrium model of the U.S. economy with heterogeneous consumers who face idiosyncratic earnings and health risk to study the implications of exogenous trends in increasing college attainment, decreasing fertility, and increasing longevity between 2005 and 2100. While all three trends contribute to a higher old age dependency ratio, increasing college attainment has different macroeconomic implications because it increases labor productivity. Decreasing fertility and increasing longevity require the government to increase the average labor tax rate from 32.0 to 44.4 percent. Increasing college attainment lowers the required tax increase by 10.1 percentage points. The required tax increase is higher under general equilibrium than in a small open economy with a constant interest rate because the reduction in the interest rate lowers capital income tax revenues.
Mot-clé: College attainment, Health care, Aging, Taxation, and Overlapping generations Assujettir: H55 - Social Security and Public Pensions, I13 - Health Insurance, Public and Private, H20 - Taxation, Subsidies, and Revenue: General, H51 - National Government Expenditures and Health, and J11 - Demographic Trends, Macroeconomic Effects, and Forecasts
Creator: Heathcote, Jonathan and Tsujiyama, Hitoshi Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 507 Abstract:
What structure of income taxation maximizes the social benefits of redistribution while minimizing the social harm associated with distorting the allocation of labor input? Many authors have advocated scrapping the current tax system, which redistributes primarily via marginal tax rates that rise with income, and replacing it with a flat tax system, in which marginal tax rates are constant and redistribution is achieved via non-means-tested transfers. In this paper we compare alternative tax systems in an environment with distinct roles for public and private insurance. We evaluate alternative policies using a social welfare function designed to capture the taste for redistribution reflected in the current tax system. In our preferred specification, moving to the optimal flat tax policy reduces welfare, whereas moving to the optimal fully nonlinear Mirrlees policy generates only tiny welfare gains. These findings suggest that proposals for dramatic tax reform should be viewed with caution.
Mot-clé: Flat tax, Social welfare functions, Ramsey taxation, Tax progressivity, Private insurance, Mirrlees taxation, and Optimal income taxation Assujettir: E62 - Fiscal Policy, H23 - Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies, H21 - Taxation and Subsidies: Efficiency; Optimal Taxation, and H31 - Fiscal Policies and Behavior of Economic Agents: Household
Creator: Arellano, Cristina, Bai, Yan, Bocola, Luigi, and test Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 547 Abstract:
This paper measures the output costs of sovereign risk by combining a sovereign debt model with firm- and bank-level data. In our framework, an increase in sovereign risk lowers the price of government debt and has an adverse impact on banks’ balance sheets, disrupting their ability to finance firms. Importantly, firms are not equally affected by these developments: those that have greater financing needs and borrow from banks that are more exposed to government debt cut their production the most in a debt crisis. We measure the extent of this heterogeneity using Italian data and parameterize the model to match these cross-sectional facts. In counterfactual analysis, we find that heightened sovereign risk was responsible for one-third of the observed output decline during the 2011-2012 crisis in Italy.
Mot-clé: Micro data, Firm heterogeneity, Business cycles, Financial intermediation, and Sovereign debt crises Assujettir: E44 - Financial Markets and the Macroeconomy, F34 - International Lending and Debt Problems, G15 - International Financial Markets, and G12 - Asset Pricing; Trading Volume; Bond Interest Rates
Creator: Koijen, Ralph S. J. and Yogo, Motohiro Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 510 Abstract:
We develop an asset pricing model with flexible heterogeneity in asset demand across investors, designed to match institutional and household holdings. A portfolio choice model implies characteristics-based demand when returns have a factor structure and expected returns and factor loadings depend on the assets' own characteristics. We propose an instrumental variables estimator for the characteristics-based demand system to address the endogeneity of demand and asset prices. Using U.S. stock market data, we illustrate how the model could be used to understand the role of institutions in asset market movements, volatility, and predictability.
Mot-clé: Demand system, Liquidity, Portfolio choice, Asset pricing model, and Institutional investors Assujettir: G23 - Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors and G12 - Asset Pricing; Trading Volume; Bond Interest Rates
Creator: Cai, Zhifeng and Heathcote, Jonathan Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 569 Abstract:
This paper evaluates the role of rising income inequality in explaining observed growth in college tuition. We develop a competitive model of the college market in which college quality depends on instructional expenditure and the average ability of admitted students. An innovative feature of our model is that it allows for a continuous distribution of college quality. We find that observed increases in US income inequality can explain more than the entire observed rise in average net tuition since 1990 and that rising income inequality has also depressed college attendance.
Mot-clé: College tuition, Club goods, and Income inequality Assujettir: I23 - Higher Education; Research Institutions, I24 - Education and Inequality, and I22 - Educational Finance; Financial Aid
Creator: Ai, Hengjie and Bhandari, Anmol Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 570 Abstract:
This paper studies asset pricing in a setting in which idiosyncratic risk in human capital is not fully insurable. Firms use long-term contracts to provide insurance to workers, but neither side can commit to these contracts; furthermore, worker-firm relationships have endogenous durations owing to costly and unobservable effort. Uninsured tail risk in labor earnings arises as a part of an optimal risk-sharing scheme. In the general equilibrium, exposure to the resulting tail risk generates higher risk premia, more volatile returns, and variations in expected returns across firms. Model outcomes are consistent with the cyclicality of factor shares in the aggregate, and the heterogeneity in exposures to idiosyncratic and aggregate shocks in the cross section.
Mot-clé: Dynamic contracting, Tail risk, Limited commitment, and Equity premium puzzle Assujettir: E30 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data) and G10 - General Financial Markets: General (includes Measurement and Data)
Creator: Atkeson, Andrew, Eisfeldt, Andrea L., Weill, Pierre-Olivier, and d'Avernas, Adrien Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 567 Abstract:
Banks' ratio of the market value to book value of their equity was close to 1 until the 1990s, then more than doubled during the 1996-2007 period, and fell again to values close to 1 after the 2008 financial crisis. Sarin and Summers (2016) and Chousakos and Gorton (2017) argue that the drop in banks' market-to-book ratio since the crisis is due to a loss in bank franchise value or profitability. In this paper we argue that banks' market-to-book ratio is the sum of two components: franchise value and the value of government guarantees. We empirically decompose the ratio between these two components and find that a large portion of the variation in this ratio over time is due to changes in the value of government guarantees.
Mot-clé: Bank valuation, Bank leverage, Risk shifting, Bank financial soundness, Banking, and Bank regulation Assujettir: H12 - Crisis Management, G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill, E44 - Financial Markets and the Macroeconomy, G38 - Corporate Finance and Governance: Government Policy and Regulation, G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages, and G28 - Financial Institutions and Services: Government Policy and Regulation
Creator: Aguiar, Mark and Amador, Manuel Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 565 Abstract:
We establish that creditor beliefs regarding future borrowing can be self-fulfilling, leading to multiple equilibria with markedly different debt accumulation patterns. We characterize such indeterminacy in the Eaton-Gersovitz sovereign debt model augmented with long maturity bonds. Two necessary conditions for the multiplicity are: (i) the government is more impatient than foreign creditors, and (ii) there are deadweight losses from default; both are realistic and standard assumptions in the quantitative literature. The multiplicity is dynamic and stems from the self-fulfilling beliefs of how future creditors will price bonds; long maturity bonds are therefore a crucial component of the multiplicity. We introduce a third party with deep pockets to discuss the policy implications of this source of multiplicity and identify the potentially perverse consequences of traditional “lender of last resort” policies.
Mot-clé: Debt dilution, Sovereign debt, Multiple equilibria, and Self-fulfilling debt crises Assujettir: F34 - International Lending and Debt Problems
Staff Reports are a series of academic research papers written by economists affiliated with the Federal Reserve Bank of Minneapolis. Staff Reports are often preprints of articles that are later published in scholarly journals. The Research Database is the official location for this series, but you can also find them on the Minneapolis Fed website, IDEAS/RePEc, and in EconLit.
Creator: Amador, Manuel and Phelan, Christopher Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 564 Abstract:
This paper presents a continuous-time model of sovereign debt. In it, a relatively impatient sovereign government’s hidden type switches back and forth between a commitment type, which cannot default, and an optimizing type, which can default on the country’s debt at any time, and assume outside lenders have particular beliefs regarding how a commitment type should borrow for any given level of debt and bond price. We show that if these beliefs satisfy reasonable assumptions, in any Markov equilibrium, the optimizing type mimics the commitment type when borrowing, revealing its type only by defaulting on its debt at random times. Further, in such Markov equilibria (the solution to a simple pair of ordinary differential equations), there are positive gross issuances at all dates, constant net imports as long as there is a positive equilibrium probability that the government is the optimizing type, and net debt repayment only by the commitment type. For countries that have recently defaulted, the interest rate the country pays on its debt is a decreasing function of the amount of time since its last default, and its total debt is an increasing function of the amount of time since its last default. For countries that have not recently defaulted, interest rates are constant.
Mot-clé: Serial defaulters, Sovereign default, Reputation, Debt intolerance, Sovereign debt, and Learning Assujettir: F34 - International Lending and Debt Problems
Creator: Ohanian, Lee E., Restrepo-Echavarria, Paulina, and Wright, Mark L. J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 563 Abstract:
After World War II, international capital flowed into slow-growing Latin America rather than fast-growing Asia. This is surprising as, everything else equal, fast growth should imply high capital returns. This paper develops a capital flow accounting framework to quantify the role of different factor market distortions in producing these patterns. Surprisingly, we find that distortions in labor markets — rather than domestic or international capital markets — account for the bulk of these flows. Labor market distortions that indirectly depress investment incentives by lowering equilibrium labor supply explain two-thirds of observed flows, while improvement in these distortions over time accounts for much of Asia’s rapid growth.
Mot-clé: Labor markets, Domestic capital markets, Capital flows, and International capital markets Assujettir: E21 - Macroeconomics: Consumption; Saving; Wealth, F41 - Open Economy Macroeconomics, F21 - International Investment; Long-term Capital Movements, and J20 - Demand and Supply of Labor: General
Creator: Prescott, Edward C. and Wessel, Ryan Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 562 Abstract:
Businesses hold large quantities of cash reserves, which have average returns well below their investments in tangible capital. Businesses do this because these monetary assets provide services. One implication is that money services is a factor of production in capital theoretic valuation equilibrium models. Our aggregate production function is consistent with both the classical demand for money function relationship and with extended periods of near zero short-term nominal interest rates. In our model economy, there is a 100 percent reserve requirement on all demand deposits. Demand deposits are legal tender. We find (i) money services in the production function necessitates revisions in the national accounts; (ii) monetary and fiscal policy cannot be completely separated; (iii) for a given policy, equilibrium is either unique or does not exist; and (iv) Friedman’s monetary satiation is not optimal. We make quantitative comparisons between interest rate targeting regimes and between inflation rate targeting regimes. The best inflation rate target was 2 percent.
Mot-clé: Money in production function, Friedman monetary satiation, Interest rate targeting, Zero lower bound, Inflation rate targeting, and 100 percent reserve banking Assujettir: E00 - Macroeconomics and Monetary Economics: General, E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General, E50 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General, and E40 - Money and Interest Rates: General
Creator: Arellano, Cristina, Bai, Yan, and Lizarazo, Sandra Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 559 Abstract:
We develop a theory of sovereign risk contagion based on financial links. In our multi-country model, sovereign bond spreads comove because default in one country can trigger default in other countries. Countries are linked because they borrow, default, and renegotiate with common lenders, and the bond price and recovery schedules for each country depend on the choices of other countries. A foreign default increases the lenders' pricing kernel, which makes home borrowing more expensive and can induce a home default. Countries also default together because by doing so they can renegotiate the debt simultaneously and pay lower recoveries. We apply our model to the 2012 debt crises of Italy and Spain and show that it can replicate the time path of spreads during the crises. In a counterfactual exercise, we find that the debt crisis in Spain (Italy) can account for one-half (one-third) of the increase in the bond spreads of Italy (Spain).
Mot-clé: Bond spreads, Sovereign default, Renegotiation, and European debt crisis Assujettir: G01 - Financial Crises and F30 - International Finance: General
Creator: Mongey, Simon J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 558 Abstract:
I propose an equilibrium menu cost model with a continuum of sectors, each consisting of strategically engaged firms. Compared to a model with monopolistically competitive sectors that is calibrated to the same data on good-level price flexibility, the dynamic duopoly model features a smaller inflation response to monetary shocks and output responses that are more than twice as large. The model also implies (i) four times larger welfare losses from nominal rigidities, (ii) smaller menu costs and idiosyncratic shocks are needed to match the data, (iii) a U-shaped relationship between market concentration and price flexibility, for which I find empirical support.
Mot-clé: Menu costs, Firm dynamics, Monetary policy, and Oligopoly Assujettir: L13 - Oligopoly and Other Imperfect Markets, E39 - Prices, Business Fluctuations, and Cycles: Other, E30 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data), L11 - Production, Pricing, and Market Structure; Size Distribution of Firms, and E51 - Money Supply; Credit; Money Multipliers
Creator: McGrattan, Ellen R., Miyachi, Kazuaki, and Peralta-Alva, Adrian Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 586 Abstract:
Japan is facing the problem of how to finance retirement, health care, and long-term care expenditures as the population ages. This paper analyzes the impact of policy options intended to address this problem by employing a dynamic general equilibrium overlapping generations model, specifically parameterized to match both the macro- and microeconomic level data of Japan. We find that financing the costs of aging through gradual increases in the consumption tax rate delivers better macroeconomic performance and higher welfare for most individuals relative to other financing options, including raising social security contributions, debt financing, and a uniform increase in health care and long-term care copayments.
Mot-clé: Japan, Health care, Aging, Retirement, and Taxation Assujettir: I13 - Health Insurance, Public and Private, H55 - Social Security and Public Pensions, E62 - Fiscal Policy, and H51 - National Government Expenditures and Health
Creator: Luttmer, Erzo G. J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 585 Abstract:
Most firms begin very small, and large firms are the result of typically decades of persistent growth. This growth can be understood as the result of some form of organization capital accumulation. In the US, the distribution of firm size k has a right tail only slightly thinner than 1/k. This is shown to imply that incumbent firms account for most aggregate organization capital accumulation. And it implies potentially extremely slow aggregate convergence rates. A benchmark model is proposed in which managers can use incumbent organization capital to create new organization capital. Workers are a specific factor for producing consumption, and they require managerial supervision. Through the lens of the model, the aftermath of the Great Recession of 2008 is unsurprising if the events of late 2008 and early 2009 are interpreted as a destruction of organization capital, or as a belief shock that made consumers want to reduce consumption and accumulate more wealth instead.
Mot-clé: Zipf's law, Business cycles, Firm size distribution, and Slow recoveries Assujettir: L11 - Production, Pricing, and Market Structure; Size Distribution of Firms and E32 - Business Fluctuations; Cycles
Creator: Benati, Luca, Lucas, Jr., Robert E., Nicolini, Juan Pablo, and Weber, Warren E. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 587 Abstract:
We explore the long-run demand for M1 based on a dataset comprising 38 countries and relatively long sample periods, extending in some cases to over a century. Overall, we find very strong evidence of a long-run relationship between the ratio of M1 to GDP and a short-term interest rate, in spite of a few failures. The standard log-log specification provides a very good characterization of the data, with the exception of periods featuring very low interest rate values. This is because such a specification implies that, as the short rate tends to zero, real money balances become arbitrarily large, which is rejected by the data. A simple extension imposing limits on the amount that households can borrow results in a truncated log-log specification, which is in line with what we observe in the data. We estimate the interest rate elasticity to be between 0.3 and 0.6, which encompasses the well-known squared-root specification of Baumol and Tobin.
Mot-clé: Cointegration and Long-run money demand Assujettir: E41 - Demand for Money and C32 - Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
Creator: Arellano, Cristina, Mateos-Planas, Xavier, and Ríos-Rull, José-Víctor Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 589 Abstract:
In the data sovereign default is always partial and varies in its duration. Debt levels during default episodes initially increase and do not experience reductions upon resolution. This paper presents a theory of sovereign default that replicates these properties, which are absent in standard sovereign default theory. Partial default is a flexible way to raise funds as the sovereign chooses its intensity and duration. Partial default is also costly because it amplifies debt crises as the defaulted debt accumulates and interest rate spreads increase. This theory is capable of rationalizing the large heterogeneity in partial default, its comovements with spreads, debt levels, and output, and the dynamics of debt during default episodes. In our theory, as in the data, debt grows during default episodes, and large defaults are longer, and associated with higher interest rate spreads, higher debt levels, and deeper recessions.
Mot-clé: Sovereign risk, Emerging markets, Debt crises, and Debt restructuring Assujettir: F34 - International Lending and Debt Problems, H63 - National Debt; Debt Management; Sovereign Debt, and G01 - Financial Crises
Creator: Kleiner, Morris and Soltas, Evan J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 590 Abstract:
We assess the welfare consequences of occupational licensing for workers and consumers. We estimate a model of labor market equilibrium in which licensing restricts labor supply but also affects labor demand via worker quality and selection. On the margin of occupations licensed differently between U.S. states, we find that licensing raises wages and hours but reduces employment. We estimate an average welfare loss of 12 percent of occupational surplus. Workers and consumers respectively bear 70 and 30 percent of the incidence. Higher willingness to pay offsets 80 percent of higher prices for consumers, and higher wages compensate workers for 60 percent of the cost of mandated investment in occupation-specific human capital.
Mot-clé: Labor supply, Welfare analysis, Human capital, and Occupational licensing Assujettir: J24 - Human Capital; Skills; Occupational Choice; Labor Productivity, D61 - Allocative Efficiency; Cost-Benefit Analysis, K31 - Labor Law, J44 - Professional Labor Markets; Occupational Licensing, and J38 - Wages, Compensation, and Labor Costs: Public Policy
Creator: McGrattan, Ellen R. and Prescott, Edward C. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 350 Abstract:
In this paper, we show that ignoring corporate intangible investments gives a distorted picture of the post-1990 U.S. economy. In particular, ignoring intangible investments in the late 1990s leads one to conclude that productivity growth was modest, corporate profits were low, and corporate investment was at moderate levels. In fact, the late 1990s was a boom period for productivity growth, corporate profits, and corporate investment.
Creator: Boldrin, Michele and Levine, David K. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 303 Abstract:
We construct a competitive model of innovation and growth under constant returns to scale. Previous models of growth under constant returns cannot model technological innovation. Current models of endogenous innovation rely on the interplay between increasing returns and monopolistic markets. In fact, established wisdom claims monopoly power to be instrumental for innovation and sees the nonrivalrous nature of ideas as a natural conduit to increasing returns. The results here challenge the positive description of previous models and the normative conclusion that monopoly through copyright and patent is socially beneficial.
Mot-clé: Innovation, Monopoly power, and Endogenous technological change Assujettir: O11 - Macroeconomic Analyses of Economic Development, O34 - Intellectual Property and Intellectual Capital, D62 - Externalities, L16 - Industrial Organization and Macroeconomics: Industrial Structure and Structural Change; Industrial Price Indices, O33 - Technological Change: Choices and Consequences; Diffusion Processes, and O31 - Innovation and Invention: Processes and Incentives
Creator: Thomas, Julia Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 302 Abstract:
Previous research has suggested that discrete and occasional plant-level capital adjustments have significant aggregate implications. In particular, it has been argued that changes in plants’ willingness to invest in response to aggregate shocks can at times generate large movements in total investment demand. In this study, I re-assess these predictions in a general equilibrium environment. Specifically, assuming nonconvex costs of capital adjustment, I derive generalized (S,s) adjustment rules yielding lumpy plant-level investment within an otherwise standard equilibrium business cycle model. In contrast to previous partial equilibrium analyses, model results reveal that the aggregate effects of lumpy investment are negligible. In general equilibrium, households’ preference for relatively smooth consumption profiles offsets changes in aggregate investment demand implied by the introduction of lumpy plant-level investment. As a result, adjustments in wages and interest rates yield quantity dynamics that are virtually indistinguishable from the standard model.
Mot-clé: Business Cycles, Lumpy Investment, and (S,s) Adjustment Assujettir: E32 - Business Fluctuations; Cycles and E22 - Investment; Capital; Intangible Capital; Capacity
Creator: Hopenhayn, Hugo Andres, Llobet, Gerard, and Mitchell, Matt Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 273 Abstract:
This paper presents a model of cumulative innovation where firms are heterogeneous in their research ability. We study the optimal reward policy when the quality of the ideas and their subsequent development effort are private information. The optimal assignment of property rights must counterbalance the incentives of current and future innovators. The resulting mechanism resembles a menu of patents that have infinite duration and fixed scope, where the latter increases in the value of the idea. Finally, we provide a way to implement this patent menu by using a simple buyout scheme: The innovator commits at the outset to a price ceiling at which he will sell his rights to a future inventor. By paying a larger fee initially, a higher price ceiling is obtained. Any subsequent innovator must pay this price and purchase its own buyout fee contract.
Mot-clé: Compulsory Licensing, Innovation, Patents, Policy, Mechanism Design, Asymmetric Information, and Sequential Innovation Assujettir: L50 - Regulation and Industrial Policy: General, K23 - Regulated Industries and Administrative Law, L51 - Economics of Regulation, D82 - Asymmetric and Private Information; Mechanism Design, D43 - Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection, H41 - Public Goods, and O31 - Innovation and Invention: Processes and Incentives
Creator: Mercenier, Jean and Schmitt, Nicolas Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 188 Abstract:
We argue that the rationalization gains often predicted by static applied general equilibrium models with imperfect competition and scale economies are artificially boosted by an unrealistic treatment of fixed costs. We introduce sunk costs into one such model calibrated with real-world data. We show how this changes the oligopoly game in a way significant enough to affect, both qualitatively and quantitatively, the outcome of a trade liberalization exercise.
Mot-clé: Market structure, Applied general equilibrium, Sunk costs, and Trade liberalization Assujettir: D58 - Computable and Other Applied General Equilibrium Models, C68 - Computable General Equilibrium Models, F17 - Trade: Forecasting and Simulation, and F12 - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
Creator: Allen, Beth, Deneckere, Raymond, Faith, Tom, and Kovenock, Daniel J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 187 Abstract:
This paper considers the role of capacity as a strategic entry deterrent for a game in which the incumbent and entrant sequentially precommit to capacity levels before competing in price, possibly using mixed strategies. Depending on the magnitudes of the fixed set-up cost, the cost of capacity, and the relative costs of production, the model produces a wide spectrum of equilibrium behaviors, including some not previously suggested in the literature. Interesting deterrence effects occur because firms need time to build. In contrast to much previous work, the incumbent may hold idle capacity when entry is deterred.
Creator: Hansen, Lars Peter and Jagannathan, Ravi Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 167 Abstract:
In this paper we develop alternative ways to compare asset pricing models when it is understood that their implied stochastic discount factors do not price all portfolios correctly. Unlike comparisons based on chi-squared statistics associated with null hypotheses that models are correct, our measures of model performance do not reward variability of discount factor proxies. One of our measures is designed to exploit fully the implications of arbitrage-free pricing of derivative claims. We demonstrate empirically the usefulness of methods in assessing some alternative stochastic factor models that have been proposed in asset pricing literature.
Assujettir: C13 - Estimation: General, E30 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data), C12 - Hypothesis Testing: General, C10 - Econometric and Statistical Methods and Methodology: General, G10 - General Financial Markets: General (includes Measurement and Data), and G12 - Asset Pricing; Trading Volume; Bond Interest Rates
Creator: Glosten, Lawrence R., Jagannathan, Ravi, and Runkle, David Edward Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 157 Abstract:
We find support for a negative relation between conditional expected monthly return and conditional variance of monthly return, using a GARCH-M model modified by allowing (i) seasonal patterns in volatility, (ii) positive and negative innovations to returns having different impacts on conditional volatility, and (iii) nominal interest rates to predict conditional variance. Using the modified GARCH-M model, we also show that monthly conditional volatility may not be as persistent as was thought. Positive unanticipated returns appear to result in a downward revision of the conditional volatility whereas negative unanticipated returns result in an upward revision of conditional volatility.
Creator: Williamson, Stephen D. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 119 Abstract:
During the period 1870–1913, Canada had a well-diversified branch banking system while banks in the U.S. unit banking system were less diversified. Canadian banks could issue large-denomination notes with no restrictions on their backing, while all U.S. currency was essentially an obligation of the U.S. government. Also, experience in the two countries with regard to bank failures and banking panics was quite different. A general equilibrium business cycle model with endogenous financial intermediation is constructed that captures these historical Canadian and American monetary and banking arrangements as special cases. The predictions of the model contradict conventional wisdom with regard to the cyclical effects of banking panics. Support for these predictions is found in aggregate annual time series data for Canada and the United States.
Creator: Miller, Preston J. and Roberds, William Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 109 Abstract:
Doan, Litterman, and Sims (DLS) have suggested using conditional forecasts to do policy analysis with Bayesian vector autoregression (BVAR) models. Their method seems to violate the Lucas critique, which implies that coefficients of a BVAR model will change when there is a change in policy rules. In this paper we construct a BVAR macro model and attempt to determine whether the Lucas critique is important quantitatively. We find evidence following two candidate policy rule changes of significant coefficient instability and of a deterioration in the performance of the DLS method.
Mot-clé: Coefficient instability, Bayesian vector autoregression, and Conditional forecasts
Creator: Litterman, Robert B. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 084 Abstract:
This paper describes a technique for distributing quarterly time series across monthly values. The method generalizes an approach described by Fernandez (1981). The paper also presents results of a test of the accuracy of these two approaches and two standard procedures suggested by Chow and Lin (1971).
Mot-clé: Chow-Lin, Serial correlation, and Interpolation
Creator: Hinich, Melvin J. and Weber, Warren E. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 065 Abstract:
This paper presents a frequency-domain technique for estimating distributed lag coefficients (the impulse-response function) when observations are randomly missed. The technique treats stationary processes with randomly missed observations as amplitude-modulated processes and estimates the transfer function accordingly. Estimates of the lag coefficients are obtained by taking the inverse transform of the estimated transfer function. Results with artificially created data show that the technique performs well even when the probability of an observation being missed is one-half and in some cases when the probability is as low as one-fifth. The approximate asymptotic variance of the estimator is also calculated in the paper.
Creator: Bryant, John B. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 056 Abstract:
The recurrent banking panics of the 19th century and the Great Depression of the 1930s are widely viewed as failures of our economic system. A simple version of Samuelson’s overlapping generations model is used to generate such failures of Walrasian equilibrium. The spontaneous “panics” generated involve a collapse of bank credit, causing in turn a drop in investment demand. The model suggests that both the recent technological advances in the intermediation industry and the current move towards deregulation of that industry are ominous developments.
Creator: Bryant, John B. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 048 Abstract:
Herein, it is demonstrated that the competitive provision of fiat money is generically either inefficient or infeasible.
Creator: Kehoe, Patrick J., Midrigan, Virgiliu, and Pastorino, Elena Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 536 Abstract:
During the Great Recession, regions of the United States that experienced the largest declines in household debt also experienced the largest drops in consumption, employment, and wages. Employment declines were larger in the nontradable sector and for firms that were facing the worst credit conditions. Motivated by these findings, we develop a search and matching model with credit frictions that affect both consumers and firms. In the model, tighter debt constraints raise the cost of investing in new job vacancies and thus reduce worker job finding rates and employment. Two key features of our model, on-the-job human capital accumulation and consumer-side credit frictions, are critical to generating sizable drops in employment. On-the-job human capital accumulation makes the flows of benefits from posting vacancies long-lived and so greatly amplifies the sensitivity of such investments to credit frictions. Consumer-side credit frictions further magnify these effects by leading wages to fall only modestly. We show that the model reproduces well the salient cross-regional features of the U.S. data during the Great Recession.
Mot-clé: Search and matching, Human capital, Employment, and Debt constraints Assujettir: E21 - Macroeconomics: Consumption; Saving; Wealth, E32 - Business Fluctuations; Cycles, E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity, J21 - Labor Force and Employment, Size, and Structure, and J64 - Unemployment: Models, Duration, Incidence, and Job Search
Creator: McGrattan, Ellen R. and Prescott, Edward C. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 534 Abstract:
Many countries are facing challenging fiscal financing issues as their populations age and the number of workers per retiree falls. Policymakers need transparent and robust analyses of alternative policies to deal with demographic changes. In this paper, we propose a simple framework that can easily be matched to aggregate data from the national accounts. We demonstrate the usefulness of our framework by comparing quantitative results for our aggregate model with those of a related model that includes within-age-cohort heterogeneity through productivity differences. When we assess proposals to switch from the current tax and transfer system in the United States to a mandatory saving-for-retirement system with no payroll taxation, we find that the aggregate predictions for the two models are close.
Mot-clé: Retirement, Medicare, Social Security, and Taxation Assujettir: H55 - Social Security and Public Pensions, I13 - Health Insurance, Public and Private, and E13 - General Aggregative Models: Neoclassical
Creator: Arellano, Cristina and Bai, Yan Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 525 Abstract:
This paper constructs a dynamic model in which fiscal restrictions interact with government borrowing and default. The government faces fiscal constraints; it cannot adjust tax rates or impose lump-sum taxes on the private sector, but it can adjust public consumption and foreign debt. When foreign debt is sufficiently high, however, the government can choose to default to increase domestic public and private consumption by freeing up the resources used to pay the debt. Two types of defaults arise in this environment: fiscal defaults and aggregate defaults. Fiscal defaults occur because of the government's inability to raise tax revenues. Aggregate defaults occur even if the government could raise tax revenues; debt is simply too high to be sustainable. In a quantitative exercise calibrated to Greece, we find that our model can predict the recent default, but that increasing taxes would not have prevented it. In fact, increasing taxes would have made the recession deeper because of the distortionary effects of taxation.
Mot-clé: Debt crisis, Tax reforms, and Sovereign default Assujettir: F30 - International Finance: General
Creator: Stevens, Lacramioara Luminita Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 520 Abstract:
The puzzling behavior of inflation in the Great Recession and its aftermath has increased the need to better understand the constraints that firms face when setting prices. Using new data and theory, I demonstrate that each firm's choice of how much information to acquire to set prices determines aggregate price dynamics through the patterns of pricing at the micro level, and through the large heterogeneity in pricing policies across firms. Viewed through this lens, the behavior of prices in recent years becomes less puzzling, as firms endogenously adjust their information acquisition strategies. In support of this mechanism, I present micro evidence that firms price goods using plans that are sticky, coarse, and volatile. A theory of information-constrained price setting generates such policies endogenously, and quantitatively matches the discreteness, duration, volatility, and heterogeneity of policies in the data. Policies track the state noisily, resulting in sluggish adjustment to shocks. A higher volatility of shocks does not reduce monetary non-neutrality and generates slight inflation, while progress in the technology to acquire information results in deflation.
Mot-clé: Rational inattention, Inflation dynamics, and Rigid prices Assujettir: E30 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data) and E50 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General
Creator: Chodorow-Reich, Gabriel and Karabarbounis, Loukas Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 514 Abstract:
The flow opportunity cost of moving from unemployment to employment consists of foregone public benefits and the foregone value of non-working time in units of consumption. We construct a time series of the opportunity cost of employment using detailed microdata and administrative or national accounts data to estimate benefit levels, eligibility and take-up of benefits, consumption by labor force status, hours per worker, taxes, and preference parameters. Our estimated opportunity cost is procyclical and volatile over the business cycle. The estimated cyclicality implies far less unemployment volatility in many leading models of the labor market than that observed in the data, irrespective of the level of the opportunity cost.
Mot-clé: Opportunity cost of employment and Unemployment fluctuations Assujettir: E32 - Business Fluctuations; Cycles, E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity, and J64 - Unemployment: Models, Duration, Incidence, and Job Search
Creator: Anderson, Eric, Malin, Benjamin A., Nakamura, Emi, Simester, Duncan, and Steinsson, Jón, 1976- Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 513 Abstract:
We use unique price data to study how retailers react to underlying cost changes. Temporary sales account for 95% of price changes in our data. Simple models would, therefore, suggest that temporary sales play a central role in price responses to cost shocks. We find, however, that, in response to a wholesale cost increase, the entire increase in retail prices comes through regular price increases. Sales actually respond temporarily in the opposite direction from regular prices, as though to conceal the price hike. Additional evidence from responses to commodity cost and local unemployment shocks, as well as broader evidence from BLS data reinforces these findings. We present institutional evidence that sales are complex contingent contracts, determined substantially in advance. We show theoretically that these institutional practices leave little money “on the table”: in a price-discrimination model of sales, dynamically adjusting the size of sales yields only a tiny increase in profits.
Mot-clé: Regular Retail Prices, Retail Sales, and Trade Deals Assujettir: M30 - Marketing and Advertising: General, E30 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data), and L11 - Production, Pricing, and Market Structure; Size Distribution of Firms
Creator: Aguiar, Mark, Amador, Manuel, Farhi, Emmanuel, and Gopinath, Gita, 1971- Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 511 Abstract:
We study fiscal and monetary policy in a monetary union with the potential for rollover crises in sovereign debt markets. Member-country fiscal authorities lack commitment to repay their debt and choose fiscal policy independently. A common monetary authority chooses inflation for the union, also without commitment. We first describe the existence of a fiscal externality that arises in the presence of limited commitment and leads countries to over-borrow; this externality rationalizes the imposition of debt ceilings in a monetary union. We then investigate the impact of the composition of debt in a monetary union, that is the fraction of high-debt versus low-debt members, on the occurrence of self-fulfilling debt crises. We demonstrate that a high-debt country may be less vulnerable to crises and have higher welfare when it belongs to a union with an intermediate mix of high- and low-debt members, than one where all other members are low-debt. This contrasts with the conventional wisdom that all countries should prefer a union with low-debt members, as such a union can credibly deliver low inflation. These findings shed new light on the criteria for an optimal currency area in the presence of rollover crises.
Mot-clé: Coordination failures, Monetary union, Debt crisis, and Fiscal policy Assujettir: E40 - Money and Interest Rates: General, F30 - International Finance: General, E50 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General, and F40 - Macroeconomic Aspects of International Trade and Finance: General
Creator: Atkeson, Andrew, Eisfeldt, Andrea L., and Weill, Pierre-Olivier Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 484 Abstract:
Building on the Merton (1974) and Leland (1994) structural models of credit risk, we develop a simple, transparent, and robust method for measuring the financial soundness of individual firms using data on their equity volatility. We use this method to retrace quantitatively the history of firms’ financial soundness during U.S. business cycles over most of the last century. We highlight three main findings. First, the three worst recessions between 1926 and 2012 coincided with insolvency crises, but other recessions did not. Second, fluctuations in asset volatility appear to drive variation in firms’ financial soundness. Finally, the financial soundness of financial firms largely resembles that of nonfinancial firms.
Mot-clé: Distance to Default, Volatility, Financial Frictions and Business Cycles, and Credit Risk Modeling Assujettir: E44 - Financial Markets and the Macroeconomy, E32 - Business Fluctuations; Cycles, G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill, and G01 - Financial Crises
Creator: Pijoan-Mas, Josep and Ríos-Rull, José-Víctor Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 471 Abstract:
We develop a new methodology to compute differences in the expected longevity of individuals who are in different socioeconomic groups at age 50. We deal with two main problems associated with the standard use of life expectancy: that people’s socioeconomic characteristics evolve over time and that there is a time trend that reduces mortality over time. Using HRS data for individuals from different cohorts, we estimate a hazard model for survival with time-varying stochastic endogenous covariates that yields the desired expected durations. We uncover an enormous amount of heterogeneity in expected longevities between individuals in different socioeconomic groups, albeit less than implied by a naive (static) use of socioeconomic characteristics. Our analysis allows us to decompose the longevity differentials into differences in health at age 50, differences in mortality conditional on health, and differences in the evolution of health with age. Remarkably, it is the latter that is the most important for most socioeconomic characteristics. For instance, education and wealth are health protecting but have little impact on two-year mortality rates conditional on health. Finally, we document an increasing time trend of all these differentials in the period 1992–2008, and a likely increase in the socioeconomic gradient in mortality rates in the near future. The mortality differences that we find have huge welfare implications that dwarf the differences in consumption accruing to people in different socioeconomic groups.
Mot-clé: Heterogeneity in mortality rates, Inequality in health, and Life expectancies Assujettir: I24 - Education and Inequality, J12 - Marriage; Marital Dissolution; Family Structure; Domestic Abuse, I14 - Health and Inequality, and J14 - Economics of the Elderly; Economics of the Handicapped; Non-labor Market Discrimination
Creator: Arellano, Cristina, Bai, Yan, and Kehoe, Patrick J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 466 Abstract:
The U.S. Great Recession featured a large decline in output and labor, tighter financial conditions, and a large increase in firm growth dispersion. We build a model in which increased volatility at the firm level generates a downturn and worsened credit conditions. The key idea is that hiring inputs is risky because financial frictions limit firms' ability to insure against shocks. An increase in volatility induces firms to reduce their inputs to reduce such risk. Out model can generate most of the decline in output and labor in the Great Recession and the observed increase in firms' interest rate spreads.
Mot-clé: Credit crunch, Credit constraints, Uncertainty shocks, Firm heterogeneity, Firm credit spreads, Labor wedge, and Great Recession Assujettir: E44 - Financial Markets and the Macroeconomy, E32 - Business Fluctuations; Cycles, E23 - Macroeconomics: Production, E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity, D53 - General Equilibrium and Disequilibrium: Financial Markets, and D52 - Incomplete Markets
Creator: Atkeson, Andrew, Hellwig, Christian, and Ordonez, Guillermo Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 464 Abstract:
In all markets, firms go through a process of creative destruction: entry, random growth and exit. In many of these markets there are also regulations that restrict entry, possibly distorting this process. We study the public interest rationale for entry taxes in a general equilibrium model with free entry and exit of firms in which firm dynamics are driven by reputation concerns. In our model firms can produce high-quality output by making a costly but efficient initial unobservable investment. If buyers never learn about this investment, an extreme “lemons problem” develops, no firm invests, and the market shuts down. Learning introduces reputation incentives such that a fraction of entrants do invest. We show that, if the market operates with spot prices, entry taxes always enhance the role of reputation to induce investment, improving welfare despite the impact of these taxes on equilibrium prices and total production.
Mot-clé: Entry and exit, Creative destruction, Firm dynamics, General equilibrium, Regulation, and Reputation Assujettir: D21 - Firm Behavior: Theory, L15 - Information and Product Quality; Standardization and Compatibility, L51 - Economics of Regulation, and D82 - Asymmetric and Private Information; Mechanism Design