Creator: Miller, Preston J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 193 Abstract:
The welfare-maximizing income tax structure, rate of money creation, and amounts of intergenerational transfers are jointly determined for given rates of government consumption. When government consumption is zero, it is found for the parameter values examined that the income tax structure is progressive, the rate of money change is negative, and positive transfers are made to the old. As government consumption increases, the tax structure’s progressivity declines and turns increasingly regressive, the rate of money change rises, and transfers decrease. It is found that the bulk of the increase in government consumption is optimally financed by a cut in transfers.
Creator: Atkeson, Andrew and Ríos-Rull, José-Víctor Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 212 Abstract:
In this paper we develop a model in which a country faces a balance of payments crisis if constraints on its international borrowing bind. We use the model to describe the dynamics of the trade balance, capital account, and balance of payments of a country that borrows to finance consumption following sweeping macroeconomic and structural reforms and then hits constraints on its international borrowing. We compare the predictions of this theoretical example with events in Mexico from 1987 through 1995.
Keyword: Balance of payments, Speculative attacks, International borrowing, and Exchange rate crises Subject (JEL): F34 - International Lending and Debt Problems and F31 - Foreign Exchange
Creator: Miller, Preston J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 266 Abstract:
Trade protection remains a prominent feature of the current world economy and likely has significant effects on industries and macroeconomies. In this paper a particular type of policy, price supports, is analyzed in a two-country, dynamic, general equilibrium model. This model brings new perspectives to the analysis in that it is monetary and has labor mobility within countries between the traded-goods and non–traded-goods sectors. It is found that: (1) The introduction of price supports in an economy benefits only the agents currently working in the traded-goods sector. (2) Cooperation among countries in setting policies results in a higher level of price supports than does noncooperation. (3) Price-support policies can importantly affect the transmission of monetary policy effects, introducing permanent changes in real variables where there were none before and even reversing the signs of changes in some variables.
Creator: Boldrin, Michele and Levine, David K. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 279 Abstract:
Market booms are often followed by dramatic falls. To explain this requires an asymmetry in the underlying shocks. A straightforward model of technological progress generates asymmetries that are also the source of growth cycles. Assuming a representative consumer, we show that the stock market generally rises, punctuated by occasional dramatic falls. With high risk aversion, bad news causes dramatic increases in prices. Bad news does not correspond to a contraction of existing production possibilities, but to a slowdown in their rate of expansion. This economy provides a model of endogenous growth cycles in which recoveries and recessions are dictated by the adoption of innovations.
Keyword: Growth Cycles, Stock Market Value, and Technological Revolutions Subject (JEL): O30 - Innovation; Research and Development; Technological Change; Intellectual Property Rights: General, O40 - Economic Growth and Aggregate Productivity: General, G12 - Asset Pricing; Trading Volume; Bond Interest Rates, and O41 - One, Two, and Multisector Growth Models
Creator: Jones, Larry E., Manuelli, Rodolfo E., and Stacchetti, Ennio Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 281 Abstract:
Our objective is to understand how fundamental uncertainty can affect the long-run growth rate and what factors determine the nature of the relationship. Qualitatively, we show that the relationship between volatility in fundamentals and policies and mean growth can be either positive or negative. We identify the curvature of the utility function as a key parameter that determines the sign of the relationship. Quantitatively, we find that when we move from a world of perfect certainty to one with uncertainty that resembles the average uncertainty in a large sample of countries, growth rates increase, but not enough to account for the large differences in mean growth rates observed in the data. However, we find that differences in the curvature of preferences have substantial effects on the estimated variability of stationary objects like the consumption/output ratio and hours worked.
Creator: Bergoeing, Raphael and Kehoe, Timothy Jerome, 1953- Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 284 Abstract:
This paper quantitatively tests the “new trade theory” based on product differentiation, increasing returns, and imperfect competition. We employ a standard model, which allows both changes in the distribution of income among industrialized countries, emphasized by Helpman and Krugman (1985), and nonhomothetic preferences, emphasized by Markusen (1986), to effect trade directions and volumes. In addition, we generalize the model to allow changes in relative prices to have large effects. We test the model by calibrating it to 1990 data and then “backcasting” to 1961 to see what changes in crucial variables between 1961 and 1990 are predicted by the theory. The results show that, although the model is capable of explaining much of the increased concentration of trade among industrialized countries, it is not capable of explaining the enormous increase in the ratio of trade to income. Our analysis suggests that it is policy changes, rather than the elements emphasized in the new trade theory, that have been the most significant determinants of the increase in trade volume.
Keyword: Nonhomothetic Preferences, Product Differentiation, Imperfect Competition, Trade Growth, Intraindustry Trade, and Scale Economics Subject (JEL): F12 - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation, F13 - Trade Policy; International Trade Organizations, and F17 - Trade: Forecasting and Simulation
Creator: Bergoeing, Raphael, Kehoe, Patrick J., Kehoe, Timothy Jerome, 1953-, and Soto, Raimundo Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 292 Abstract:
Chile and Mexico experienced severe economic crises in the early 1980s. This paper analyzes four possible explanations for why Chile recovered much faster than did Mexico. Comparing data from the two countries allows us to rule out a monetarist explanation, an explanation based on falls in real wages and real exchange rates, and a debt overhang explanation. Using growth accounting, a calibrated growth model, and economic theory, we conclude that the crucial difference between the two countries was the earlier policy reforms in Chile that generated faster productivity growth. The most crucial of these reforms were in banking and bankruptcy procedures.
Keyword: Depression, Growth accounting, Chile, Total factor productivity, and Mexico Subject (JEL): N16 - Economic History: Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations: Latin America; Caribbean, E32 - Business Fluctuations; Cycles, and O40 - Economic Growth and Aggregate Productivity: General
Creator: Cooper, Russell and Kempf, Hubert Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 311 Abstract:
Central to ongoing debates over the desirability of monetary unions is a supposed trade-off, outlined by Mundell : a monetary union reduces transactions costs but renders stabilization policy less effective. If shocks across countries are sufficiently correlated, then, according to this argument, delegating monetary policy to a single central bank is not very costly and a monetary union is desirable.
This paper explores this argument in a setting with both monetary and fiscal policies. In an economy with monetary policy alone, we confirm the presence of the trade-off and find that indeed a monetary union will not be welfare improving if the correlation of national shocks is too low. However, fiscal interventions by national governments, combined with a central bank that has the ability to commit to monetary policy, overturn these results. In equilibrium, such a monetary union will be welfare improving for any correlation of shocks.
Keyword: Stabilization policies, Unemployment, Monetary unions, Public assistance programs, Currency, Income taxes, and Central banks
Creator: Kehoe, Timothy Jerome, 1953- Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 318 Abstract:
Currently, Argentina is experiencing what the government describes as a “great depression.” Using the “Great Depressions” methodology developed by Cole and Ohanian (1999) and Kehoe and Prescott (2002), we find that the primary determinants of both the boom in Argentina in the 1990s and the subsequent depression were changes in productivity, rather than changes in factor inputs. The timing of events links the boom to the currency-board-like Convertibility Plan and the crisis to its collapse. To gain credibility, the Argentine government took measures to make abandoning the plan more costly. Because the government was unable to enforce fiscal discipline, however, these increased costs failed to make the plan more credible and instead made the crisis far worse when it failed.
Creator: Albanesi, Stefania, Chari, V. V., and Christiano, Lawrence J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 319 Abstract:
Why is inflation persistently high in some periods and low in others? The reason may be absence of commitment in monetary policy. In a standard model, absence of commitment leads to multiple equilibria, or expectation traps, even without trigger strategies. In these traps, expectations of high or low inflation lead the public to take defensive actions, which then make accommodating those expectations the optimal monetary policy. Under commitment, the equilibrium is unique and the inflation rate is low on average. This analysis suggests that institutions which promote commitment can prevent high inflation episodes from recurring.
Subject (JEL): E50 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General, E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy, and E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination