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Creator: Chari, V. V., Kehoe, Patrick J., and McGrattan, Ellen R. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 664 Abstract:
In the 1970s macroeconomists often disagreed bitterly. Macroeconomists have now largely converged on method, model design, and macroeconomic policy advice. The disagreements that remain all stem from the practical implementation of the methodology. Some macroeconomists think that New Keynesian models are on the verge of being useful for quarter-to-quarter quantitative policy advice. We do not. We argue that the shocks in these models are dubiously structural and show that many of the features of the model as well as the implications due to these features are inconsistent with microeconomic evidence. These arguments lead us to conclude that New Keynesian models are not yet useful for policy analysis.
Tema: E32 - Business Fluctuations; Cycles and E58 - Central Banks and Their Policies
Creator: Ales, Laurence and Maziero, Pricila Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 663 Abstract:
We study the quantitative properties of constrained efficient allocations in an environment where risk sharing is limited by the presence of private information. We consider a life cycle version of a standard Mirrlees economy where shocks to labor productivity have a component that is public information and one that is private information. The presence of private shocks has important implications for the age profiles of consumption and income. First, they introduce an endogenous dispersion of continuation utilities. As a result, consumption inequality rises with age even if the variance of the shocks does not. Second, they introduce an endogenous rise of the distortion on the marginal rate of substitution between consumption and leisure over the life cycle. This is because, as agents age, the ability to properly provide incentives for work must become less and less tied to promises of benefits (through either increased leisure or consumption) in future periods. Both of these features are also present in the data. We look at the data through the lens of our model and estimate the fraction of labor productivity that is private information. We find that for the model and data to be consistent, a large fraction of shocks to labor productivities must be private information.
Palabra clave: Risk sharing, Private information, and Consumption inequality Tema: D91 - Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making, H21 - Taxation and Subsidies: Efficiency; Optimal Taxation, D11 - Consumer Economics: Theory, D58 - Computable and Other Applied General Equilibrium Models, D86 - Economics of Contract: Theory, and D82 - Asymmetric and Private Information; Mechanism Design
Creator: Kehoe, Patrick J. and Midrigan, Virgiliu Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 661 Abstract:
In the data, a large fraction of price changes are temporary. We provide a simple menu cost model which explicitly includes a motive for temporary price changes. We show that this simple model can account for the main regularities concerning temporary and permanent price changes. We use the model as a benchmark to evaluate existing shortcuts that do not explicitly model temporary price changes. One shortcut is to take the temporary changes out of the data and fit a simple Calvo model to it. If we do so prices change only every 50 weeks and the Calvo model overestimates the real effects of monetary shocks by almost 70%. A second shortcut is to leave the temporary changes in the data. If we do so prices change every 3 weeks and the Calvo model produces only 1/9 of the real effects of money as in our benchmark. We show that a simple Calvo model can generate the same real effects as our benchmark model if we set parameters so that prices change every 17 weeks.
Tema: E12 - General Aggregative Models: Keynes; Keynesian; Post-Keynesian, E50 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General, and E58 - Central Banks and Their Policies
Creator: Guner, Nezih, Kaygusuz, Remzi, and Ventura, Gustavo Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 660 Abstract:
We evaluate reforms to the U.S. tax system in a dynamic setup with heterogeneous married and single households, and with an operative extensive margin in labor supply. We restrict our model with observations on gender and skill premia, labor force participation of married females across skill groups, and the structure of marital sorting. We study four revenue-neutral tax reforms: a proportional consumption tax, a proportional income tax, a progressive consumption tax, and a reform in which married individuals file taxes separately. Our findings indicate that tax reforms are accompanied by large and differential effects on labor supply: while hours per-worker display small increases, total hours and female labor force participation increase substantially. Married females account for more than 50% of the changes in hours associated to reforms, and their importance increases sharply for values of the intertemporal labor supply elasticity on the low side of empirical estimates. Tax reforms in a standard version of the model result in output gains that are up to 15% lower than in our benchmark economy.
Palabra clave: Taxation, Two-earner households, and Labor force participation Tema: E62 - Fiscal Policy, H31 - Fiscal Policies and Behavior of Economic Agents: Household, J22 - Time Allocation and Labor Supply, and J12 - Marriage; Marital Dissolution; Family Structure; Domestic Abuse
Creator: Atkeson, Andrew, Chari, V. V., and Kehoe, Patrick J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 659 Abstract:
The Ramsey approach to policy analysis finds the best competitive equilibrium given a set of available instruments. This approach is silent about unique implementation, namely designing policies so that the associated competitive equilibrium is unique. This silence is particularly problematic in monetary policy environments where many ways of specifying policy lead to indeterminacy. We show that sophisticated policies which depend on the history of private actions and which can differ on and off the equilibrium path can uniquely implement any desired competitive equilibrium. A large literature has argued that monetary policy should adhere to the Taylor principle to eliminate indeterminacy. Our findings say that adherence to the Taylor principle on these grounds is unnecessary. Finally, we show that sophisticated policies are robust to imperfect information.
Tema: E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General, E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination, E50 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General, E58 - Central Banks and Their Policies, and E52 - Monetary Policy
Creator: Luttmer, Erzo G. J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 657 Abstract:
Given a common technology for replicating blueprints, high-quality blueprints will be replicated more quickly than low-quality blueprints. If quality begets quality, and firms are identified with collections of blueprints derived from the same initial blueprint, then, along a balanced growth path, Gibrat’s Law holds for every type of firm. A firm size distribution with the thick right tail observed in the data can then arise only when the number of blueprints in the economy grows over time, or else firms cannot grow at a positive rate on average. But when calibrated to match the observed firm entry rate and the right tail of the size distribution, this model implies that the median age among firms with more than 10,000 employees is about 750 years. The problem is Gibrat’s Law. If the relative quality of a firm’s blueprints depreciates as the firm ages, then the firm’s growth rate slows down over time. By allowing for rapid and noisy initial growth, this version of the model can explain high observed entry rates, a thick-tailed size distribution, and the relatively young age of large U.S. corporations.
Palabra clave: Gibrat's Law, Firm age and size distribution, and Capital accumulation Tema: L11 - Production, Pricing, and Market Structure; Size Distribution of Firms and O40 - Economic Growth and Aggregate Productivity: General
Creator: Kehoe, Patrick J. and Midrigan, Virgiliu Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 656 Abstract:
The classic explanation for the persistence and volatility of real exchange rates is that they are the result of nominal shocks in an economy with sticky goods prices. A key implication of this explanation is that if goods have differing degrees of price stickiness then relatively more sticky goods tend to have relatively more persistent and volatile good-level real exchange rates. Using panel data, we find only modest support for these key implications. The predictions of the theory for persistence have some modest support: in the data, the stickier is the price of a good the more persistent is its real exchange rate, but the theory predicts much more variation in persistence than is in the data. The predictions of the theory for volatility fare less well: in the data, the stickier is the price of a good the smaller is its conditional variance while in the theory the opposite holds. We show that allowing for pricing complementarities leads to a modest improvement in the theory’s predictions for persistence but little improvement in the theory’s predictions for conditional variances.
Tema: F00 - International Economics: General and F40 - Macroeconomic Aspects of International Trade and Finance: General
Creator: Chari, V. V. and Kehoe, Patrick J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 654 Abstract:
Here we reply to Robert Solow’s comment on our work, Modern Macroeconomics in Practice: How Theory is Shaping Policy.
Creator: Liu, Zheng, Waggoner, Daniel F., and Zha, Tao Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 653 Abstract:
The possibility of regime shifts in monetary policy can have important effects on rational agents’ expectation formation and equilibrium dynamics. In a DSGE model where the monetary policy rule switches between a dovish regime that accommodates inflation and a hawkish regime that stabilizes inflation, the expectation effect is asymmetric across regimes. Such an asymmetric effect makes it difficult, but still possible, to generate substantial reductions in the volatilities of inflation and output as the monetary policy switches from the dovish regime to the hawkish regime.
Palabra clave: Structural breaks, Monetary policy regime, Expectations formation, Lucas critique, and Macroeconomic volatility Tema: E32 - Business Fluctuations; Cycles, E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems, and E52 - Monetary Policy
Creator: Kehoe, Patrick J. and Midrigan, Virgiliu Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 652 Abstract:
In the data, a sizable fraction of price changes are temporary price reductions referred to as sales. Existing models include no role for sales. Hence, when confronted with data in which a large fraction of price changes are sales related, the models must either exclude sales from the data or leave them in and implicitly treat sales like any other price change. When sales are included, prices change frequently and standard sticky price models with this high frequency of price changes predict small effects from money shocks. If sales are excluded, prices change much less frequently and a standard sticky price model with this low frequency of price changes predict much larger effects of money shocks. This paper adds a motive for sales in a parsimonious extension of existing sticky price models. We show that the model can account for most of the patterns of sales in the data. Using our model as the data generating process, we evaluate the existing approaches and find that neither well approximates the real effects of money in our economy in which sales are explicitly modeled.