Creator: Kareken, John H., Muench, Thomas J., Supel, Thomas M., and Wallace, Neil Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 000 Description:
This paper was published with no issue number.
Keyword: Central banks and Monetary policy Subject (JEL): E52 - Monetary Policy
Creator: Krueger, Dirk and Perri, Fabrizio Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 363 Abstract:
Using data from the Consumer Expenditure Survey, we first document that the recent increase in income inequality in the United States has not been accompanied by a corresponding rise in consumption inequality. Much of this divergence is due to different trends in within-group inequality, which has increased significantly for income but little for consumption. We then develop a simple framework that allows us to analytically characterize how within-group income inequality affects consumption inequality in a world in which agents can trade a full set of contingent consumption claims, subject to endogenous constraints emanating from the limited enforcement of intertemporal contracts (as in Kehoe and Levine, 1993). Finally, we quantitatively evaluate, in the context of a calibrated general equilibrium production economy, whether this setup, or alternatively a standard incomplete markets model (as in Aiyagari, 1994), can account for the documented stylized consumption inequality facts from the U.S. data.
Keyword: Limited Enforcement, Risk Sharing, and Consumption Inequality Subject (JEL): G22 - Insurance; Insurance Companies; Actuarial Studies, D91 - Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making, E21 - Macroeconomics: Consumption; Saving; Wealth, D31 - Personal Income, Wealth, and Their Distributions, and D63 - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
Creator: Arellano, Cristina and Heathcote, Jonathan Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 385 Abstract:
How does a country’s choice of exchange rate regime impact its ability to borrow from abroad? We build a small open economy model in which the government can potentially respond to shocks via domestic monetary policy and by international borrowing. We assume that debt repayment must be incentive compatible when the default punishment is equivalent to permanent exclusion from debt markets. We compare a floating regime to full dollarization.
We find that dollarization is potentially beneficial, even though it means the loss of the monetary instrument, precisely because this loss can strengthen incentives to maintain access to debt markets. Given stronger repayment incentives, more borrowing can be supported, and thus dollarization can increase international financial integration. This prediction of theory is consistent with the experiences of El Salvador and Ecuador, which recently dollarized, as well as with that of highly-indebted countries like Italy which adopted the Euro as part of Economic and Monetary Union: in each case, around the time of regime change, spreads on foreign currency government debt declined substantially.
Keyword: Dollarization, Exchange rate regime, Borrowing limits, and Debt policy Subject (JEL): E40 - Money and Interest Rates: General and F30 - International Finance: General
Creator: Backus, David and Kehoe, Patrick J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 323 Abstract:
We examine deviations from trend of net exports and other components of GNP for the United States and attempt to build models consistent with their behavior. The most striking fact is that net exports have consistently been countercyclical. We show, first, that dynamic pure-exchange models can only produce a negative correlation between net exports and GNP if the variance of consumption exceeds that of output. In (he United Slates it does not, so this class of models cannot explain observed comovements between output and trade. We then examine government spending and nontraded goods as potential remedies, but show that their behavior is either inconsistent with the data or can be made consistent with any pattern of comovements. The most promising model introduces production and capital formation. Fluctuations are driven by country-specific productivity shocks, in which high productivity domestically leads to high domestic investment and a deficit in the balance of trade. This theory also receives support from the large negative covariance between net exports and investment in American data.
Keyword: Investment, Risk sharing, Non-traded goods, Government deficits, Competitive equilibrium, and Productivity Subject (JEL): F21 - International Investment; Long-term Capital Movements, F30 - International Finance: General, and E32 - Business Fluctuations; Cycles
Creator: Goodfriend, Marvin and McDermott, John H. Series: Economic growth and development Abstract:
We explain how a long period of slow pre-industrial development triggers an Industrial Revolution that leads to modern balanced growth. Development in the preindustrial period is driven by increasing returns to specialization made possible by a growing population. Increasing access to specialized intermediate goods eventually makes fundamental technological innovation possible. Innovation initiates the Industrial Revolution, after which productivity grows endogenously regardless of population growth. Industrialization reconciles the crucial role of population early on with its weak relation to per capita product in developed economies. Faster population growth speeds early development, though if it results from a highly productive primitive technology, the consequences for development are ambiguous.
Keyword: Growth and Industrial Revolution Subject (JEL): O11 - Economic development - Macroeconomic analyses of economic development and N10 - Macroeconomics and monetary economics ; Growth and fluctuations - General, international, or comparative
Creator: Townsend, Robert M., 1948- Series: Financial history conference Abstract:
ln environments with private information and spatial separation, the ability of agents to establish mutually beneficial arrangements can be limited by their ability to communicate contemporary dealings and histories of past dealings. Indeed, with the extension of some recent work in contract theory and mechanism design, this paper argues that location or person-specific assignment systems, portable object record-keeping systems, written message systems, and telecommunication systems can be viewed as communication systems which are successively more complete in this sense. An attempt is made also to match these various communication systems with systems in use in historical primitive, and/or contemporary societies and to interpret these communication systems as financial structures.
Subject (JEL): C44 - Operations Research; Statistical Decision Theory, D83 - Information, knowledge, and uncertainty - Search ; Learning ; Information and knowledge ; Communication ; Belief, and D23 - Organizational Behavior; Transaction Costs; Property Rights
Creator: Fernandez, Raquel, 1959- and Rogerson, Richard Donald Series: Law and economics of federalism Abstract:
This paper examines the effect of different education financing systems on the level and distribution of resources devoted to public education. We focus on California, which in the 1970's was transformed from a system of mixed local and state financing to one of effectively pure state finance and subsequently saw its funding of public education fall between ten and fifteen percent relative to the rest of the US. We show that a simple political economy model of public finance can account for the bulk of this drop. We find that while the distribution of spending became more equal, this was mainly at the cost of a large reduction in spending in the wealthier communities with little increase for the poorer districts. Our model implies that there is no simple trade-off between equity and resources; we show that if California had moved to the opposite extreme and abolished state aid altogether, funding for public education would also have dropped by almost ten percent.
Keyword: Education finance reform, Public finance, California, State government policy, and Human capital Subject (JEL): I22 - Educational Finance; Financial Aid, H42 - Publicly Provided Private Goods, and I28 - Education: Government Policy
Creator: Lacker, Jeffrey Malcolm Series: Foundations of policy toward electronic money Abstract:
Briefly reviews the potential consequences of electronic money for the management of the government's balance sheet through open market operations and for the regulations governing the public and private issue of payment instruments.
Keyword: Monetary policy, Payment instruments, and Electronic money Subject (JEL): E52 - Monetary policy, central banking, and the supply of money and credit - Monetary policy, E58 - Monetary policy, central banking, and the supply of money and credit - Central banks and their policies, and E42 - Money and interest rates - Monetary systems ; Standards ; Regimes ; Government and the monetary system ; Payment systems
Creator: Huo, Zhen and Ríos-Rull, José-Víctor Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 478 Abstract:
We build a variation of the neoclassical growth model in which financial shocks to households or wealth shocks (in the sense of wealth destruction) generate recessions. Two standard ingredients that are necessary are (1) the existence of adjustment costs that make the expansion of the tradable goods sector difficult and (2) the existence of some frictions in the labor market that prevent enormous reductions in real wages (Nash bargaining in Mortensen-Pissarides labor markets is enough). We pose a new ingredient that greatly magnifies the recession: a reduction in consumption expenditures reduces measured productivity, while technology is unchanged due to reduced utilization of production capacity. Our model provides a novel, quantitative theory of the current recessions in southern Europe.
Keyword: Paradox of thrift, Great Recession, and Endogenous productivity Subject (JEL): E32 - Business Fluctuations; Cycles, E20 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy: General (includes Measurement and Data), and F44 - International Business Cycles