Creator: Heathcote, Jonathan, Storesletten, Kjetil, and Violante, Giovanni L. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 432 Abstract:
This paper develops a model with partial insurance against idiosyncratic wage shocks to quantify risk sharing, and to decompose inequality into life-cycle shocks versus initial heterogeneity in preferences and productivity. Closed-form solutions are obtained for equilibrium allocations and for moments of the joint distribution of consumption, hours, and wages. We prove identification and estimate the model with data from the CEX and the PSID over the period 1967–2006. We find that (i) 40% of permanent wage shocks pass through to consumption; (ii) the share of wage risk insured privately increased until the early 1980s and remained stable thereafter; (iii) life-cycle productivity shocks account for half of the cross-sectional variance of wages and earnings, but for much less of dispersion in consumption or hours worked.
Subject (JEL): E52 - Monetary Policy, E21 - Macroeconomics: Consumption; Saving; Wealth, E31 - Price Level; Inflation; Deflation, and E23 - Macroeconomics: Production
Creator: Perri, Fabrizio and Quadrini, Vincenzo Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 463 Abstract:
The 2007–2009 crisis was characterized by an unprecedented degree of international synchronization as all major industrialized countries experienced large macroeconomic contractions around the date of Lehman bankruptcy. At the same time countries also experienced large and synchronized tightening of credit conditions. We present a two-country model with financial market frictions where a credit tightening can emerge as a self-fulfilling equilibrium caused by pessimistic but fully rational expectations. As a result of the credit tightening, countries experience large and endogenously synchronized declines in asset prices and economic activity (international recessions). The model suggests that these recessions are more severe if they happen after a prolonged period of credit expansion.
Keyword: International co-movement, Global liquidity, and Credit shocks Subject (JEL): F41 - Open Economy Macroeconomics, F44 - International Business Cycles, and G01 - Financial Crises
Creator: Schulhofer-Wohl, Sam Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 462 Abstract:
How well do people share risk? Standard risk-sharing regressions assume that any variation in households’ risk preferences is uncorrelated with variation in the cyclicality of income. I combine administrative and survey data to show that this assumption is questionable: Risk-tolerant workers hold jobs where earnings carry more aggregate risk. The correlation makes risk-sharing regressions in the previous literature too pessimistic. I derive techniques that eliminate the bias, apply them to U.S. data, and find that the effect of idiosyncratic income shocks on consumption is practically small and statistically difficult to distinguish from zero.
Keyword: Imperfect insurance, Heterogeneity, Risk preferences, and Risk sharing Subject (JEL): E21 - Macroeconomics: Consumption; Saving; Wealth and E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
Creator: McGrattan, Ellen R. and Prescott, Edward C. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 369 Abstract:
For the 1990s, the basic neoclassical growth model predicts a depressed economy, when in fact the U.S. economy boomed. We extend the base model by introducing intangible investment and non-neutral technology change with respect to producing intangible investment goods and find that the 1990s are not puzzling in light of this new theory. There is micro and macro evidence motivating our extension, and the theory’s predictions are in conformity with U.S. national accounts and capital gains. We compare accounting measures with corresponding measures for our model economy. We find that standard accounting measures greatly understate the 1990s boom.
Keyword: Intangible Investment, Hours, and Productivity Subject (JEL): O47 - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence, E23 - Macroeconomics: Production, O33 - Technological Change: Choices and Consequences; Diffusion Processes, and E22 - Investment; Capital; Intangible Capital; Capacity
Creator: Adão, Bernardino, Correia, Isabel, and Teles, Pedro Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 680 Abstract:
We show that short and long nominal interest rates are independent monetary policy instruments. The pegging of both helps solving the problem of multiplicity that arises when only short rates are used as the instrument of policy. A peg of the nominal returns on assets of different maturities is equivalent to a peg of state-contingent interest rates. These are the rates that should be targeted in order to implement unique equilibria. At the zero bound, while it is still possible to target state-contingent interest rates, that is no longer equivalent to the target of the term structure.
Keyword: Term structure, Long rates, Monetary policy, Maturities, Multiplicity of equilibria, Monetary policy instruments, Sticky prices, and Short rates Subject (JEL): E50 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General, E30 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data), and E40 - Money and Interest Rates: General
Creator: Guvenen, Fatih and Smith, Anthony Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 450 Abstract:
This paper uses the information contained in the joint dynamics of households’ labor earnings and consumption-choice decisions to quantify the nature and amount of income risk that households face. We accomplish this task by estimating a structural consumption-savings model using data from the Panel Study of Income Dynamics and the Consumer Expenditure Survey. Specifically, we estimate the persistence of labor income shocks, the extent of systematic differences in income growth rates, the fraction of these systematic differences that households know when they begin their working lives, and the amount of measurement error in the data. Although data on labor earnings alone can shed light on some of these dimensions, to assess what households know about their income processes requires using the information contained in their economic choices (here, consumption-savings decisions). To estimate the consumption-savings model, we use indirect inference, a simulation method that puts virtually no restrictions on the structural model and allows the estimation of income processes from economic decisions with general specifications of utility, frequently binding borrowing constraints, and missing observations. The main substantive findings are that income shocks are not very persistent, systematic differences in income growth rates are large, and individuals have substantial amounts of information about their future income prospects. Consequently, the amount of uninsurable lifetime income risk that households perceive is substantially smaller than what is typically assumed in calibrated macroeconomic models with incomplete markets.
Creator: Luttmer, Erzo G. J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 678 Abstract:
Although employment at individual firms tends to be highly non-stationary, the employment size distribution of all firms in the United States appears to be stationary. It closely resembles a Pareto distribution. There is a lot of entry and exit, mostly of small firms. This paper surveys general equilibrium models that can be used to interpret these facts and explores the role of innovation by new and incumbent firms in determining aggregate growth. The existence of a balanced growth path with a stationary employment size distribution depends crucially on assumptions made about the cost of entry. Some type of labor must be an essential input in setting up new firms.
Keyword: Heterogeneous productivity, Firm size distribution, Selection, and Organization capital Subject (JEL): O33 - Technological Change: Choices and Consequences; Diffusion Processes and E10 - General Aggregative Models: General
Creator: Williamson, Stephen D. and Wright, Randall D. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 443 Abstract:
The purpose of this paper is to discuss some of the models used in New Monetarist Economics, which is our label for a body of recent work on money, banking, payments systems, asset markets, and related topics. A key principle in New Monetarism is that solid microfoundations are critical for understanding monetary issues. We survey recent papers on monetary theory, showing how they build on common foundations. We then lay out a tractable benchmark version of the model that allows us to address a variety of issues. We use it to analyze some classic economic topics, like the welfare effects of inflation, the relationship between money and capital accumulation, and the Phillips curve. We also extend the benchmark model in new ways, and show how it can be used to generate new insights in the study of payments, banking, and asset markets.
Keyword: New Monetarism, Monetary Policy, and Monetary Theory Subject (JEL): E40 - Money and Interest Rates: General, E50 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General, E10 - General Aggregative Models: General, and E00 - Macroeconomics and Monetary Economics: General
Creator: Williamson, Stephen D. and Wright, Randall D. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 442 Abstract:
This essay articulates the principles and practices of New Monetarism, our label for a recent body of work on money, banking, payments, and asset markets. We first discuss methodological issues distinguishing our approach from others: New Monetarism has something in common with Old Monetarism, but there are also important differences; it has little in common with Keynesianism. We describe the principles of these schools and contrast them with our approach. To show how it works, in practice, we build a benchmark New Monetarist model, and use it to study several issues, including the cost of inflation, liquidity and asset trading. We also develop a new model of banking.
Subject (JEL): E40 - Money and Interest Rates: General, E50 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General, E10 - General Aggregative Models: General, and E00 - Macroeconomics and Monetary Economics: General