Creator: Aguiar, Mark and Amador, Manuel Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 518 Abstract:
We study optimal fiscal policy in a small open economy (SOE) with sovereign and private default risk and limited commitment to tax plans. The SOE's government uses linear taxation to fund exogenous expenditures and uses public debt to inter-temporally allocate tax distortions. We characterize a class of environments in which the tax on labor goes to zero in the long run, while the tax on capital income may be non-zero, reversing the standard prediction of the Ramsey tax literature. The zero labor tax is an optimal long run outcome if the economy is subject to sovereign debt constraints and the domestic households are impatient relative to the international interest rate. The front loading of tax distortions allows the economy to build a large (aggregate) debt position in the presence of limited commitment. We show that a similar result holds in a closed economy with imperfect inter-generational altruism, providing a link with the closed-economy literature that has explored disagreement between the government and its citizens regarding inter-temporal tradeoffs.
关键词: Limited commitment, Fiscal policy, and Sovereign debt 学科: F34 - International Lending and Debt Problems, E62 - Fiscal Policy, F38 - International Financial Policy: Financial Transactions Tax; Capital Controls, and F32 - Current Account Adjustment; Short-term Capital Movements
Creator: Ligon, Ethan, Thomas, Jonathan P., and Worrall, Tim Series: Endogenous incompleteness Abstract:
This paper studies efficient insurance arrangements in village economies when there is complete information but limited commitment. Commitment is limited because only limited penalties can be imposed on households which renege on their promises. Any efficient insurance arrangement must therefore take into account the fact that households will renege if the benefits from doing so outweigh the costs. We study a general model which admits aggregate and idiosyncratic risk as well as serial correlation of incomes. It is shown that in the case of two households and no storage the efficient insurance arrangement is characterized by a simple updating rule. An example illustrates the similarity of the efficient arrangement to a simple debt contract with occasional debt forgiveness. The model is then extended to multiple households and a simple storage technology. We use data from the ICRISAT survey of three villages in southern India to test the theory against three alternative models: autarky, full insurance, and a static model of limited commitment due to Coate and Ravallion (1993). Overall, the model we develop does a significantly better job of explaining the data than does any of these alternatives.
关键词: Risk, Limited commitment, Agrarian economies, Insurance arrangements, Village economies, and India 学科: O12 - Economic development - Microeconomic analyses of economic development, D81 - Information, knowledge, and uncertainty - Criteria for decision-making under risk and uncertainty, and O15 - Economic development - Human resources ; Human development ; Income distribution ; Migration
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.
关键词: Dynamic contracting, Tail risk, Equity premium puzzle, and Limited commitment 学科: E30 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data) and G10 - General Financial Markets: General (includes Measurement and Data)
Creator: Smith, Bruce D. (Bruce David), 1954-2002 Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 202 Abstract:
A model of credit rationing based on asymmetrically informed borrowers and lenders is developed. In this context, sufficient conditions are derived for an appropriate government policy response to credit rationing to be a continuously open discount window. It is also demonstrated that such a policy can be deflationary, and that given a commitment to operate in this way, the monopoly issue of liabilities can Pareto dominate their competitive issuance.
关键词: Federal lending, Assymetric information, Credit limit, Jaffee-Russel model, and Government loans 学科: D82 - Asymmetric and Private Information; Mechanism Design, E51 - Money Supply; Credit; Money Multipliers, and H81 - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts
Creator: Lepetyuk, Vadym and Stoltenberg, Christian Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 705 Abstract:
The rise in within-group consumption inequality in response to the increase in within-group income inequality over the last three decades in the U.S. is puzzling to expected-utility-based incomplete market models. The two-sided lack of commitment models exhibit too little consumption inequality while the standard incomplete markets models tend to predict too much consumption inequality. We show that a model with two-sided lack of commitment and chance attitudes, as emphasized by prospect theory, can explain the relationship and can avoid the systematic bias of the expected utility models. The chance attitudes, such as optimism and pessimism, imply that the households attribute a higher weight to high and low outcomes compared to their objective probabilities. For realistic values of risk aversion and of chance attitudes, the incentives for households to share the idiosyncratic risk decrease. The latter effect endogenously amplifies the increase in consumption inequality relative to the expected utility model, thereby improving the fit to the data.
关键词: Risk sharing, Prospect theory, Limited enforcement, and Consumption inequality 学科: D31 - Personal Income, Wealth, and Their Distributions, E21 - Macroeconomics: Consumption; Saving; Wealth, and D52 - Incomplete Markets
Creator: Huang, Kevin X. D., Liu, Zheng, and Zhu, Qi Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 367 Abstract:
This paper studies the empirical relevance of temptation and self-control using household-level data from the Consumer Expenditure Survey. We estimate an infinite-horizon consumption-savings model that allows, but does not require, temptation and self-control in preferences. To help identify the presence of temptation, we exploit an implication of the theory that a tempted individual has a preference for commitment. In the presence of temptation, the cross-sectional distribution of the wealth-consumption ratio, in addition to that of consumption growth, becomes a determinant of the asset-pricing kernel, and the importance of this additional pricing factor depends on the strength of temptation. The estimates that we obtain provide statistical evidence supporting the presence of temptation. Based on our estimates, we explore some quantitative implications of this class of preferences on equity premium and on the welfare cost of business cycles.
关键词: Limited participation, Consumption, Self-control, Temptation, and Intertemporal decision 学科: E21 - Macroeconomics: Consumption; Saving; Wealth and D91 - Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
Creator: Gu, Chao and Wright, Randall D. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 689 Abstract:
We study models of credit with limited commitment, which implies endogenous borrowing constraints. We show that there are multiple stationary equilibria, as well as nonstationary equilibria, including some that display deterministic cyclic and chaotic dynamics. There are also stochastic (sunspot) equilibria, in which credit conditions change randomly over time, even though fundamentals are deterministic and stationary. We show this can occur when the terms of trade are determined by Walrasian pricing or by Nash bargaining. The results illustrate how it is possible to generate equilibria with credit cycles (crunches, freezes, crises) in theory, and as recently observed in actual economies.
关键词: Credit and Cycles 学科: E51 - Money Supply; Credit; Money Multipliers 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.
关键词: Safety nets, Time inconsistency, Public liquidity provision, and Bailouts 学科: E58 - Central Banks and Their Policies, G28 - Financial Institutions and Services: Government Policy and Regulation, and E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
Creator: Aguiar, Mark, Amador, Manuel, Farhi, Emmanuel, and Gopinath, Gita, 1971- Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 511 Abstract:
We study fiscal and monetary policy in a monetary union with the potential for rollover crises in sovereign debt markets. Member-country fiscal authorities lack commitment to repay their debt and choose fiscal policy independently. A common monetary authority chooses inflation for the union, also without commitment. We first describe the existence of a fiscal externality that arises in the presence of limited commitment and leads countries to over-borrow; this externality rationalizes the imposition of debt ceilings in a monetary union. We then investigate the impact of the composition of debt in a monetary union, that is the fraction of high-debt versus low-debt members, on the occurrence of self-fulfilling debt crises. We demonstrate that a high-debt country may be less vulnerable to crises and have higher welfare when it belongs to a union with an intermediate mix of high- and low-debt members, than one where all other members are low-debt. This contrasts with the conventional wisdom that all countries should prefer a union with low-debt members, as such a union can credibly deliver low inflation. These findings shed new light on the criteria for an optimal currency area in the presence of rollover crises.
关键词: Monetary union, Fiscal policy , Coordination failures, and Debt crisis 学科: E50 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General, E40 - Money and Interest Rates: General, F30 - International Finance: General, and F40 - Macroeconomic Aspects of International Trade and Finance: General