Creator: Platt, Glenn J. Series: Law and economics of federalism Abstract:
This paper develops a model of firm location where communities differ by exogenous endowments of a factor of production. Firms choose to locate based on local subsidies to production. Community and firm optimal strategies are then examined. Through the introduction of information asymmetries about the communities' endowments, equilibrium bidding strategies for communities are found. The results show that auction institutions used by firms may in fact be signaling on the part of communities. These results also indicate that community bids reveal information, and restrictions on this bidding may do more harm than good.
Keyword: Tax breaks, Subsidies, Plant location, Tax competition, and Asymmetric information Subject (JEL): H70 - State and local government ; Intergovernmental relations - General, R30 - Production analysis and firm location - General, and D80 - Information, knowledge, and uncertainty - General
Creator: Mendoza, Enrique G., 1963- and Smith, Katherine A. Series: Advances in dynamic economics Abstract:
"Sudden Stops " experienced during emerging markets crises are characterized by large reversals of capital inflows and the current account, deep recessions, and collapses in asset prices. This paper proposes an open-economy equilibrium asset pricing model in which financial frictions cause Sudden Stops. Margin requirements impose a collateral constraint on foreign borrowing by domestic agents and trading costs distort asset trading by foreign securities firms. At equilibrium, margin constraints may or may not bind depending on portfolio decisions and equilibrium asset prices. If margin constraints do not bind, productivity shocks cause a moderate fall in consumption and a widening current account deficit. If debt is high relative to asset holdings, the same productivity shocks trigger margin calls forcing domestic agents to fire-sell equity to foreign traders. This sets off a Fisherian asset-price deflation and subsequent rounds of margin calls. A current account reversal and a collapse in consumption occur when equity sales cannot prevent a sharp rise in net foreign assets.
Keyword: Collateral constraints, Fisherian deflation, Emerging markets, Margin calls, Open economy asset pricing, Asset pricing, Sudden stops, Nonlinear dynamics, and Trading costs Subject (JEL): F32 - International finance - Current account adjustment ; Short-term capital movements, D52 - General equilibrium and disequilibrium - Incomplete markets, E44 - Money and interest rates - Financial markets and the macroeconomy, and F41 - Macroeconomic aspects of international trade and finance - Open economy macroeconomics
Creator: Bergoeing, Raphael., Hernando, Andrés., and Repetto, Andrea. Series: Advances in dynamic economics Abstract:
We estimate the effects of policy distortions on aggregate productivity. Based on a model of plant production and productivity uncertainty and heterogeneity, and using Chilean manufacturing data, we focus on the effect of taxation on the exit behavior of plants. We find that taxes do distort the liquidation decisions of firms, suggesting that policy distortions reduce the extent to which factors are reallocated towards the most productive plants. Our results have important consequences for growth and development, as policies that alter the measure of plants that operate in equilibrium change the short-run response of output to exogenous shocks and the long run level of aggregate TFP. In particular, we find that the amount of productivity lost due to excessive plant shutdowns are very large.
Keyword: South America, Exit behavior of firms, Chile, Latin America, Taxation policy, and Total factor productivity Subject (JEL): H25 - Taxation, subsidies and revenue - Business taxes and subsidies and E23 - Macroeconomics : Consumption, saving, production, employment, and investment - Production
Creator: Croushore, Dean Darrell, 1956- and Evans, Charles, 1958- Series: Joint committee on business and financial analysis Abstract:
Monetary policy research using time series methods has been criticized for using more information than the Federal Reserve had available in setting policy. To quantify the role of this criticism, we propose a method to estimate a VAR with real-time data while accounting for the latent nature of many economic variables, such as output. Our estimated monetary policy shocks are closely correlated with a typically estimated measure. The impulse response functions are broadly similar across the methods. Our evidence suggests that the use of revised data in VAR analyses of monetary policy shocks may not be a serious limitation.
Keyword: Monetary policy, Identification, VARs, Data revisions, Real-time data, and Shocks Subject (JEL): C82 - Data collection and data estimation methodology ; Computer programs - Methodology for collecting, estimating, and organizing macroeconomic data, C32 - Multiple or simultaneous equation models - Time-series models ; Dynamic quantile regressions, and E52 - Monetary policy, central banking, and the supply of money and credit - Monetary policy
Creator: Altig, David, 1956-, Christiano, Lawrence J., Eichenbaum, Martin S., and Lindé, Jesper. Series: Joint commitee on business and financial analysis Abstract:
We report estimates of the dynamic effects of a technology shock, and then use these to estimate the parameters of a dynamic general equilibrium model with money. We find: (i) a positive technology shock drives up hours worked, consumption, investment and output; (ii) the positive response of hours worked reflects that the Fed has in practice accommodated technology shocks; (iii) model parameter values and functional forms that match the response of macroeconomic variables to monetary policy shocks also work well for technology shocks; (iv) while technology shocks account for a large fraction of the lower frequency component of economic fluctuations, they account for only a small part of the business cycle component of fluctuations.
Preliminary and incomplete
Keyword: Consumption, Technology, General equilibrium model, Shocks, and Fluctuations Subject (JEL): D58 - General equilibrium and disequilibrium - Computable and other applied general equilibrium models and E32 - Prices, business fluctuations, and cycles - Business fluctuations ; Cycles
Creator: Erceg, Christopher J. and Levin, Andrew T. (Andrew Theo) Series: Joint commitee on business and financial analysis Abstract:
The durable goods sector is much more interest sensitive than the non-durables sector, and these sectoral differences have important implications for monetary policy. In this paper, we perform VAR analysis of quarterly US data and find that a monetary policy innovation has a peak impact on durable expenditures that is roughly five times as large as its impact on non-durable expenditures. We then proceed to formulate and calibrate a two-sector dynamic general equilibrium model that roughly matches the impulse response functions of the data. We derive the social welfare function and show that the optimal monetary policy rule responds to sector-specific inflation rates and output gaps. We show that some commonlyprescribed policy rules perform poorly in terms of social welfare, especially rules that put a higher weight on inflation stabilization than on output gap stabilization. By contrast, it is interesting that certain rules that react only to aggregate variables, including aggregate output gap targeting and rules that respond to a weighted average of price and wage inflation, may yield a welfare level close to the optimum given a typical distribution of shocks.
Keyword: Monetary policy, Consumer, Business cycles, Durable goods, and Social welfare Subject (JEL): E31 - Prices, business fluctuations, and cycles - Price level ; Inflation ; Deflation, E52 - Monetary policy, central banking, and the supply of money and credit - Monetary policy, and E32 - Prices, business fluctuations, and cycles - Business fluctuations ; Cycles
Creator: Bullard, James. and Russell, Steven. Series: Finance, fluctuations, and development Abstract:
We examine the conditions under which steady states with low real interest rates—real rates substantially below the output growth rate—exist in an overlapping generations model with production, capital accumulation, a labor-leisure trade-off, technological progress, and agents who live for many periods. The number of periods in an agent's life (n) is left open for much of the analysis and determines the temporal interpretation of a time period. The qualitative properties of the model are largely invariant to different values of n. We find that two low real interest rate steady states exist for empirically plausible values of the parameters of the model. Outside liabilities such as fiat currency or unbacked government debt are valued in one of these steady states.
Keyword: General equilibrium models, Interest rates, and Debts, Public Subject (JEL): D51 - General equilibrium and disequilibrium - Exchange and production economies and E40 - Money and interest rates - General