Research Database

We study economies where government currency and electronic money, drawn from interest bearing deposits in private financial intermediary institutions, are full substitutes. We analyze the impact of competition on policy outcomes under different assumptions regarding: the objectives of the central bank, the ability of the monetary authorities to commit to future policies, and the legal restrictions—in the form of reserve requirements—on financial intermediaries. Electronic money competition can discipline a revenue maximizing government and result in lower equilibrium inflation rates, even when there is imperfect commitment. The efficient Friedman rule policy, of zero nominal interest rates, is only implemented if the government maximizes households preferences, in which case, electronic money competition may either have no role, or weaken the incentive effects of the “reputational mechanism.” We also show how an independent choice of the reserve requirements can be an effective policy rule to enhance the disciplinary role of electronic money competition.

This article studies the extent to which governments produce goods for the market (that is, the extent of public enterprise production). It concludes that the current literature dramatically understates the role of public enterprises in many low-productivity countries. The current literature focuses on the total value of goods produced by public enterprises. This article focuses on the types of goods they produce. While the total value of goods produced by public enterprises (as a share of total output) differs a bit across countries, the types of goods they produce differ much more dramatically. In many low-productivity countries, the government produces a large share of the country's manufactured goods. In nearly all high-productivity countries, the government stays out of the manufacturing sector altogether. Therefore—and because the manufacturing sector plays a special role in economies—this article concludes that public enterprises play a very large role in many low-productivity countries.

This model extends one originally constructed by Robert Litterman in 1980 and used continuously since then to prepare quarterly forecasts. The current version is 3 variables larger than Litterman’s original model, and it now allows time variation in coefficients, predictable time variation in forecast error variance, and non-normality in disturbances. Despite this elaboration the model in a sense has just 12 parameters free to fit the behavior of 9 variables in 9 equations. The paper reports the model structure and summarizes some aspects of its recent forecasting performance.

We study a representative agent, open economy in which government-provided services that enter the domestic production function must be financed with distortionary taxes, and focus on the optimal size of government and the associated optimal tax rate. If the government can precommit its actions, it maximizes individual welfare by announcing and implementing a constant tax rate, which we label the “orthodox” tax rate. This tax rate is time inconsistent, and under discretion the government implements a tax that maximizes each period’s output. We label this the “populist” tax rate. It may be higher or lower than the “orthodox” rate, depending on whether the elasticity of substitution in production between private and public inputs is below or above one. We also characterize the second-best tax rate that can be sustained through trigger strategies. This best sustainable tax rate is constant and lies between the “orthodox” and “populist” extremes.

This article is largely a description of inequality of earnings, income, and wealth in the United States in 2007 as measured by the Survey of Consumer Finances (SCF). We look at inequality in relation to various characteristics such as age, education, employment status, marital status, and whether households are late payers or include bankruptcy filers. We also look at economic mobility. We compare these variables in 2007 with their values in our earlier study in 1998.

Three of the arguments made by Temin (2008) in his review of Great Depressions of the Twentieth Century are demonstrably wrong: that the treatment of the data in the volume is cursory; that the definition of great depressions is too general and, in particular, groups slow growth experiences in Latin America in the 1980s with far more severe great depressions in Europe in the 1930s; and that the book is an advertisement for the real business cycle methodology. Without these three arguments — which are the results of obvious conceptual and arithmetical errors, including copying the wrong column of data from a source — his review says little more than that he does not think it appropriate to apply our dynamic general equilibrium methodology to the study of great depressions, and he does not like the conclusion that we draw: that a successful model of a great depression needs to be able to account for the effects of government policy on productivity.

This paper describes a dynamic model in which the provision mechanism for a public project is itself the object of locational choice of individuals. Individuals in an ongoing society must choose between a Majority Rule mechanism and a Voluntary Contribution mechanism. Each mechanism determines a funding decision for a local public project which is repeated over time. Generations of individuals asynchronously supercede their “parents,” creating an entry/exit process that allows individuals with possibly different beliefs to enter society. A self confirming equilibrium (SCE) belief process describes an evolution of beliefs in this society consistent with a self confirming equilibrium of the repeated location/provision game. Due to Fudenberg and Levine (1993), SCE is weaker than Nash as it requires correct forecasts of an individual only along the realized path during the individual's lifetime. Since individuals' beliefs on out-of-equilibrium behavior may vary, an SCE belief process may admit random and heterogenous forecasts in the form of mutations of beliefs across generations as newborn individuals enter the system. It is shown that the process with belief mutation results in a globally absorbing state in which the Majority Rule mechanism is the unique survivor of the two.

Under a narrow set of assumptions, Chamley (1986) established that the optimal tax rate on capital income is eventually zero. This study examines and extends that result by relaxing Chamley’s assumptions, one by one, to see if the result still holds. It does. This study unifies the work of other researchers, who have confirmed the result independently using different types of models and approaches. This study uses just one type of model (discrete time) and just one approach (primal). Chamley’s result holds when agents are heterogeneous rather than identical, the economy’s growth rate is endogenous rather than exogenous, the economy is open rather than closed, and agents live in overlapping generations rather than forever. (With this last assumption, the result holds under stricter conditions than with the others.)

This paper develops a Limited-Dependent Rational Expectations (LD-RE) model where the bounds can be fixed for an extended period, but are subject to occasional jumps. In this case, the behavior of the endogenous variable is affected by the agent's expectations about both the occurrence and the size of the jump. The RE solution for the one-sided and two-sided band are derived and shown to encompass the cases of perfectly predictable and stochastically varying bounds examined by earlier literature. We demonstrate that the solution for the one-sided band exists and is unique when the coefficient of the expectational variable is less than one. In the case of a two-sided band, the RE solution exists for all the parameter values and is unique if the coefficient of the expectational variable is less than or equal to one. These results hold even when the jump probability is stochastically varying and the error terms are conditionally heteroscedastic. As an illustration, we estimate a model of exchange rate determination in a target zone using data for the Franc/Mark exchange rate. Empirical results provide support for the non-linear model with time-varying realignment probability and indicate that the agents correctly anticipated most of the observed changes in the central parity.

This paper develops the Parameterized Expectations Approach (PEA) for solving nonlinear dynamic stochastic models with rational expectations. The method can be applied to a variety of models, including models with strong nonlinearities, sub-optimal equilibria, and many continuous state variables. In this approach, the conditional expectations in the equilibrium conditions are approximated by finite-dimensional classes of functional forms. The approach is highly efficient computationally because it incorporates endogenous oversampling and Monte-Carlo integration, and it does not impost a discrete grid on the state variables or the stochastic shocks. We prove that PEA can approximate the correct solution with arbitrary accuracy on the ergodic set by increasing the size of the Monte-Carlo simulations and the dimensionality of the approximating family of functions.