Risultati della ricerca
Creator: Chari, V. V., Jones, Larry E., and Marimon, Ramon, 1953- Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 582 Abstract:
In U.S. elections, voters often vote for candidates from different parties for president and Congress. Voters also express dissatisfaction with the performance of Congress as a whole and satisfaction with their own representative. We develop a model of split-ticket voting in which government spending is financed by uniform taxes but the benefits from this spending are concentrated. While the model generates split-ticket voting, overall spending is too high only if the president’s powers are limited. Overall spending is too high in a parliamentary system, and our model can be used as the basis of an argument for term limits.
Soggetto: H40 - Publicly Provided Goods: General, H30 - Fiscal Policies and Behavior of Economic Agents: General, and H00 - Public Economics: General
Creator: Wallace, Neil and de O. Cavalcanti, Ricardo Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 581 Abstract:
A random-matching model (of money) is formulated in which there is complete public knowledge of the trading histories of a subset of the population, called banks, and no public knowledge of the trading histories of the complement of that subset, called nonbanks. Each person, whether a banker or a non banker, is assumed to have the technological capability to create indivisible, distinct and durable objects called notes. If outside money is indivisible and sufficiently scarce, then an optimal mechanism is shown to have note issue and destruction (redemption) by banks.
Creator: Chari, V. V., Nicolini, Juan Pablo, and Teles, Pedro Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 581 Abstract:
We use the Ramsey and Mirrlees approaches to study how fiscal and trade policy should be set cooperatively when governments must raise revenues with distorting taxes. Free trade and unrestricted capital mobility are optimal. Efficient outcomes can be implemented with taxes only on final consumption goods and labor income. We study alternative tax systems, showing that uniform taxation of household asset returns, and not taxing corporate income yields efficient outcomes. Border adjustments exempting exports from and including imports in the tax base are desirable. Destination- and residence-based tax systems are desirable compared to origin- and source-based systems.
Parola chiave: Origin- and destination-based taxation, Capital income tax, Border adjustment, Production efficiency, Free trade, and Value-added taxes Soggetto: E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination, E62 - Fiscal Policy, and E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General
Creator: Cole, Harold Linh, 1957- and Kehoe, Patrick J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 580 Abstract:
Some economists argue that as long as governments can earn the market rate of return by saving abroad, standard reputation models cannot support debt. We argue that these standard reputation models are partial in the sense that actions of agents in one arena affect reputation in that arena only. We develop a general model of reputation in which if a government is viewed as untrustworthy in one relationship, this government will be viewed as untrustworthy in other relationships. We show that our general model of reputation can support large amounts of debt.
Creator: Buera, Francisco and Nicolini, Juan Pablo Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 580 Abstract:
In this chapter, we review the monetary and fiscal history of Argentina for the period 1960–2017, a time during which the country suffered several balance of payments crises, three periods of hyperinflation, two defaults on government debt, and three banking crises. All told, between 1969 and 1991, after several monetary reforms, thirteen zeros had been removed from its currency. We argue that all these events are the symptom of a recurrent problem: Argentina’s unsuccessful attempts to tame the fiscal deficit. An implication of our analysis is that the future economic evolution of Argentina depends greatly on its ability to develop institutions that guarantee that the government does not spend more than its genuine tax revenues over reasonable periods of time.
Parola chiave: Macroeconomic history, Inflation, Fiscal and monetary interactions, Deficits, and Government budget constraint Soggetto: E31 - Price Level; Inflation; Deflation, E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems, E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy, E50 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General, and N16 - Economic History: Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations: Latin America; Caribbean
Creator: Cole, Harold Linh, 1957- and Ohanian, Lee E. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 579 Abstract:
In the postwar period velocity has risen so sharply in the U.S. that the ratio of money to nominal output has fallen by a factor of three. We analyze the implications of shrinking money for the real effects of a monetary shock in two classes of equilibrium monetary business cycle models: limited participation (liquidity) models and predetermined (sticky) price models. We show that the liquidity model predicts that a rise in velocity leads to a substantial reduction in the real effects of a monetary shock. In sharp contrast, we show that the real effects of a monetary shock in the sticky price model are largely invariant to changes in velocity. We provide evidence that suggests that the real effects of monetary shocks have fallen over the postwar period.
Creator: Kehoe, Timothy Jerome, 1953-, Machicado, Carlos Gustavo, and Peres Cajías, José Alejandro, 1982- Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 579 Abstract:
After the economic reforms that followed the National Revolution of the 1950s, Bolivia seemed positioned for sustained growth. Indeed, it achieved unprecedented growth from 1960 to 1977. Mistakes in economic policies, especially the rapid accumulation of debt due to persistent deficits and a fixed exchange rate policy during the 1970s, led to a debt crisis that began in 1977. From 1977 to 1986, Bolivia lost almost all the gains in GDP per capita that it had achieved since 1960. In 1986, Bolivia started to grow again, interrupted only by the financial crisis of 1998–2002, which was the result of a drop in the availability of external financing. Bolivia has grown since 2002, but government policies since 2006 are reminiscent of the policies of the 1970s that led to the debt crisis, in particular, the accumulation of external debt and the drop in international reserves due to a de facto fixed exchange rate since 2012.
Parola chiave: Fiscal policy, Bolivia, Public enterprises, Monetary policy, and Hyperinflation Soggetto: H63 - National Debt; Debt Management; Sovereign Debt, E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy, E52 - Monetary Policy, and N16 - Economic History: Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations: Latin America; Caribbean
Creator: Kocherlakota, Narayana Rao, 1963- and Wallace, Neil Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 578 Abstract:
We study a random-matching, absence-of-double-coincidence environment in which people cannot precommit and in which there are two imperfect ways of keeping track of what other people have done in the past: money and a public record of all past actions that is updated with an average lag. We study how the magnitude of that lag affects the allocations that are optimal from among allocations that are stationary and feasible and that satisfy incentive constraints which arise from the absence of commitment and the imperfect ways of keeping track of what others have done in the past.
Creator: Bhandari, Anmol, Birinci, Serdar, McGrattan, Ellen R., and See, Kurt Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 578 Abstract:
In this appendix, we provide details on the data sources and construction of variables for our analysis in "What Do Survey Data Tell Us about U.S. Businesses?" We also include the auxiliary tables and figures omitted from the main text.
Parola chiave: Survey data Soggetto: C83 - Survey Methods; Sampling Methods
Creator: Cole, Harold Linh, 1957- and Kocherlakota, Narayana Rao, 1963- Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 577 Abstract:
We consider a simple environment in which individuals receive income shocks that are unobservable to others and can privately store resources. We show that this ability to privately store can undercut the ability to shift resources across individuals to the extent that the efficient allocation only involves consumption smoothing over time, as opposed to insurance (consumption smoothing over states) if the rate of return on savings is not too far below the rate of time preference, or, alternatively, if the worst possible outcome is sufficiently dire. We also show that unlike environments without unobservable storage, the symmetric efficient allocation is decentralizable through a competitive asset market in which individuals trade risk-free bonds among themselves.
Creator: Alvarez, Fernando, 1964- and Atkeson, Andrew Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 577 Abstract:
We develop a new general equilibrium model of asset pricing and asset trading volume in which agents’ motivations to trade arise due to uninsurable idiosyncratic shocks to agents’ risk tolerance. In response to these shocks, agents trade to rebalance their portfolios between risky and riskless assets. We study a positive question — When does trade volume become a pricing factor? — and a normative question — What is the impact of Tobin taxes on asset trading on welfare? In our model, economies in which marketwide risk tolerance is negatively correlated with trade volume have a higher risk premium for aggregate risk. Likewise, for a given economy, we ﬁnd that assets whose cash ﬂows are concentrated on states with high trading volume have higher prices and lower risk premia. We then show that Tobin taxes on asset trade have a ﬁrst-order negative impact on ex-ante welfare, i.e., a small subsidy to trade leads to an improvement in ex-ante welfare. Finally, we develop an alternative version of our model in which asset trade arises from uninsurable idiosyncratic shocks to agents’ hedging needs rather than shocks to their risk tolerance. We show that our positive results regarding the relationship between trade volume and asset prices carry through. In contrast, the normative implications of this speciﬁcation of our model for Tobin taxes or subsidies depend on the speciﬁcation of agents’ preferences and non-traded endowments.
Parola chiave: Liquidity, Asset pricing, Trade volume, and Tobin taxes Soggetto: G12 - Asset Pricing; Trading Volume; Bond Interest Rates
Creator: Green, Edward J. and Lin, Ping Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 576 Abstract:
In a finite-trader version of the Diamond-Dybvig (1983) model, the symmetric, ex-ante efficient allocation is implementable by a direct mechanism (i.e., each trader announces the type of his own ex-post preference) in which truthful revelation is the strictly dominant strategy for each trader. When the model is modified by formalizing the sequential-service constraint (cf. Wallace, 1988), the truth-telling equilibrium implements the symmetric, ex-ante efficient allocation with respect to iterated elimination of strictly dominated strategies.
Parola chiave: Financial intermediation, Bank run, and Implementation Soggetto: D82 - Asymmetric and Private Information; Mechanism Design and G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Creator: Chari, V. V. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 576 Abstract:
This chapter is an introductory essay to the volume Climate Change Economics: The Role of Uncertainty and Risk, edited by V. V. Chari and Robert Litterman. This volume consists of a collection of papers that were presented at "The Next Generation of Economic Models of Climate Change," a conference hosted by the Heller-Hurwicz Economics Institute at the University of Minnesota.
Parola chiave: Externalities, Greenhouse gases, and Global warming Soggetto: G12 - Asset Pricing; Trading Volume; Bond Interest Rates and H41 - Public Goods
Creator: Braun, R. Anton and Evans, Charles, 1958- Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 575 Abstract:
In aggregate unadjusted data, measured Solow residuals exhibit large seasonal variations. Total Factor Productivity grows rapidly in the fourth quarter at an annual rate of 16 percent and regresses sharply in the first quarter at an annual rate of –24 percent. This paper considers two potential explanations for the measured seasonal variation in the Solow residual: labor hoarding and increasing returns to scale. Using a specification that allows for no exogenous seasonal variation in technology and a single seasonal demand shift in the fourth quarter, we ask the following question: How much of the total seasonal variation in the measured Solow residual can be explained by Christmas? The answer to this question is surprising. With increasing returns and time varying labor effort, Christmas is sufficient to explain the seasonal variation in the Solow residual, consumption, average productivity, and output in all four quarters. Our analysis of seasonally unadjusted data uncovers important roles for labor hoarding and increasing returns which are difficult to identify in adjusted data.
Creator: Ayres, João, Garcia, Márcio Gomes Pinto, Guillen, Diogo, and Kehoe, Patrick J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 575 Abstract:
Brazil has had a long period of high inflation. It peaked around 100 percent per year in 1964, decreased until the first oil shock (1973), but accelerated again afterward, reaching levels above 100 percent on average between 1980 and 1994. This last period coincided with severe balance of payments problems and economic stagnation that followed the external debt crisis in the early 1980s. We show that the high-inflation period (1960-1994) was characterized by a combination of fiscal deficits, passive monetary policy, and constraints on debt financing. The transition to the low-inflation period (1995-2016) was characterized by improvements in all of these features, but it did not lead to significant improvements in economic growth. In addition, we document a strong positive correlation between inflation rates and seigniorage revenues, although inflation rates are relatively high for modest levels of seigniorage revenues. Finally, we discuss the role of the weak institutional framework surrounding the fiscal and monetary authorities and the role of monetary passiveness and inflation indexation in accounting for the unique features of inflation dynamics in Brazil.
Parola chiave: Stabilization plans, Brazil's stagnation, Brazil's hyperinflation, Debt accounting, and Fiscal deficit Soggetto: H62 - National Deficit; Surplus, H63 - National Debt; Debt Management; Sovereign Debt, E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems, and E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
Creator: Smith, Bruce D. (Bruce David), 1954-2002 and Wang, Cheng Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 574 Abstract:
We consider the problem of an insurer who enters into a repeated relationship with a set of risk averse agents in the presence of ex post verification costs. The insurer wishes to minimize the expected cost of providing these agents a certain expected utility level. We characterize the optimal contract between the insurer and the insured agents. We then apply the analysis to the provision of deposit insurance. Our results suggest—in a deposit insurance context—that it may be optimal to utilize the discount window early on, and to make deposit insurance payments only later, or not at all.
Parola chiave: Deposit insurance and Bank supervision Soggetto: E58 - Central Banks and Their Policies and G20 - Financial Institutions and Services: General
Creator: Hur, Sewon, Kondo, Illenin O., and Perri, Fabrizio Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 574 Abstract:
This paper argues that the comovement between inflation and economic activity is an important determinant of real interest rates over time and across countries. First, we show that for advanced economies, periods with more procyclical inflation are associated with lower real rates, but only when there is no risk of default on government debt. Second, we present a model of nominal sovereign debt with domestic risk-averse lenders. With procyclical inflation, nominal bonds pay out more in bad times, making them a good hedge against aggregate risk. In the absence of default risk, procyclical inflation yields lower real rates. However, procyclicality implies that the government needs to make larger (real) payments when the economy deteriorates, which could increase default risk and trigger an increase in real rates. The patterns of real rates predicted by the model are quantitatively consistent with those documented in the data.
Parola chiave: Inflation risk, Sovereign default, Government debt, and Nominal bonds Soggetto: G12 - Asset Pricing; Trading Volume; Bond Interest Rates, E31 - Price Level; Inflation; Deflation, H63 - National Debt; Debt Management; Sovereign Debt, and F34 - International Lending and Debt Problems
Creator: Boyd, John H., Levine, Ross, and Smith, Bruce D. (Bruce David), 1954-2002 Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 573 Descrizione:
Cover page issue number is "573D".
Creator: Atkeson, Andrew, Burstein, Ariel, and Chatzikonstantinou, Manolis Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 573 Abstract:
What quantitative lessons can we learn from models of endogenous technical change through innovative investments by firms for the impact of changes in the economic environment on the dynamics of aggregate productivity in the short, medium, and long run? We present a unifying model that nests a number of canonical models in the literature and characterize their positive implications for the transitional dynamics of aggregate productivity and their welfare implications in terms of two sufficient statistics. We review the current state of measurement of these two sufficient statistics and discuss the range of positive and normative quantitative implications of our model for a wide array of counterfactual experiments, including the link between a decline in the entry rate of new firms and a slowdown in the growth of aggregate productivity given that measurement. We conclude with a summary of the lessons learned from our analysis to help direct future research aimed at building models of endogenous productivity growth useful for quantitative analysis.
Parola chiave: Endogenous growth, Transitional dynamics, and Innovative investment Soggetto: O30 - Innovation; Research and Development; Technological Change; Intellectual Property Rights: General and O40 - Economic Growth and Aggregate Productivity: General
Creator: Fogli, Alessandra and Veldkamp, Laura Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 572 Abstract:
Does the pattern of social connections between individuals matter for macroeconomic outcomes? If so, where do these differences come from and how large are their effects? Using network analysis tools, we explore how different social network structures affect technology diffusion and thereby a country's rate of growth. The correlation between high-diffusion networks and income is strongly positive. But when we use a model to isolate the effect of a change in social networks, the effect can be positive, negative, or zero. The reason is that networks diffuse ideas and disease. Low-diffusion networks have evolved in countries where disease is prevalent because limited connectivity protects residents from epidemics. But a low-diffusion network in a low-disease environment needlessly compromises the diffusion of good ideas. In general, social networks have evolved to fit their economic and epidemiological environment. Trying to change networks in one country to mimic those in a higher-income country may well be counterproductive.
Parola chiave: Pathogens, Disease , Development, Technology diffusion, Growth, Social networks, and Economic networks Soggetto: O33 - Technological Change: Choices and Consequences; Diffusion Processes, E02 - Institutions and the Macroeconomy, I10 - Health: General, and O10 - Economic Development: General
Creator: Boyd, John H. and Graham, Stanley L. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 572 Abstract:
We don’t really know why the U.S. banking industry is consolidating rapidly, as it has been doing for the last decade or so. After a large number of studies on the topic including this one, what seems clear is that consolidation is not producing significant efficiencies — at least not on average. Other dimensions of the consolidation trend — such as its heavy concentration in large banks — are just as poorly understood. Given this ignorance as to the “why” of consolidation, it is extremely risky to predict its future effects. Based on past experience and data, at least, we can conclude the following.
Parola chiave: Large bank, Small bank, Bank market, Banking industry, and Total asset
Creator: Green, Edward J. and Weber, Warren E. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 571 Abstract:
A current U.S. policy is to introduce a new style of currency that is harder to counterfeit, but not immediately to withdraw from circulation all of the old-style currency. This policy is analyzed in a random-matching model of money, and its potential to decrease counterfeiting in the long run is shown. For various parameters of the model, three types of equilibria are found to occur. In only one does counterfeiting continue at its initial high level. In the other two, both genuine and counterfeit old-style money go out of circulation—immediately in one and gradually in the other. There are objectives and expectations that can reasonably be imputed to policymakers, under which the policy that they have chosen can make sense.
Creator: Chari, V. V., Nicolini, Juan Pablo, and Teles, Pedro Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 571 Abstract:
We revisit the question of how capital should be taxed. We allow for a rich set of tax instruments that consists of taxes widely used in practice, including consumption, dividend, capital, and labor income taxes. We restrict policies to respect promises that the government has made in the previous period regarding the current value of wealth. We show that capital should not be taxed if households have preferences that are standard in the macroeconomics literature. We show that Ramsey outcomes that must respect such promises are time consistent. We show that the presumption in the literature that capital should be taxed for some length of time arises because the tax system is restricted.
Parola chiave: Production efficiency, Capital income taxe60, and Time consistency Soggetto: E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination, E62 - Fiscal Policy, and E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General
Creator: Geweke, John Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 570 Abstract:
This paper surveys recently developed methods for Bayesian inference and their use in economic time series models. It begins by reviewing aspects of Bayesian inference essential to understanding the implications of the Bayesian paradigm for time series analysis. It next describes the use of posterior simulators to solve otherwise intractable analytical problems. The theory and the computational advances are brought together in setting forth a practical framework for decision-making and forecasting. These developments are illustrated in the context of the vector autoregressions, stochastic volatility models, and models of changing regimes.
Creator: Ai, Hengjie and Bhandari, Anmol Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 570 Abstract:
This paper studies asset pricing in a setting in which idiosyncratic risk in human capital is not fully insurable. Firms use long-term contracts to provide insurance to workers, but neither side can commit to these contracts; furthermore, worker-firm relationships have endogenous durations owing to costly and unobservable effort. Uninsured tail risk in labor earnings arises as a part of an optimal risk-sharing scheme. In the general equilibrium, exposure to the resulting tail risk generates higher risk premia, more volatile returns, and variations in expected returns across firms. Model outcomes are consistent with the cyclicality of factor shares in the aggregate, and the heterogeneity in exposures to idiosyncratic and aggregate shocks in the cross section.
Parola chiave: Equity premium puzzle, Dynamic contracting, Tail risk, and Limited commitment Soggetto: G10 - General Financial Markets: General (includes Measurement and Data) and E30 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data)
Creator: Wallace, Neil and Zhou, Ruilin Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 569 Abstract:
Until the mid-19th century, shortages of currency were sometimes serious problems. One common response was to prohibit the export of coins. We use a random matching model with indivisible money to explain a shortage and to judge the desirability of a prohibition on the export of coins. The model, although extreme in many regards, represents better than earlier models a demand for outside money and the problems that arise when that money is indivisible. It can also rationalize a prohibition on the export of coins.
Parola chiave: Currency shortage, Indivisible money, and Export of coins Soggetto: E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems, E40 - Money and Interest Rates: General, and N10 - Economic History: Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations: General, International, or Comparative
Creator: Cai, Zhifeng and Heathcote, Jonathan Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 569 Abstract:
This paper evaluates the role of rising income inequality in explaining observed growth in college tuition. We develop a competitive model of the college market in which college quality depends on instructional expenditure and the average ability of admitted students. An innovative feature of our model is that it allows for a continuous distribution of college quality. We find that observed increases in US income inequality can explain more than the entire observed rise in average net tuition since 1990 and that rising income inequality has also depressed college attendance.
Parola chiave: Income inequality, College tuition, and Club goods Soggetto: I23 - Higher Education; Research Institutions, I22 - Educational Finance; Financial Aid, and I24 - Education and Inequality
Creator: Bhandari, Anmol, Birinci, Serdar, McGrattan, Ellen R., and See, Kurt Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 568 Abstract:
This paper examines the reliability of widely used surveys on U.S. businesses. We compare survey responses of business owners with administrative data and document large inconsistencies in business incomes, receipts, and the number of owners. We document problems due to nonrepresentative samples and measurement errors. Nonrepresentativeness is reflected in undersampling of owners with low incomes. Measurement errors arise because respondents do not refer to relevant documents and possibly because of framing issues. We discuss implications for statistics of interest, such as business valuations and returns. We conclude that predictions based on current survey data should be treated with caution.
Parola chiave: Business taxes and valuation, Intangibles, and Survey data Soggetto: H25 - Business Taxes and Subsidies including sales and value-added (VAT), C83 - Survey Methods; Sampling Methods, and E22 - Investment; Capital; Intangible Capital; Capacity
Creator: Wallace, Neil Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 568 Abstract:
Using an existing random matching model of money, I show that a once-for-all change in the quantity of money has short-run effects that are predominantly real and long-run effects that are in the direction of being predominantly nominal provided (i) the quantity of money is random and (ii) people learn about what happened to it only with a lag. The change in the quantity of money comes about through a random process of discovery that does not permit anyone to deduce the aggregate amount discovered when the change actually occurs.
Soggetto: E30 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data)
Creator: Atkeson, Andrew, Eisfeldt, Andrea L., Weill, Pierre-Olivier, and d'Avernas, Adrien Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 567 Abstract:
Banks' ratio of the market value to book value of their equity was close to 1 until the 1990s, then more than doubled during the 1996-2007 period, and fell again to values close to 1 after the 2008 financial crisis. Sarin and Summers (2016) and Chousakos and Gorton (2017) argue that the drop in banks' market-to-book ratio since the crisis is due to a loss in bank franchise value or profitability. In this paper we argue that banks' market-to-book ratio is the sum of two components: franchise value and the value of government guarantees. We empirically decompose the ratio between these two components and find that a large portion of the variation in this ratio over time is due to changes in the value of government guarantees.
Parola chiave: Risk shifting, Bank valuation, Banking, Bank financial soundness, Bank regulation, and Bank leverage Soggetto: G28 - Financial Institutions and Services: Government Policy and Regulation, G38 - Corporate Finance and Governance: Government Policy and Regulation, G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages, H12 - Crisis Management, G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill, and E44 - Financial Markets and the Macroeconomy
Creator: Cole, Harold Linh, 1957- and Ohanian, Lee E. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 566 Abstract:
Constant returns to scale is a central construct of neoclassical theory. Previous studies argued that one must adopt a specification of the production function with substantial unobserved service variation to reconcile constant returns with the data. Some economists have argued that this finding has not resolved the size of returns to scale, since factor service variation is unobserved, and there is no generally accepted theory to guide specification of this alternative framework. In this paper we show that the stochastic version of the neoclassical growth model delivers an orthogonality condition which can be used to estimate returns to scale. Rather than the standard finding of increasing returns, we show that standard theory and conventional measures of output and inputs yield estimates of constant returns to scale at the aggregate level. Our estimates also suggest that factor service variation is not an important determinant of output fluctuations.
Creator: Kehoe, Patrick J., Midrigan, Virgiliu, and Pastorino, Elena Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 566 Abstract:
Modern business cycle theory focuses on the study of dynamic stochastic general equilibrium models that generate aggregate fluctuations similar to those experienced by actual economies. We discuss how this theory has evolved from its roots in the early real business cycle models of the late 1970s through the turmoil of the Great Recession four decades later. We document the strikingly different pattern of comovements of macro aggregates during the Great Recession compared to other postwar recessions, especially the 1982 recession. We then show how two versions of the latest generation of real business cycle models can account, respectively, for the aggregate and the cross-regional fluctuations observed in the Great Recession in the United States.
Parola chiave: New Keynesian models, Financial frictions, and External validation Soggetto: E32 - Business Fluctuations; Cycles, E13 - General Aggregative Models: Neoclassical, E52 - Monetary Policy, and E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
Creator: Aiyagari, S. Rao and Braun, R. Anton Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 565 Abstract:
We consider the nature of optimal cyclical monetary policy in three different stochastic models with various shocks. The first is a pure liquidity effect model, the second is a cost of changing prices model, and the third is an optimal seinorage model. In each case we solve for the optimal monetary policy and describe how money growth and interest rates respond to shocks under the optimal policy. The shocks we consider are money demand shocks, productivity shocks, and government consumption shocks. All of the models have the feature that the Friedman rule of setting the nominal interest rate to zero is not optimal. Optimal policies are always time inconsistent even though lump sum taxation is allowed. At least in some instances we find that optimal policy dictates responses of money growth and interest rates which run counter to conventional wisdom.
Creator: Aguiar, Mark and Amador, Manuel Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 565 Abstract:
We establish that creditor beliefs regarding future borrowing can be self-fulfilling, leading to multiple equilibria with markedly different debt accumulation patterns. We characterize such indeterminacy in the Eaton-Gersovitz sovereign debt model augmented with long maturity bonds. Two necessary conditions for the multiplicity are: (i) the government is more impatient than foreign creditors, and (ii) there are deadweight losses from default; both are realistic and standard assumptions in the quantitative literature. The multiplicity is dynamic and stems from the self-fulfilling beliefs of how future creditors will price bonds; long maturity bonds are therefore a crucial component of the multiplicity. We introduce a third party with deep pockets to discuss the policy implications of this source of multiplicity and identify the potentially perverse consequences of traditional “lender of last resort” policies.
Parola chiave: Self-fulfilling debt crises, Multiple equilibria, Sovereign debt, and Debt dilution Soggetto: F34 - International Lending and Debt Problems
Creator: Amador, Manuel and Phelan, Christopher Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 564 Abstract:
This paper presents a continuous-time model of sovereign debt. In it, a relatively impatient sovereign government’s hidden type switches back and forth between a commitment type, which cannot default, and an optimizing type, which can default on the country’s debt at any time, and assume outside lenders have particular beliefs regarding how a commitment type should borrow for any given level of debt and bond price. We show that if these beliefs satisfy reasonable assumptions, in any Markov equilibrium, the optimizing type mimics the commitment type when borrowing, revealing its type only by defaulting on its debt at random times. Further, in such Markov equilibria (the solution to a simple pair of ordinary differential equations), there are positive gross issuances at all dates, constant net imports as long as there is a positive equilibrium probability that the government is the optimizing type, and net debt repayment only by the commitment type. For countries that have recently defaulted, the interest rate the country pays on its debt is a decreasing function of the amount of time since its last default, and its total debt is an increasing function of the amount of time since its last default. For countries that have not recently defaulted, interest rates are constant.
Parola chiave: Reputation, Debt intolerance, Sovereign default, Sovereign debt, Serial defaulters, and Learning Soggetto: F34 - International Lending and Debt Problems
Creator: Ohanian, Lee E., Restrepo-Echavarria, Paulina, and Wright, Mark L. J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 563 Abstract:
After World War II, international capital flowed into slow-growing Latin America rather than fast-growing Asia. This is surprising as, everything else equal, fast growth should imply high capital returns. This paper develops a capital flow accounting framework to quantify the role of different factor market distortions in producing these patterns. Surprisingly, we find that distortions in labor markets — rather than domestic or international capital markets — account for the bulk of these flows. Labor market distortions that indirectly depress investment incentives by lowering equilibrium labor supply explain two-thirds of observed flows, while improvement in these distortions over time accounts for much of Asia’s rapid growth.
Parola chiave: International capital markets, Domestic capital markets, Capital flows, and Labor markets Soggetto: J20 - Demand and Supply of Labor: General, E21 - Macroeconomics: Consumption; Saving; Wealth, F41 - Open Economy Macroeconomics, and F21 - International Investment; Long-term Capital Movements
Creator: Kehoe, Timothy Jerome, 1953- Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 563 Abstract:
To illustrate the use of social accounting matrices (SAMs) in applied general equilibrium (GE) modeling, we use an aggregated SAM for the Spanish economy to calibrate a simple applied GE model. The idea is to construct artificial people—households, government, and a foreign sector—who make the same transactions in the equilibrium of the model economy as do their counterparts in the data. This calibration procedure can be augmented, or partially substituted for, by statistical estimation of key parameters. We show the usefulness of such a model by presenting the results of a comparative exercise that mimics the policy changes that took place in Spain during its 1986 integration into the European Community. Sub-sequent data shows the model results to be remarkably accurate, especially if we account for other major shocks affected the Spanish economy in 1986.
Creator: Prescott, Edward C. and Wessel, Ryan Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 562 Abstract:
Businesses hold large quantities of cash reserves, which have average returns well below their investments in tangible capital. Businesses do this because these monetary assets provide services. One implication is that money services is a factor of production in capital theoretic valuation equilibrium models. Our aggregate production function is consistent with both the classical demand for money function relationship and with extended periods of near zero short-term nominal interest rates. In our model economy, there is a 100 percent reserve requirement on all demand deposits. Demand deposits are legal tender. We find (i) money services in the production function necessitates revisions in the national accounts; (ii) monetary and fiscal policy cannot be completely separated; (iii) for a given policy, equilibrium is either unique or does not exist; and (iv) Friedman’s monetary satiation is not optimal. We make quantitative comparisons between interest rate targeting regimes and between inflation rate targeting regimes. The best inflation rate target was 2 percent.
Parola chiave: Money in production function, Interest rate targeting, Inflation rate targeting, 100 percent reserve banking, Zero lower bound, and Friedman monetary satiation Soggetto: E00 - Macroeconomics and Monetary Economics: General, E50 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General, E40 - Money and Interest Rates: General, and E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General
Creator: Schreft, Stacey Lee and Smith, Bruce D. (Bruce David), 1954-2002 Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 562 Abstract:
We examine an otherwise standard model of capital accumulation to which spatial separation and limited communication create a role for money and shocks to portfolio needs create a role for banks. In this context we examine the existence, multiplicity, and dynamical properties of monetary equilibria with positive nominal interest rates. Moderate levels of risk aversion can lead to the existence of multiple monetary steady states, all of which can be approached from a given set of initial conditions. In addition, even if there is a unique monetary steady state, monetary equilibria can be indeterminate, and oscillatory equilibrium paths can be observed. Thus financial market frictions are a potential source of both indeterminacies and endogenously arising economic volatility.
We also consider the consequences of monetary policy actions that rearrange the composition of government liabilities. Contractionary monetary policy activities can have complicated consequences, depending especially on the nature of the steady state equilibrium that obtains when there are multiple steady states. Under plausible conditions, however, a permanent contractionary change in monetary policy raises both the nominal rate of interest and the rate of inflation, and reduces long-run output levels. Thus liquidity provision by a central bank—just as by the banking system as a whole—can be growth promoting. Loose monetary policy also is conducive to avoiding development trap phenomena.
Creator: Bencivenga, Valerie R. and Smith, Bruce D. (Bruce David), 1954-2002 Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 561 Abstract:
Economic development is typically accompanied by a very pronounced migration of labor from rural to urban employment. This migration, in turn, is often associated with large scale urban underemployment. Both factors appear to play a very prominent role in the process of development. We consider a model in which rural-urban migration and urban underemployment are integrated into an otherwise conventional neoclassical growth model. Unemployment arises not from any exogenous rigidities, but from an adverse selection problem in labor markets. We demonstrate that, in the most natural case, rural-urban migration—and its associated underemployment—can be a source of multiple, asymptotically stable steady state equilibria, and hence of development traps. They also easily give rise to an indeterminacy of perfect foresight equilibrium, as well as to the existence of a large set of periodic equilibria displaying undamped oscillation. Many such equilibria display long periods of uninterrupted growth and rural-urban migration, punctuated by brief but severe recessions associated with net migration from urban to rural employment. Such equilibria are argued to be broadly consistent with historical U.S. experience.
Creator: Johnson, Janna and Kleiner, Morris Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 561 Abstract:
Occupational licensure, one of the most significant labor market regulations in the United States, may restrict the interstate movement of workers. We analyze the interstate migration of 22 licensed occupations. Using an empirical strategy that controls for unobservable characteristics that drive long-distance moves, we find that the between-state migration rate for individuals in occupations with state-specific licensing exam requirements is 36 percent lower relative to members of other occupations. Members of licensed occupations with national licensing exams show no evidence of limited interstate migration. The size of this effect varies across occupations and appears to be tied to the state specificity of licensing requirements. We also provide evidence that the adoption of reciprocity agreements, which lower re-licensure costs, increases the interstate migration rate of lawyers. Based on our results, we estimate that the rise in occupational licensing can explain part of the documented decline in interstate migration and job transitions in the United States.
Parola chiave: Interstate migration, Occupational licensing, and Labor market regulation Soggetto: J01 - Labor Economics: General, L38 - Public Policy, J10 - Demographic Economics: General, J44 - Professional Labor Markets; Occupational Licensing, and K00 - Law and Economics: General
Creator: Bhandari, Anmol and McGrattan, Ellen R. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 560 Abstract:
We develop a theory of sweat equity—which is the value of business owners’ time and expenses to build customer bases, client lists, and other intangible assets. We discipline the theory using data from U.S. national accounts, business censuses, and brokered sales to estimate a value for sweat equity for the private business sector equal to 1.2 times U.S. GDP, which is roughly the value of fixed assets in use in these businesses. Although latent, the equity values are positively correlated with business incomes, ages, and standard measures of markups based on accounting data, but not with financial assets of owners or standard measures of business total factor productivity (TFP). We use our theory to show that abstracting from sweat activity leads to a significant understatement of the impacts of lowering tax rates on business incomes—on both the extensive and intensive margins. We also document large differences in the effective tax rates and the effects of tax changes for owner and employee labor inputs. Lower tax rates on owners results in increased self-employment and smaller firm sizes, whereas lower rates on employees has the opposite effects. Allowing for financial constraints and superstar firms does not overturn our main findings.
Parola chiave: Intangibles and Business valuation Soggetto: E13 - General Aggregative Models: Neoclassical, H25 - Business Taxes and Subsidies including sales and value-added (VAT), and E22 - Investment; Capital; Intangible Capital; Capacity
Creator: Boldrin, Michele, Christiano, Lawrence J., and Fisher, Jonas D. M. (Jonas Daniel Maurice), 1965- Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 560 Abstract:
We develop a model which accounts for the observed equity premium and average risk-free rate, without implying counterfactually high risk aversion. The model also does well in accounting for business-cycle phenomena. With respect to the conventional measures of business-cycle volatility and comovement with output, the model does roughly as well as the standard business-cycle model. On two other dimensions, the model’s business-cycle implications are actually improved. Its enhanced internal propagation allows it to account for the fact that there is positive persistence in output growth, and the model also provides a resolution to the “excess sensitivity puzzle” for consumption and income. Two key features of the model are habit persistence preferences and a multisector technology with limited intersectoral mobility of factors of production.
Creator: Keane, Michael P. and Wolpin, Kenneth I. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 559 Abstract:
This paper provides structural estimates of a dynamic model of schooling, work, and occupational choice decisions based on 11 years of observations on a sample of young men from the 1979 youth cohort of the National Longitudinal Surveys of Labor Market Experience (NLSY). The structural estimation framework that we adopt fully imposes the restrictions of the theory and permits an investigation of whether such a theoretically restricted model can succeed in quantitatively fitting the observed data patterns. We find that a suitably extended human capital investment model can in fact do an excellent job of fitting observed data on school attendance, work, occupational choices, and wages in the NLSY data on young men and also produces reasonable forecasts of future work decisions and wage patterns.
Creator: Arellano, Cristina, Bai, Yan, and Lizarazo, Sandra Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 559 Abstract:
We develop a theory of sovereign risk contagion based on financial links. In our multi-country model, sovereign bond spreads comove because default in one country can trigger default in other countries. Countries are linked because they borrow, default, and renegotiate with common lenders, and the bond price and recovery schedules for each country depend on the choices of other countries. A foreign default increases the lenders' pricing kernel, which makes home borrowing more expensive and can induce a home default. Countries also default together because by doing so they can renegotiate the debt simultaneously and pay lower recoveries. We apply our model to the 2012 debt crises of Italy and Spain and show that it can replicate the time path of spreads during the crises. In a counterfactual exercise, we find that the debt crisis in Spain (Italy) can account for one-half (one-third) of the increase in the bond spreads of Italy (Spain).
Parola chiave: Sovereign default, European debt crisis, Bond spreads, and Renegotiation Soggetto: G01 - Financial Crises and F30 - International Finance: General
Creator: Green, Edward J. and Park, In-Uck Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 558 Abstract:
An intuitively natural consistency condition for contingent plans is necessary and sufficient for a contingent plan to be rationalized by maximization of conditional expected utility. One alternative theory of choice under uncertainty, the weighted-utility theory developed by Chew Soo Hong (1983) does not entail that contingent plans will generally satisfy this condition. Another alternative theory, the minimax theory as formulated by Savage (1972), does entail the consistency condition (at least for singleton-valued plans).
Creator: Mongey, Simon J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 558 Abstract:
I propose an equilibrium menu cost model with a continuum of sectors, each consisting of strategically engaged firms. Compared to a model with monopolistically competitive sectors that is calibrated to the same data on good-level price flexibility, the dynamic duopoly model features a smaller inflation response to monetary shocks and output responses that are more than twice as large. The model also implies (i) four times larger welfare losses from nominal rigidities, (ii) smaller menu costs and idiosyncratic shocks are needed to match the data, (iii) a U-shaped relationship between market concentration and price flexibility, for which I find empirical support.
Parola chiave: Firm dynamics, Menu costs, Oligopoly, and Monetary policy Soggetto: L13 - Oligopoly and Other Imperfect Markets, E30 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data), E51 - Money Supply; Credit; Money Multipliers, L11 - Production, Pricing, and Market Structure; Size Distribution of Firms, and E39 - Prices, Business Fluctuations, and Cycles: Other
Creator: Keane, Michael P. and Moffitt, Robert A. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 557 Abstract:
One of the long-standing issues in the literature on transfer programs for the U.S. low-income population concerns the high cumulative marginal tax rate on earnings induced by participation in the multiplicity of programs offered by the government. Empirical work on the issue has reached an impasse partly because the analytic solution to the choice problem is intractable and partly because the model requires the estimation of multiple sets of equations with limited dependent variables, an estimation problem which until recently has been computationally infeasible. In this paper we estimate a model of labor supply and multiple program participation using methods of simulation estimation that enable us to solve both problems. The results show asymmetric wage and tax rate effects, with fairly large wage elasticities of labor supply but very inelastic responses to moderate changes in cumulative marginal tax rates, implying that high welfare tax rates do not necessarily induce major reductions in work effort.
Creator: Bocola, Luigi and Lorenzoni, Guido Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 557 Abstract:
We study financial panics in a small open economy with floating exchange rates. In our model, bank runs trigger a decline in domestic wealth and a currency depreciation. Runs are more likely when banks have dollar debt. Dollar debt emerges endogenously in response to the precautionary motive of domestic savers: dollar savings provide insurance against crises; so when crises are possible it becomes relatively more expensive for banks to borrow in local currency, which gives them an incentive to issue dollar debt. This feedback between aggregate risk and savers’ behavior can generate multiple equilibria, with the bad equilibrium characterized by financial dollarization and the possibility of bank runs. A domestic lender of last resort can eliminate the bad equilibrium, but interventions need to be fiscally credible. Holding foreign currency reserves hedges the fiscal position of the government and enhances its credibility, thus improving financial stability.
Parola chiave: Foreign reserves, Dollarization, Lending of last resort, and Financial crises Soggetto: G15 - International Financial Markets, F34 - International Lending and Debt Problems, G11 - Portfolio Choice; Investment Decisions, and E44 - Financial Markets and the Macroeconomy
Creator: Han, Suyoun and Kleiner, Morris Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 556 Abstract:
The length of time from the implementation of an occupational licensing statute (i.e., licensing duration) may matter in influencing labor market outcomes. Adding to or raising the entry barriers are likely easier once an occupation is established and has gained influence in a political jurisdiction. States often enact grandfather clauses and ratchet up requirements that protect existing workers and increase entry costs to new entrants. We analyze the labor market influence of the duration of occupational licensing statutes for 13 major universally licensed occupations over a 75-year period. These occupations comprise the vast majority of workers in these regulated occupations in the United States. We provide among the first estimates of potential economic rents to grandfathering. We find that duration years of occupational licensure are positively associated with wages for continuing and grandfathered workers. The estimates show a positive relationship of duration with hours worked, but we find moderately negative results for participation in the labor market. The universally licensed occupations, however, exhibit heterogeneity in outcomes. Consequently, unlike some other labor market public policies, such as minimum wages or direct unemployment insurance benefits, occupational licensing would likely influence labor market outcomes when measured over a longer period of time.
Parola chiave: Workforce participation, Hours worked, Duration and grandfathering effects on wage determination, Occupational licensing, and Labor market regulation Soggetto: L88 - Industry Studies: Services: Government Policy, L38 - Public Policy, J38 - Wages, Compensation, and Labor Costs: Public Policy, J30 - Wages, Compensation, and Labor Costs: General, K20 - Regulation and Business Law: General, J08 - Labor Economics Policies, L51 - Economics of Regulation, J80 - Labor Standards: General, J88 - Labor Standards: Public Policy, K00 - Law and Economics: General, L84 - Personal, Professional, and Business Services, L12 - Monopoly; Monopolization Strategies, and J44 - Professional Labor Markets; Occupational Licensing
Creator: Arellano, Cristina, Bai, Yan, and Mihalache, Gabriel Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 555 Abstract:
Sovereign debt crises are associated with large and persistent declines in economic activity, disproportionately so for nontradable sectors. This paper documents this pattern using Spanish data and builds a two-sector dynamic quantitative model of sovereign default with capital accumulation. Recessions are very persistent in the model and more pronounced for nontraded sectors because of default risk. An adverse domestic shock increases the likelihood of default, limits capital inﬂows, and thus restricts the ability of the economy to exploit investment opportunities. The economy responds by reducing investment and reallocating capital toward the traded sector to support debt service payments. The real exchange rate depreciates, a reﬂection of the scarcity of traded goods. We ﬁnd that these mechanisms are quantitatively important for rationalizing the experience of Spain during the recent debt crisis.
Parola chiave: Sovereign default with production economy, Capital accumulation, Traded and nontraded production, European debt crisis, and Real exchange rate Soggetto: E30 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data) and F30 - International Finance: General
Creator: Geweke, John Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 555
Creator: Mercenier, Jean and Michel, Philippe Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 554 Abstract:
We provide a theoretical treatment of temporal aggregation in models that exhibit long-term endogenously-generated steady growth; hence generalizing our previous analysis (Econometrica 62, 1994, pp. 635–56). We introduce the property of steady-growth invariance—that the long-term growth of the continuous-time economy not be affected by the discretization—which imposes consistency restrictions on the joint formulation of preferences and stock accumulation of the discrete-time approximation. We establish, under mild conditions, these restrictions in the form of necessary and sufficient conditions on the discretization.
Creator: Perri, Fabrizio and Stefanidis, Georgios Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 554 Abstract:
We use balance sheet data and stock market data for the major U.S. banking institutions during and after the 2007-8 financial crisis to estimate the magnitude of the losses experienced by these institutions because of the crisis. We then use these estimates to assess the impact of the crisis under alternative, and higher, capital requirements. We find that substantially higher capital requirements (in the 20% to 30% range) would have substantially reduced the vulnerability of these financial institutions, and consequently they would have significantly reduced the need of a public bailout.
Parola chiave: Too big to fail and Financial crises Soggetto: G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages and G01 - Financial Crises
Creator: Gavazza, Alessandro, Mongey, Simon J., and Violante, Giovanni L. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 553 Abstract:
We develop an equilibrium model of firm dynamics with random search in the labor market where hiring firms exert recruiting effort by spending resources to fill vacancies faster. Consistent with microevidence, fast-growing firms invest more in recruiting activities and achieve higher job-filling rates. These hiring decisions of firms aggregate into an index of economy-wide recruiting intensity. We study how aggregate shocks transmit to recruiting intensity, and whether this channel can account for the dynamics of aggregate matching efficiency during the Great Recession. Productivity and financial shocks lead to sizable pro-cyclical fluctuations in matching efficiency through recruiting effort. Quantitatively, the main mechanism is that firms attain their employment targets by adjusting their recruiting effort in response to movements in labor market slackness.
Parola chiave: Recruiting intensity, Firm dynamics, Aggregate matching efficiency, Vacancies, Unemployment, and Macroeconomic shocks Soggetto: E32 - Business Fluctuations; Cycles, J64 - Unemployment: Models, Duration, Incidence, and Job Search, G01 - Financial Crises, D25 - Intertemporal Firm Choice: Investment, Capacity, and Financing, J23 - Labor Demand, J63 - Labor Turnover; Vacancies; Layoffs, E44 - Financial Markets and the Macroeconomy, and E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
Creator: Geweke, John and Petrella, Lea Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 553 Abstract:
This paper provides a general and efficient method for computing density ratio class bounds on posterior moments, given the output of a posterior simulator. It shows how density ratio class bounds for posterior odds ratios may be formed in many situations, also on the basis of posterior simulator output. The computational method is used to provide density ratio class bounds in two econometric models. It is found that the exact bounds are approximated poorly by their asymptotic approximation, when the posterior distribution of the function of interest is skewed. It is also found that posterior odds ratios display substantial variation within the density ratio class, in ways that cannot be anticipated by the asymptotic approximation.
Parola chiave: Markov-chain Monte Carlo, Bayesian inference, Probit model, and Normal mixture Soggetto: C63 - Computational Techniques; Simulation Modeling and C11 - Bayesian Analysis: General
Creator: Geweke, John Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 552 Abstract:
The normal linear model, with sign or other linear inequality constraints on its coefficients, arises very commonly in many scientific applications. Given inequality constraints Bayesian inference is much simpler than classical inference, but standard Bayesian computational methods become impractical when the posterior probability of the inequality constraints (under a diffuse prior) is small. This paper shows how the Gibbs sampling algorithm can provide an alternative, attractive approach to inference subject to linear inequality constraints in this situation, and how the GHK probability simulator may be used to assess the posterior probability of the constraints.
Creator: Chari, V. V. and Christiano, Lawrence J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 552 Abstract:
The ﬁnancialization view is that increased trading in commodity futures markets is associated with increases in the growth rate and volatility of commodity spot prices. This view gained credence be-cause in the 2000s trading volume increased sharply and many commodity prices rose and became more volatile. Using a large panel dataset we constructed, which includes commodities with and with-out futures markets, we ﬁnd no empirical link between increased futures market trading and changes in price behavior. Our data sheds light on the economic role of futures markets. The conventional view is that futures markets provide one-way insurance by allowing outsiders, traders with no direct interest in a commodity, to insure insiders, traders with a direct interest. The data are not consistent with the conventional view and we argue that they point to an alternative mutual insurance view, in which all participants insure each other. We formalize this view in a model and show that it is consistent with key features of the data.
Parola chiave: Futures market returns, Spot price volatility, Open interest, and Net financial flows Soggetto: G12 - Asset Pricing; Trading Volume; Bond Interest Rates, E02 - Institutions and the Macroeconomy, and G23 - Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors
Creator: Aiyagari, S. Rao, Braun, R. Anton, and Eckstein, Zvi Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 551 Abstract:
This paper is motivated by a variety of empirical observations on the comovements of currency velocity, inflation, and the relative size of the “credit services” sector. By the credit services sector we mean the part of banking and credit sector which provides alternative means of transactions to using currency as well as other services which help people economize on currency. We incorporate the credit services sector into a monetary growth model. Our model makes two specific and new contributions. The first is to show that direct quantitative evidence on the welfare cost of low inflation using measures of the relative size of an appropriately defined credit services sector for the U.S.—essentially the cost incurred by banks and credit unions in providing demand deposit and credit card services—is consistent with the welfare cost measured using an estimated money demand curve following the classic analysis of Bailey (1956) and the more recent analysis of Lucas (1993). Both of these measures amount to about 0.5 percent of GNP. The second contribution is in providing welfare cost of inflation estimates over a range of inflation rates which have some new features. We find that the total welfare cost of inflation remains bounded at about 5 percent of consumption.
Soggetto: E31 - Price Level; Inflation; Deflation and E51 - Money Supply; Credit; Money Multipliers
Creator: Heathcote, Jonathan, Storesletten, Kjetil, and Violante, Giovanni L. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 551 Abstract:
This paper studies optimal taxation of earnings when the degree of tax progressivity is allowed to vary with age. The setting is an overlapping-generations model that incorporates irreversible skill investment, flexible labor supply, ex-ante heterogeneity in the disutility of work and the cost of skill acquisition, partially insurable wage risk, and a life cycle productivity profile. An analytically tractable version of the model without intertemporal trade is used to characterize and quantify the salient trade-offs in tax design. The key results are that progressivity should be U-shaped in age and that the average marginal tax rate should be increasing and concave in age. These findings are confirmed in a version of the model with borrowing and saving that we solve numerically.
Parola chiave: Labor supply, Tax progressivity, Income distribution, Incomplete markets, Life cycle, and Skill investment Soggetto: J22 - Time Allocation and Labor Supply, J24 - Human Capital; Skills; Occupational Choice; Labor Productivity, E20 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy: General (includes Measurement and Data), H20 - Taxation, Subsidies, and Revenue: General, D30 - Distribution: General, and H40 - Publicly Provided Goods: General
Creator: Aiyagari, S. Rao, Wallace, Neil, and Wright, Randall D. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 550 Abstract:
A random matching model with money is used to study the nominal yield on small denomination, bearer, safe, discount securities issued by the government. There is always one steady state with matured securities circulating at par and, for some parameters, another with them circulating at a discount. In the former, a necessary and sufficient condition for a positive nominal yield on not-yet-matured securities is exogenous discriminatory treatment of them by the government. In the latter, the post-maturity discount on securities induces a deeper pre-maturity discount even without such discriminatory treatment.
Parola chiave: Money, Monetary policy, and Interest rates Soggetto: E43 - Interest Rates: Determination, Term Structure, and Effects, E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems, E41 - Demand for Money, and E40 - Money and Interest Rates: General
Creator: Conesa, Juan Carlos and Kehoe, Timothy Jerome, 1953- Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 550 Abstract:
In the early 1970s, hours worked per working-age person in Spain were higher than in the United States. Starting in 1975, however, hours worked in Spain fell by 40 percent. We find that 80 percent of the decline in hours worked can be accounted for by the evolution of taxes in an otherwise standard neoclassical growth model. Although taxes play a crucial role, we cannot argue that taxes drive all of the movements in hours worked. In particular, the model underpredicts the large decrease in hours in 1975–1986 and the large increase in hours in 1994–2007. The lack of productivity growth in Spain during 1994–2015 has little impact on the model’s prediction for hours worked.
Parola chiave: Hours worked, Distortionary taxes, Total factor productivity, and Dynamic general equilibrium Soggetto: E13 - General Aggregative Models: Neoclassical, C68 - Computable General Equilibrium Models, E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity, and H31 - Fiscal Policies and Behavior of Economic Agents: Household
Creator: Fitzgerald, Doireann and Haller, Stefanie Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 549 Abstract:
We use micro data for Ireland to estimate how export participation and the export revenue of incumbent exporters respond to tariffs and real exchange rates. Both participation and revenue, but especially revenue, are more responsive to tariffs than to real exchange rates. Our estimates translate into an elasticity of aggregate exports with respect to tariffs of between -3.8 and -5.4, and with respect to real exchange rates of between 0.45 and 0.6, consistent with estimates in the literature based on aggregate data. We argue that forward-looking investment in customer base combined with the fact that tariffs are much more predictable than real exchange rates can explain why export revenue responds so much more to tariffs.
Parola chiave: Real exchange rates, International elasticity puzzle, and Tariffs Soggetto: F14 - Empirical Studies of Trade and F41 - Open Economy Macroeconomics
Creator: Atkeson, Andrew and Kehoe, Patrick J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 548 Abstract:
We evaluate the ability of models with putty-clay capital and stochastic energy prices to account for the dynamics of energy use and output. Economists have noted a close relationship between changes in the price of energy and changes in output. Moreover, they have documents that this relationship is asymmetric: energy price increases are associated with large output charges while energy prices decreases are associated with small output changes. Finally, following energy price changes, energy use adjusts slowly over time. Standard models with putty-putty capital fail to reproduce the features of the data. In our study of putty-clay models, we first develop a simple characterization of equilibrium. We apply these results to solve a prototype model. Preliminary results suggest that models with putty-clay capital improve on putty-putty models in accounting for the data.
Creator: Conesa, Juan Carlos, Costa, Daniela, Kamali, Parisa , Kehoe, Timothy Jerome, 1953-, Nygaard, Vegard M., Raveendranathan, Gajendran, and Saxena, Akshar Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 548 Abstract:
This paper develops an overlapping generations model to study the macroeconomic effects of an unexpected elimination of Medicare. We ﬁnd that a large share of the elderly respond by substituting Medicaid for Medicare. Consequently, the government saves only 46 cents for every dollar cut in Medicare spending. We argue that a comparison of steady states is insufficient to evaluate the welfare effects of the reform. In particular, we ﬁnd lower ex-ante welfare gains from eliminating Medicare when we account for the costs of transition. Lastly, we ﬁnd that a majority of the current population benefits from the reform but that aggregate welfare, measured as the dollar value of the sum of wealth equivalent variations, is higher with Medicare.
Parola chiave: Overlapping generations, Transition path, Medicaid, Steady state, and Medicare Soggetto: I13 - Health Insurance, Public and Private, E21 - Macroeconomics: Consumption; Saving; Wealth, E62 - Fiscal Policy, and H51 - National Government Expenditures and Health
Creator: Atkeson, Andrew and Kehoe, Patrick J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 547 Abstract:
We study the general equilibrium effects of social insurance on the transition in a model in which the process of moving workers from matches in the state sector to new matches in the private sector takes time and involves uncertainty. As to be expected, adding social insurance to an economy without any improves welfare. Contrary to standard intuition, however, adding social insurance may slow transition. We show that this result depends crucially on general equilibrium interactions of interest rates and savings under alternative market structures.
Creator: Arellano, Cristina, Bai, Yan, Bocola, Luigi, and test Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 547 Abstract:
This paper measures the output costs of sovereign risk by combining a sovereign debt model with firm- and bank-level data. In our framework, an increase in sovereign risk lowers the price of government debt and has an adverse impact on banks’ balance sheets, disrupting their ability to finance firms. Importantly, firms are not equally affected by these developments: those that have greater financing needs and borrow from banks that are more exposed to government debt cut their production the most in a debt crisis. We measure the extent of this heterogeneity using Italian data and parameterize the model to match these cross-sectional facts. In counterfactual analysis, we find that heightened sovereign risk was responsible for one-third of the observed output decline during the 2011-2012 crisis in Italy.
Parola chiave: Business cycles, Sovereign debt crises, Firm heterogeneity, Financial intermediation, and Micro data Soggetto: G12 - Asset Pricing; Trading Volume; Bond Interest Rates, F34 - International Lending and Debt Problems, E44 - Financial Markets and the Macroeconomy, and G15 - International Financial Markets
Creator: Atkeson, Andrew and Kehoe, Patrick J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 546 Abstract:
We study transition in a model in which the process of moving workers from matches in the state sector to new matches in the private sector takes time and involves uncertainty. When there are incentive problems in this rematching process, the optimal scheme may involve forced layoffs, involuntary unemployment, and a recession.
Creator: Guvenen, Fatih, Schulhofer-Wohl, Sam, Song, Jae, and Yogo, Motohiro Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 546 Abstract:
The magnitude of and heterogeneity in systematic earnings risk has important implications for various theories in macro, labor, and ﬁnancial economics. Using administrative data, we document how the aggregate risk exposure of individual earnings to GDP and stock returns varies across gender, age, the worker’s earnings level, and industry. Aggregate risk exposure is U-shaped with respect to the earnings level. In the middle of the earnings distribution, aggregate risk exposure is higher for males, younger workers, and those in construction and durable manufacturing. At the top of the earnings distribution, aggregate risk exposure is higher for older workers and those in ﬁnance. Workers in larger employers are less exposed to aggregate risk, but they are more exposed to a common factor in employer-level earnings, especially at the top of the earnings distribution. Within an employer, higher-paid workers have higher exposure to employer-level risk than lower-paid workers.
Soggetto: G11 - Portfolio Choice; Investment Decisions and D31 - Personal Income, Wealth, and Their Distributions
Creator: Holmes, Thomas J. and Schmitz, James Andrew Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 545 Abstract:
This paper develops a model of small business failure and sale that is motivated by recent evidence concerning how the failure and sale of small businesses vary with the age of the business and the tenure of the manager. This evidence motivates two key features of the model: A match between the manager and the business, and characteristics of businesses that survive beyond the current match. The parameters of the model are estimated, and the properties of this parametric model are studied. This analysis results in a simple characterization of the workings of the small business sector.
Creator: McGrattan, Ellen R. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 545 Abstract:
Because ﬁrms invest heavily in R&D, software, brands, and other intangible assets—at a rate close to that of tangible assets—changes in measured GDP, which does not include all intangible investments, understate the actual changes in total output. If changes in the labor input are more precisely measured, then it is possible to observe little change in measured total factor productivity (TFP) coincidentally with large changes in hours and investment. This mismeasurement leaves business cycle modelers with large and unexplained labor wedges accounting for most of the ﬂuctuations in aggregate data. To address this issue, I incorporate intangible investments into a multi-sector general equilibrium model and parameterize income and cost shares using data from an updated U.S. input and output table, with intangible investments reassigned from intermediate to ﬁnal uses. I employ maximum likelihood methods and quarterly observations on sectoral gross outputs for the United States over the period 1985–2014 to estimate processes for latent sectoral TFPs—that have common and sector-speciﬁc components. Aggregate hours are not used to estimate TFPs, but the model predicts changes in hours that compare well with the actual hours series and account for roughly two-thirds of its standard deviation. I ﬁnd that sector-speciﬁc shocks and industry linkages play an important role in accounting for ﬂuctuations and comovements in aggregate and industry-level U.S. data, and I ﬁnd that the model’s common component of TFP is not correlated at business cycle frequencies with the standard measures of aggregate TFP used in the macroeconomic literature.
Parola chiave: Input-output linkages, Business cycles, Intangible investments, and Total factor productivity Soggetto: E32 - Business Fluctuations; Cycles, O41 - One, Two, and Multisector Growth Models, and D57 - General Equilibrium and Disequilibrium: Input-Output Tables and Analysis
Creator: Asturias, Jose, Hur, Sewon, Kehoe, Timothy Jerome, 1953-, and Ruhl, Kim J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 544 Abstract:
Applying the Foster, Haltiwanger, and Krizan (FHK) (2001) decomposition to plant-level manufacturing data from Chile and Korea, we find that the entry and exit of plants account for a larger fraction of aggregate productivity growth during periods of fast GDP growth. Studies of other countries confirm this empirical relationship. To analyze this relationship, we develop a simple model of firm entry and exit based on Hopenhayn (1992) in which there are analytical expressions for the FHK decomposition. When we introduce reforms that reduce entry costs or reduce barriers to technology adoption into a calibrated model, we find that the entry and exit terms in the FHK decomposition become more important as GDP grows rapidly, just as they do in the data from Chile and Korea.
Parola chiave: Exit, Productivity, Entry, Barriers to technology adoption, and Entry costs Soggetto: O38 - Technological Change: Government Policy, O47 - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence, E22 - Investment; Capital; Intangible Capital; Capacity, and O10 - Economic Development: General
Creator: Aiyagari, S. Rao Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 543 Abstract:
I argue that Farmer and Guo's one-sector real business cycle model with indeterminacy and sunspots fails empirically and that its failure is inherent in the logic of the model taken together with some simple labor market facts.
No electronic copy available.
Creator: Kehoe, Patrick J. and Pastorino, Elena Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 543 Abstract:
Before the advent of sophisticated international financial markets, a widely accepted belief was that within a monetary union, a union-wide authority orchestrating fiscal transfers between countries is necessary to provide adequate insurance against country-specific economic fluctuations. A natural question is then: Do sophisticated international financial markets obviate the need for such an active union-wide authority? We argue that they do. Specifically, we show that in a benchmark economy with no international financial markets, an activist union-wide authority is necessary to achieve desirable outcomes. With sophisticated financial markets, however, such an authority is unnecessary if its only goal is to provide cross-country insurance. Since restricting the set of policy instruments available to member countries does not create a fiscal externality across them, this result holds in a wide variety of settings. Finally, we establish that an activist union-wide authority concerned just with providing insurance across member countries is optimal only when individual countries are either unable or unwilling to pursue desirable policies
Parola chiave: Fiscal externalities, Cross-country externalities, International transfers, Optimal currency area, Cross-country transfers, International financial markets, and Cross-country insurance Soggetto: G28 - Financial Institutions and Services: Government Policy and Regulation, F33 - International Monetary Arrangements and Institutions, F38 - International Financial Policy: Financial Transactions Tax; Capital Controls, F42 - International Policy Coordination and Transmission, E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination, G33 - Bankruptcy; Liquidation, E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General, G15 - International Financial Markets, and F35 - Foreign Aid
Creator: McGrattan, Ellen R. and Waddle, Andrea Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 542 Abstract:
Using simulations from a multicountry neoclassical growth model, we analyze several post-Brexit scenarios. First, the United Kingdom unilaterally imposes tighter restrictions on FDI and trade from other EU nations. Second, the European Union retaliates and imposes the same restrictions on the UK. Finally, the United Kingdom reduces restrictions on other nations during the post-Brexit transition. Model predictions depend crucially on the policy response of multinationals’ investment in technology capital, accumulated know-how from investments in R&D, brands, and organizations used simultaneously in their domestic and foreign operations.
Parola chiave: United Kingdom, FDI, Brexit, European Union, and Foreign investment Soggetto: O33 - Technological Change: Choices and Consequences; Diffusion Processes, F41 - Open Economy Macroeconomics, F23 - Multinational Firms; International Business, and O34 - Intellectual Property and Intellectual Capital
Creator: Boyd, John H. and Smith, Bruce D. (Bruce David), 1954-2002 Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 541 Abstract:
We produce a theoretical framework that helps explain the co-evolution of the real and financial sectors of an economy in the growth process, as described by Gurley and Shaw. According to them, self-financed capital investment first gives way to debt finance and later to the emergence of equity as an additional instrument for raising funds externally. As the economy develops further, the aggregate ratio of debt to equity will generally fall. We analyze that portion of their account concerning the evolution of equity markets. We show that in an important sense, debt equity are complementary sources for the financing of capital investments.
Creator: Geweke, John Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 540 Abstract:
The reduced rank regression model arises repeatedly in theoretical and applied econometrics. To date the only general treatment of this model have been frequentist. This paper develops general methods for Bayesian inference with noninformative reference priors in this model, based on a Markov chain sampling algorithm, and procedures for obtaining predictive odds ratios for regression models with different ranks. These methods are used to obtain evidence on the number of factors in a capital asset pricing model.
Parola chiave: Factor model, Predictive odds, and Capital asset pricing model Soggetto: C11 - Bayesian Analysis: General and C15 - Statistical Simulation Methods: General
Creator: Buera, Francisco and Nicolini, Juan Pablo Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 540 Abstract:
We study a model with heterogeneous producers that face collateral and cash-in-advance constraints. A tightening of the collateral constraint results in a credit-crunch-generated recession that reproduces several features of the ﬁnancial crisis that unraveled in 2007 in the United States. The model can be used to study the effects of the credit-crunch on the main macroeconomic variables and the impact of alternative policies. The policy implications regarding forward guidance are in contrast with the prevalent view in most central banks, based on the New Keynesian explanation of the liquidity trap.
Parola chiave: Ricardian equivalence, Credit crunch, Monetary policy, Collateral constraints, and Liquidity trap Soggetto: E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy, E52 - Monetary Policy, E44 - Financial Markets and the Macroeconomy, and E58 - Central Banks and Their Policies
Creator: Geweke, John Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 539 Abstract:
In the specification of linear regression models it is common to indicate a list of candidate variables from which a subset enters the model with nonzero coefficients. This paper interprets this specification as a mixed continuous-discrete prior distribution for coefficient values. It then utilizes a Gibbs sampler to construct posterior moments. It is shown how this method can incorporate sign constraints and provide posterior probabilities for all possible subsets of regressors. The methods are illustrated using some standard data sets.
Creator: Aiyagari, S. Rao and McGrattan, Ellen R. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 538 Abstract:
We describe a model for calculating the optimal quantity of debt and then apply it to the U.S. economy. The model consists of a large number of infinitely-lived households whose saving behavior is influenced by precautionary saving motives and borrowing constraints. This model incorporates a different role for government debt than the standard representative agent growth model and captures different trade-offs between the benefits and costs of varying its level. Government debt enhances the liquidity of households by providing additional assets for smoothing consumption (in addition to claims to capital) and effectively loosening borrowing constraints. By raising the interest rate, government debt makes assets less costly to hold and more effective in smoothing consumption. However, the implied taxes have wealth distribution, incentive, and insurance effects. Further, government debt crowds out capital (via higher interest rates) and lowers per capita consumption. Our quantitative analysis suggests that the crowding out effect is decisive for welfare. We also describe variations of the model which permit endogenous growth. It turns out that even with lump sum taxes and inelastic labor, government debt as well as government consumption have growth rate effects, thereby implying large welfare gains from reducing the level of debt.
Parola chiave: Precautionary saving, Government debt, and Borrowing constraints Soggetto: H60 - National Budget, Deficit, and Debt: General and E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General
Creator: Boyd, John H. and Smith, Bruce D. (Bruce David), 1954-2002 Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 537 Abstract:
We consider an environment in which risk-neutral firms must obtain external finance. They have access to two kinds of linear, stochastic investment opportunities. For one, return realizations are costlessly observed by all agents. For the other, return realizations are costlessly observed only by the investing firm; however, they can be (privately) observed by outsiders who bear a fixed verification cost. Thus, the second investment opportunity is subject to a standard costly state verification (CSV) problem of the type considered by Townsend (1979), Gale and Hellwig (1985), or Williamson (1986, 1987).
We examine the optimal allocations of investment between the two kinds of projects, as well as the optimal contract used to finance it. We show that the optimal contractual outcome can be supported by having firms issue appropriate (and determinate) quantities of debt and equity securities to outside investors.
The optimal debt-equity ratio necessarily depends (in part) on the firm’s asset structure. Investments in projects subject to CSV problems are associated (in a sense to be made precise) with the use of debt—as might be expected from the existing CSV literature. Investments in projects with publicly observable returns are associated with the use of external equity.
We examine in detail the relationship between the optimal asset and liability structure of the firm. We also describe conditions under which an increase in the cost of state verification shifts the composition of investment towards projects with observable returns, and reduces the optimal debt-equity ratio. Interestingly, the optimal debt-equity ratio is also shown to depend on factors that are irrelevant to asset allocations.
Finally, a large part of the interest in CSV environments has been due to the fact that they may result in equilibrium credit rationing. Our analysis has strong implications for the possibility of equilibrium credit rationing in more general CSV models.
Soggetto: G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages and E51 - Money Supply; Credit; Money Multipliers
Creator: Kehoe, Timothy Jerome, 1953-, Pujolas, Pau S., and Rossbach, Jack Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 537 Abstract:
Applied general equilibrium (AGE) models, which feature multiple countries, multiple industries, and input-output linkages across industries, have been the dominant tool for evaluating the impact of trade reforms since the 1980s. We review how these models are used to perform policy analysis and document their shortcomings in predicting the industry-level effects of past trade reforms. We argue that, to improve their performance, AGE models need to incorporate product-level data on bilateral trade relations by industry and better model how trade reforms lower bilateral trade costs. We use the least traded products methodology of Kehoe et al. (2015) to provide guidance on how improvements can be made. We provide further suggestions on how AGE models can incorporate recent advances in quantitative trade theory to improve their predictive ability and better quantify the gains from trade liberalization.
Parola chiave: Applied general equilibrium, Input-output linkages, Armington elasticities, Trade costs, and Trade liberalization Soggetto: F17 - Trade: Forecasting and Simulation, F14 - Empirical Studies of Trade, F11 - Neoclassical Models of Trade, and F13 - Trade Policy; International Trade Organizations
Creator: Kehoe, Patrick J., Midrigan, Virgiliu, and Pastorino, Elena Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 536 Abstract:
During the Great Recession, regions of the United States that experienced the largest declines in household debt also experienced the largest drops in consumption, employment, and wages. Employment declines were larger in the nontradable sector and for firms that were facing the worst credit conditions. Motivated by these findings, we develop a search and matching model with credit frictions that affect both consumers and firms. In the model, tighter debt constraints raise the cost of investing in new job vacancies and thus reduce worker job finding rates and employment. Two key features of our model, on-the-job human capital accumulation and consumer-side credit frictions, are critical to generating sizable drops in employment. On-the-job human capital accumulation makes the flows of benefits from posting vacancies long-lived and so greatly amplifies the sensitivity of such investments to credit frictions. Consumer-side credit frictions further magnify these effects by leading wages to fall only modestly. We show that the model reproduces well the salient cross-regional features of the U.S. data during the Great Recession.
Parola chiave: Employment, Debt constraints, Search and matching, and Human capital Soggetto: E32 - Business Fluctuations; Cycles, E21 - Macroeconomics: Consumption; Saving; Wealth, J64 - Unemployment: Models, Duration, Incidence, and Job Search, J21 - Labor Force and Employment, Size, and Structure, and E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
Creator: Rolnick, Arthur J., 1944-, Velde, François R., and Weber, Warren E. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 536 Abstract:
This paper establishes the stylized fact that medieval debasements were accompanied by unusually large minting volumes and revenues. This fact is a puzzle under the commonly held view that metallic coins are commodity money and exchange by weight. An existing explanation is that debased coins were used to reduce the real burden of nominally denominated debts. This explanation is logically flawed: nothing prevents agents from renegotiating contracts and avoid incurring minting costs. The paper also establishes other facts about monetary mutations, which altogether pose a challenge to monetary economics.
Creator: Cooley, Thomas F., Hansen, Gary D. (Gary Duane), and Prescott, Edward C. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 535 Parola chiave: Equilibrium and Business cycle Soggetto: E13 - General Aggregative Models: Neoclassical and E32 - Business Fluctuations; Cycles
Creator: Bengui, Julien, Bianchi, Javier, and Coulibaly, Louphou Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 535 Abstract:
In this paper, we study the optimal design of financial safety nets under limited private credit. We ask when it is optimal to restrict ex ante the set of investors that can receive public liquidity support ex post. When the government can commit, the optimal safety net covers all investors. Introducing a wedge between identical investors is inefficient. Without commitment, an optimally designed financial safety net covers only a subset of investors. Compared to an economy where all investors are protected, this results in more liquid portfolios, better social insurance, and higher ex ante welfare. Our result can rationalize the prevalent limited coverage of safety nets, such as the lender of last resort facilities.
Parola chiave: Safety nets, Public liquidity provision, Bailouts, and Time inconsistency Soggetto: G28 - Financial Institutions and Services: Government Policy and Regulation, E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination, and E58 - Central Banks and Their Policies
Creator: Cole, Harold Linh, 1957- and Kehoe, Patrick J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 534 Parola chiave: Loans and Debt Soggetto: F34 - International Lending and Debt Problems and E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
Creator: McGrattan, Ellen R. and Prescott, Edward C. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 534 Abstract:
Many countries are facing challenging fiscal financing issues as their populations age and the number of workers per retiree falls. Policymakers need transparent and robust analyses of alternative policies to deal with demographic changes. In this paper, we propose a simple framework that can easily be matched to aggregate data from the national accounts. We demonstrate the usefulness of our framework by comparing quantitative results for our aggregate model with those of a related model that includes within-age-cohort heterogeneity through productivity differences. When we assess proposals to switch from the current tax and transfer system in the United States to a mandatory saving-for-retirement system with no payroll taxation, we find that the aggregate predictions for the two models are close.
Parola chiave: Medicare, Social Security, Retirement, and Taxation Soggetto: I13 - Health Insurance, Public and Private, E13 - General Aggregative Models: Neoclassical, and H55 - Social Security and Public Pensions
Creator: Kehoe, Timothy Jerome, 1953-, Pujolas, Pau S., and Ruhl, Kim J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 533 Abstract:
We show that a trade model with an exogenous set of heterogeneous firms with fixed operating costs has the same aggregate outcomes as a span-of-control model. Fixed costs in the heterogeneous-firm model are entrepreneurs' forgone wage in the span-of-control model.
Parola chiave: Income distribution, Span-of-control model, International trade, and Firm heterogeneity Soggetto: D43 - Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection, F12 - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation, and D31 - Personal Income, Wealth, and Their Distributions
Creator: Geweke, John Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 532 Abstract:
This paper integrates and extends some recent computational advances in Bayesian inference with the objective of more fully realizing the Bayesian promise of coherent inference and model comparison in economics. It combines Markov chain Monte Carlo and independence Monte Carlo with importance sampling to provide an efficient and generic method for updating posterior distributions. It exploits the multiplicative decomposition of marginalized likelihood into predictive factors, to compute posterior odds ratios efficiently and with minimal further investment in software. It argues for the use of predictive odds ratios in model comparison in economics. Finally, it suggests procedures for public reporting that will enable remote clients to conveniently modify priors, form posterior expectations of their own functions of interest, and update the posterior distribution with new observations. A series of examples explores the practicality and efficiency of these methods.
This paper was prepared for the inaugural Colin Clark Lecture, Australasian Meetings of the Econometric Society, July 1994.
Parola chiave: Computation, Model comparison, Bayesian inference, and Econometric modeling Soggetto: C53 - Forecasting Models; Simulation Methods and C11 - Bayesian Analysis: General