Creator: Aiyagari, S. Rao. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Dept.) Number: 518 Abstract:
This paper is about a useful way of taking account of frictions in asset pricing and macroeconomics. I start by noting that complete frictionless markets models have a number of empirical deficiencies. Then I suggest an alternative class of models with incomplete markets and heterogenous agents which can also accommodate a variety of other frictions. These models are quantitatively attractive and computationally feasible and have the potential to overcome many or all of the empirical deficiencies of complete frictionless markets models. The incomplete markets model can also differ significantly from the complete frictionless markets model on some important policy questions.
Keyword: Friction, Frictionless market model, Asset pricing, Macroeconomics, and Incomplete markets Subject (JEL): E13 - General aggregative models - Neoclassical and G12 - General financial markets - Asset pricing ; Trading volume ; Bond interest rates
Creator: Prescott, Edward C. and Townsend, Robert M., 1948- Series: Working paper (Federal Reserve Bank of Minneapolis. Research Dept.) Number: 203 Abstract:
General competitive analysis is extended to cover a dynamic, pure-exchange economy with privately observed shocks to preferences. In the linear, infinite-dimensional space containing lotteries we establish the existence of optima, the existence of competitive equilibria, and that every competitive equilibrium is an optimum. An example illustrates that rationing and securities with contrived risk have an equilibrium interpretation.
Keyword: Pure exchange, Lotteries, and Competitive equilibria Subject (JEL): D82 - Information, knowledge, and uncertainty - Asymmetric and private information and D51 - General equilibrium and disequilibrium - Exchange and production economies
Creator: Schulhofer-Wohl, Sam Series: Staff Reports (Federal Reserve Bank of Minneapolis) Number: 462 Abstract:
This appendix contains seven sections. Section A reports results from running regressions of labor earnings on GDP using data from the PSID, for comparison with the results using HRS data in the body of the paper. Section B examines the relationship between family income, aggregate shocks, and risk preferences in the PSID. Section C gives technical details on the Markov Chain Monte Carlo estimation employed in table 1 of the paper and reports the complete parameter estimates for the regressions summarized in that table. Section D reports results when the relationship between earnings and aggregate shocks is estimated with individual-specific coecients rather than common coecients for each risk-tolerance group. Section E reports results comparable to table 1 of the paper and table D.1 of this appendix using only Social Security covered earnings instead of the combination of Social Security and W-2 earnings. Section F reports robustness checks for tables 2 and 3 of the paper under alternative definitions of the household and the consumption and income variables. Section G reports robustness checks for tables 2 and 3 under an alternative definition of the leisure variable.
Keyword: Risk preferences, Heterogeneity, Imperfect insurance, and Risk sharing Subject (JEL): E21 - Macroeconomics : Consumption, saving, production, employment, and investment - Consumption ; Saving ; Wealth and E24 - Macroeconomics : Consumption, saving, production, employment, and investment - Employment ; Unemployment ; Wages ; Intergenerational income distribution ; Aggregate human capital
Creator: Boyd, John H. and Smith, Bruce D., d. 2002. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Dept.) Number: 512 Abstract:
We investigate ex-ante efficient contracts in an environment in which implementation is costless. In this environment, standard debt contracts will typically not be optimal. Optimal contracts may involve defaults, even in states in which the borrower is fully able to repay. We then examine the welfare costs of arbitrarily restricting the set of feasible contracts to standard debt contracts. When model parameters are calibrated to realistic values, the welfare loss from exogenously imposing this restriction is extremely small. Thus, if the implementation costs are actually nontrivial (as seems likely), standard debt contracts will be (very close to) optimal.
Keyword: CESV, CSV, Debt, Contracts, Standard debt contract, Costly ex-post state verification, Bankruptcy, Optimal contract, Ex ante contract, Financial contract, Loans, and Costly state verification Subject (JEL): D86 - Information, knowledge, and uncertainty - Economics of contract : Theory and G10 - General financial markets - General
Creator: Aiyagari, S. Rao. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Dept.) Number: 424 Keyword: Deficit, Taxation, Budget management, Federal government, Tax policy, Tax rates, Taxes , and Tax Subject (JEL): H62 - National budget, deficit, and debt - Deficit ; Surplus and H21 - Taxation, subsidies and revenue - Efficiency ; Optimal taxation
Creator: Todd, Richard M. Series: Business analysis committee meeting Description:
Version without Software Appendix appears on the Federal Reserve Bank of Minneapolis Web site at http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=571
Keyword: BVAR, Vector autoregression, and Bayesian analysis Subject (JEL): C53 - Econometric modeling - Forecasting and other model applications
Creator: Backus, David., Kehoe, Patrick J., and Kehoe, Timothy Jerome, 1953- Series: Modeling North American economic integration Abstract:
We look for the scale effects on growth predicted by some theories of trade and growth based on dynamic returns to scale at the national or industry level. The increasing returns can arise from learning by doing, investment in human capital, research and development, or development of new products. We find some evidence of a relation between growth rates and the measures of scale implied by the learning by doing theory, especially total manufacturing. With respect to human capital, there is some evidence of a relation between growth rates and per capita measures of inputs into the human capital accumulation process, but little evidence of a relation with the scale of inputs. There is also little evidence that growth rates are related to measures of inputs into R&D. We find, however, that growth rates are related to measures of intra-industry trade, particularly when we control for scale of industry.
Keyword: Human capital, Learning by doing, International trade, Research and development, Specialization indexes, Increasing returns to scale, Intra-industry trade, and External effects Subject (JEL): F43 - Economic Growth of Open Economies and O41 - One, Two, and Multisector Growth Models
Creator: Atkeson, Andrew. and Kehoe, Patrick J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Dept.) Number: 513 Abstract:
In this paper, we build a model of the transition following large-scale economic reforms that predicts both a substantial drop in output and a prolonged pause in physical investment as the initial phase of the optimal transition following the reform. We model reform as a change in policy which induces agents to close existing enterprises using old technologies of production and to open up new enterprises adopting new technologies of production. The central idea of our paper is that it is costly to close old enterprises and open new enterprises because, in doing so, information capital built up about old enterprises is lost and time must pass before information capital about new enterprises can be acquired. Thus, an acceleration of the pace of industry evolution leads in the short run to a net loss of information capital, a drop in productivity, a recession, and a fall in physical investment. We calibrate our model of industry evolution, information capital, and transition to match micro data on industry evolution in the United States and macro data from the United States, Japan, and the former communist countries of Europe. We find that the loss of information capital that accompanies a major acceleration in the pace of industry evolution in an economy leads initially to a decade of recession and a five year pause in physical investment before the benefits of reform are realized.
Keyword: Economic reform, Technological evolution, Policy change, Transition, Recession, Technology change, Information capital, and Industrial evolution Subject (JEL): O33 - Technological change ; Research and development - Technological change : Choices and consequences ; Diffusion processes and O25 - Development planning and policy - Industrial policy
Creator: Sargent, Thomas J. and Wallace, Neil. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Dept.) Number: 211 Abstract:
In a general equilibrium setting, we study versions of the proposal to pay interest on reserves at the market rate. We argue that the proposal makes the demand for total reserves indeterminate whether interest is paid on total reserves or on required reserves only. One consequence is that tax financing of the proposal gives rise to a continuum of equilibria, equilibria which differ in real returns and consumption allocations. Another consequence is that an attempt to finance the proposal through earnings on the central bank’s portfolio either gives rise to an equilibrium with a zero nominal interest rate or fails to give rise to an equilibrium.
Keyword: Interest rates, General equilibrium models, and Reserves Subject (JEL): D58 - General equilibrium and disequilibrium - Computable and other applied general equilibrium models and E43 - Money and interest rates - Determination of interest rates ; Term structure of interest rates