resolving new keynesian anomalies with wealth in the utility function at the zero lower bound the new keynesian model predicts that output and inflation collapse to implausibly low levels and that government spending and forward guidance have implausibly large effects to resolve these anomalies we introduce wealth into the utility function the justification is that wealth is a marker of social status and people value status since people partly save to accrue social status the euler equation is modified as a result when the marginal utility of wealth is sufficiently large the dynamical system representing the zero lower bound equilibrium transforms from a saddle to a source which resolves all the anomalies

policy options in a liquidity trap the specter of a liquidity trap originally proposed as a theoretical possibility by john maynard keynes 1936 but long considered to be of doubtful practical relevance has recently created alarm among the world s central banks in japan the overnight rate has been essentially at zero for most of the time since february 1999 making further interest rate cuts impossible yet until well into 2003 growth remained anemic while prices continued to fall suggesting a need for further monetary stimulus since march 2001 the bank of japan has supplemented its zero interest rate policy with a policy of quantitative easing under which additional bank reserves are supplied beyond those needed to keep overnight interest rates at zero yet an increase in base money of more than 50 percent failed to halt the deflation suggesting a liquidity trap more recently other central banks including the fed have come close enough to the zero bound to worry about how they would deal with a similar predicament here we first discuss whether monetary policy should actually become ineffective when the zero bound on interest rates is reached we argue that open market operations even of unconventional types will be ineffective if they do not change expectations about the future conduct of policy in this sense a liquidity trap is possible nonetheless a credible commitment regarding future policy can largely mitigate the distortions created by the zero bound we fully characterize the optimal commitment in a simple example

understanding hank insights from a prank using an analytically tractable heterogeneous agent new keynesian model we show that whether incomplete markets resolve new keynesian paradoxes depends on the cyclicality of income risk incomplete markets reduce the effectiveness of forward guidance and multipliers in a liquidity trap only with procyclical risk countercyclical risk amplifies these puzzles procyclical risk permits determinacy under a peg countercyclical risk may generate indeterminacy even under the taylor principle by affecting the cyclicality of risk even passive fiscal policy influences the effects of monetary policy

debt deleveraging and the liquidity trap a fisher minsky koo approach in this paper we present a simple new keynesian style model of debt driven slumps that is situations in which an overhang of debt on the part of some agents who are forced into rapid deleveraging is depressing aggregate demand making some agents debt constrained is a surprisingly powerful assumption fisherian debt deflation the possibility of a liquidity trap the paradox of thrift a keynesiantype multiplier and a rationale for expansionary fiscal policy all emerge naturally from the model we argue that this approach sheds considerable light both on current economic difficulties and on historical episodes including japan s lost decade now in its 18th year and the great depression itself

relative wealth status seeking and catching up abstract according to our studies if relative wealth appears in the reduced form utility function for example because of status seeking then the poor will catch up with the rich if the elasticity of marginal utility of relative wealth is greater than the elasticity of marginal utility of consumption we give sufficient conditions for the final distribution of wealth to be independent of the initial distribution and conditions for saddlepoint stability in a two class model

empirical evidence on inflation expectations in the new keynesian phillips curve abstract we review the main identification strategies and empirical evidence on the role of expectations in the new keynesian phillips curve paying particular attention to the issue of weak identi

the role of human capital in postacquisition ceo departure in this study we examined the postacquisition departure of target firms ceos and found support for the predictions of becker s 1962 human capital theory firms and ceos appear to weigh the cost

the spirit of capitalism and savings behavior abstract this paper presents a capitalist spirit model of savings by including wealth in the intertemporal utility function while this model includes the life cycle model and bequest model as two special cases it sheds light on why wealth holding has tended to increase with age why decumulation of wealth after retirement has not happened and why households with and without children have not shown significant differences in their savings behavior the capitalist spirit approach is especially useful for understanding savings by the rich and savings across countries and over time jel e21 b10

the ecb s asset purchase programme a model based evaluation abstract this paper uses a dynamic stochastic general equilibrium model with financial frictions to quantify the effects of the european central bank s recent asset purchase programme our results suggest that the macroeconomic effects of purchases are potentially important when the programme is associated with forward guidance on the interest rate the signalling that the future monetary policy stance will remain accommodative is the prominent transmission channel

on the structural interpretation of the smets wouters risk premium shock this article shows that the risk premium shock in smets and wouters 2007 can be interpreted as a structural shock to the demand for safe and liquid assets such as short term u s treasury securities several implications of this interpretation are discussed

the impact of regulation on ceo labor markets i examine empirically whether the executive labor market helps to slot managers with higher education quality into jobs where they can obtain greater returns from their human capital skills comparing a sample of regulated gas and electric firms with manufacturing firms i find that utilities attract ceos with a lower quality education than do unregulated firms comparing a sample of airline firms pre and postderegulation airlines have ceos with a higher quality education postderegulation these results suggest that the labor market slots ceos with a lower quality of education into regulated business environments

forward guidance without common knowledge abstract how does the economy respond to news about future policies or future fundamentals standard practice assumes that agents have common knowledge of such news and face no uncertainty about how others will respond relaxing this assumption attenuates the general equilibrium effects of news and rationalizes a form of myopia at the aggregate level we establish these insights within a class of games which nests but is not limited to the new keynesian model our results help resolve the forward guidance puzzle offer a rationale for the front loading of fiscal stimuli and illustrate more broadly the fragility of predictions that rest on long series of forward looking feedback loops jel d82 d83 d84 e12 e23 e52 e62

the power of forward guidance revisited in recent years central banks have increasingly turned to forward guidance as a central tool of monetary policy especially as interest rates around the world have hit the zero lower bound standard monetary models imply that far future forward guidance is extremely powerful promises about far future interest rates have huge effects on current economic outcomes and these effects grow with the horizon of the forward guidance we show that the power of forward guidance is highly sensitive to the assumption of complete markets if agents face uninsurable income risk and borrowing constraints a precautionary savings effect tempers their responses to changes in future interest rates as a consequence forward guidance has substantially less power to stimulate the economy in addition we show that the business cycle dynamics of our incomplete markets model differ substantially from its complete market counterpart this contrasts with the well known results of krusell and smith 1998 we present approximate representations that can easily be incorporated into standard business cycle models

inequality leverage and crises the paper studies how high leverage and crises can arise as a result of changes in the income distribution empirically the periods 1920 1929 and 1983 2007 both exhibited a large increase in the income share of the rich a large increase in leverage for the remainder and an eventual financial and real crisis the paper presents a theoretical model where these features arise endogenously as a result of a shift in bargaining powers over incomes a financial crisis can reduce leverage if it is very large and not accompanied by a real contraction but restoration of the lower income group s bargaining power is more effective

automatic stabilizers and economic crisis us vs europe this paper analyzes the effectiveness of the tax and transfer systems in the eu and the us to provide income insurance through automatic stabilization in the recent economic crisis we find that automatic stabilizers absorb 38 of a proportional income shock in the eu compared to 32 in the us in the case of an unemployment shock 47 of the shock is absorbed in the eu compared to 34 in the us this cushioning of disposable income leads to a demand stabilization of up to 30 in the eu and up to 20 in the us there is large heterogeneity within the eu automatic stabilizers in eastern and southern europe are much lower than in central and northern european countries we also investigate whether countries with weak automatic stabilizers have enacted larger fiscal stimulus programs

the effect of individual uncertainty on the specificity of human capital empirical evidence from career developments in professional soccer this study looks at careers in professional soccer to investigate the determinants of human capital hc specificity inspired by labour market research we formulate three hypotheses on how uncertainty about the usefulness of individuals more productive specific skills affects their investment in more flexible general skills the empirical analysis is based on unique panel data on school grades soccer evaluations and sociodemographic characteristics of 90 elite players from the youth academy of a german bundesliga club we find that senior and long serving players who are comparably certain that their soccer specific capital will be sufficient to pursue a lucrative professional career invest less in general hc at school expected soccer performance in contrast has a counterintuitive positive effect our results expand knowledge on the factors influencing hc specificity from the macro to the subject level and highlight practical implications for institutions that train gifted individuals

inflation and output in new keynesian models with a transient interest rate peg a familiar result in the canonical dynamic new keynesian dnk model is that policymakers constrained by the zero bound can improve outcomes by promising to keep rates low after the zero bound is not binding we examine a general class of interest rate pegs in a variety of dnk models standard versions of the model produce counterintuitive reversals where the effect of the interest rate peg can switch from highly expansionary to highly contractionary for modest changes in the length of the interest rate peg this unusual behavior does not arise in sticky information models of the phillips curve

social status and economic performance a survey abstract this survey combines ideas and results from sociology and economics recognizing that economic decisions are often shaped by social concerns and influences based on the sociological literature we define social status and describe its measurement we then describe the role of social status in economic analysis of saving and consumption wages and economic growth we review recent work on status determination in equilibrium including evolutionary models we conclude with some remarks on the need for further interaction between sociology and economics

wealth seeking reconsidered abstract if individuals are interested in their relative wealth position they engage in contests for wealth this leads to a steady state with overaccumulation in a simple growth model it is shown that if some individuals are engaged in wealth seeking activity but others are not the latter might benefit however wealth seeking is not welfare enhancing under usual assumptions concerning production technology the steady state equilibrium is characterized by a marginal productivity of capital that is below the steady state rate of time preference and by emergence of a class structure

a matrix approach to the gini index decomposition by subgroup and by income source the literature offers two main ways of decomposing the gini index decomposition by population subgroup and by income source this article proposes merging the two decomposition dimensions by suggesting a matrix formula for the gini index which permits the simultaneous decomposition by subgroup and by income source using this multi decomposition one can investigate the role of the interaction between the subgroup and the source components in determining the overall inequality we apply the methodology to sample data on italian household incomes collected in 2008

rule of thumb consumers meet sticky wages it has been argued that rule of thumb consumers substantially alter the determinacy properties of simple interest rate rules and the dynamics of an otherwise standard new keynesian model in this paper we show that nominal wage stickiness helps re establishing standard results key findings are that wage stickiness i affects the shape of determinacy regions in the parameters space restoring the relevance of the taylor principle for the conduct of monetary policy ii implies that a rise in consumption in response to an innovation in government spending is not a robust feature of the model

on relative wealth effects and the optimality of growth abstract we present a model of endogenous growth in which a desire for social status lead individuals to care about their relative wealth the growth rate of the economy is socially optimal if the status motive is sufficiently important but the presence of status seeking may also lead to excessive growth

the gini concentration index a review of the inference literature more than a century ago corrado gini proposed his well known concentration index for measuring the degree of inequality in the distribution of income and wealth his index is still extremely relevant and widely used in several fields of research and application in this paper we focus on the inferential properties of the gini index and discuss the main directions of analysis proposed in the literature the aim of the paper is to provide a comprehensive review of the main developments on the inferential aspects of the gini concentration ratio we feel that this work can provide a valuable contribution to those scholars who are approaching the large amount of literature on the inferential properties of the gini index

a simpler theory of optimal capital taxation abstract this paper develops a theory of optimal capital taxation that expresses optimal tax formulas in sufficient statistics we first consider a simple model with utility functions linear in consumption and featuring heterogeneous utility for wealth in this case there are no transitional dynamics the steady state is reached immediately and has finite elasticities of capital with respect to the net of tax rate this allows for a tractable optimal tax analysis with formulas expressed in terms of empirical elasticities and social preferences that can address many important policy questions these formulas can easily be taken to the data to simulate optimal taxes which we do using u s tax return data on labor and capital incomes second we show how these results can be extended to the case with concave utility for consumption the same types of formulas carry over by appropriately defining elasticities we show that one can recover all the results from the simpler model using a new and non standard steady state approach that respects individual preferences even with a fully general utility function

the taylor rule and optimal monetary policy where it denotes the fed s operating target for the federal funds rate pt is the inflation rate measured by the gdp deflator yt is the log of real gdp and y t is the log of potential output identified empirically with a linear trend the rule has since been subject to considerable attention both as an account of actual policy in the united states and elsewhere and as a prescription for desirable policy taylor argues for the rule s normative significance both on the basis of simulations and on the ground that it describes u s policy in a period in which monetary policy is widely judged to have been unusually successful taylor 1999 suggesting that the rule is worth adopting as a principle of behavior here i wish to consider to what extent this prescription resembles the sort of policy that economic theory would recommend i consider the question in the context of a simple but widely used optimizing model of the monetary transmission mechanism which allows one to reach clear conclusions about economic welfare the model is highly stylized but incorporates important features of more realistic models and allows me to make several points that are of more general validity out of concern for the robustness of the conclusions reached the analysis here addresses only broad qualitative features of the taylor rule and attempts to identify features of a desirable policy rule that are likely to hold under a variety of model specifications

asset market participation monetary policy rules and the great inflation this paper argues that limited asset market participation is crucial in explaining u s macroeconomic performance and monetary policy before the 1980s and their changes thereafter in an otherwise conventional sticky price model standard aggregate demand logic is inverted at low enough asset market participation interest rate increases become expansionary passive monetary policy ensures equilibrium determinacy and maximizes welfare this suggests that federal reserve policy in the pre volcker era was better than conventional wisdom implies we provide empirical evidence consistent with this hypothesis and study the relative merits of changes in structure and shocks for reproducing the conquest of the great inflation and the great moderation

discounting behavior a reconsideration we re evaluate the theory experimental design and econometrics behind claims that individuals exhibit non constant discounting behavior theory points to the importance of controlling for the non linearity of the utility function of individuals since the discount rate is defined over time dated utility flows and not flows of money it also points to a menagerie of functional forms to characterize different types of non constant discounting behavior the implied experimental design calls for individuals to undertake several tasks to allow us to identify these models and to several treatments such as multiple horizons and the effect of allowing for a front end delay on earlier payments the implied econometrics calls for structural estimation of the theoretical models allowing for joint estimation of utility functions and discounting functions using data collected from a representative sample of 413 adult danes in 2009 we draw striking conclusions assuming an exponential discounting model we estimate discount rates to be 5 6 on average this is significantly lower than all previous estimates using controlled experiments we also find no evidence to support quasi hyperbolic discounting or fixed cost discounting and only modest evidence to support other specifications of non constant discounting furthermore the evidence for non constant discounting while statistically significant is not economically significant in terms of the size of the estimated discount rates we undertake extensive robustness checks on these findings including a detailed review of the previous comparable literature

the perils of taylor rules abstract since john taylor s 1993 carnegie rochester conf ser publ policy39 195 214 seminal paper a large literature has argued that active interest rate feedback rules that is rules that respond to increases in inflation with a more than one for one increase in the nominal interest rate are stabilizing in this paper we argue that once the zero bound on nominal interest rates is taken into account active interest rate feedback rules can easily lead to unexpected consequences specifically we show that even if the steady state at which monetary policy is active is locally the unique equilibrium typically there exist an infinite number of equilibrium trajectories originating arbitrarily close to that steady state that converge to a liquidity trap that is a steady state in which the nominal interest rate is near zero and inflation is possibly negative journal of economic literature classification numbers e52 e31 e63

social norms savings behavior and growth we argue that many goods and decisions are not allocated or made through markets we interpret an agent s status as a ranking device that determines how well he or she fares in the nonmarket sector the existence of a nonmarket sector can endogenously generate a concern for relative position in for example the income distribution so that higher income implies higher status moreover it can naturally yield multiple equilibria it is thus possible to explain differences in growth rates across countries without recourse to differences in underlying preferences technologies or endowments different social organizations lead to different reduced form preferences which lead to different growth rates

limited asset markets participation monetary policy and inverted aggregate demand logic abstract this paper incorporates limited asset markets participation in dynamic general equilibrium and develops a simple analytical framework for monetary policy analysis aggregate dynamics and stability properties of an otherwise standard business cycle model depend nonlinearly on the degree of asset market participation while moderate participation rates strengthen the role of monetary policy low enough participation causes an inversion of results dictated by conventional wisdom the slope of the is curve changes sign the taylor principle is inverted optimal welfare maximizing discretionary monetary policy requires a passive policy rule and the effects and propagation of shocks are changed however a targeting rule implementing optimal policy under commitment delivers equilibrium determinacy regardless of the degree of asset market participation our results may justify fed s behavior during the great inflation period

the new keynesian cross abstract the new keynesian nk cross is a graphical and analytical apparatus for heterogeneous agent hank models expressing key aggregate demand objects mpc and multipliers as functions of heterogeneity parameters it affords analytical insights into monetary fiscal and forward guidance multipliers and replicates the aggregate implications of quantitative hank the key parameter the constrained agents income elasticity to aggregate income depends on fiscal redistribution when it is larger smaller than one the effects of policies and shocks are amplified dampened with uninsurable idiosyncratic uncertainty this translates intertemporally through compounding discounting in the aggregate euler equation into further amplification dampening of future shocks

the power of forward guidance in a quantitative tank model abstract we quantify the macroeconomic effects of interest rate forward guidance in an estimated medium scale two agent new keynesian tank model although tank models can in principle dampen or amplify the power of forward guidance compared to a representative agent model our estimates indicate a dampening as there is sufficient countercyclical redistribution an interaction of forward guidance with asset purchases gives rise to non linear effects that depend on the horizon of the interest rate peg

keeping one step ahead of the joneses status the distribution of wealth and long run growth assuming that the utility of each agent depends on its relative wealth position in the society this chapter constructs an endogenous growth model it is shown that even if the subjective discount rates differ across agents there exists a unique balanced growth equilibrium in which each agent owns a positive share of the world wealth it is also shown that if the agents are identical then an increase in savings incentives always raises the long run growth rate but if they are heterogeneous then an increase in savings incentives may lower the long run growth rate

secular stagnation theory and remedies abstract to investigate secular stagnation i add two features to a standard ramsey model with money i households have a preference for wealth ii wages are downward rigid in this framework there exists a frictionless neoclassical steady state equilibrium characterized by a low natural real interest rate in addition if wages are sufficiently rigid and the natural real interest rate sufficiently low then there also exists a keynesian secular stagnation steady state characterized by under employment low inflation and a binding zero lower bound on the nominal interest rate as wages become more flexible the keynesian steady state diverges away from the neoclassical steady state until wages are so flexible that it ceases to exist if monetary policy is excessively restrictive then the secular stagnation steady state is the unique steady state equilibrium of the economy the optimal policy response to secular stagnation is to move the economy to the neoclassical steady state this can either be achieved by raising the central bank s inflation ceiling or by taxing wealth and subsidizing investment in physical capital this optimal tax policy is revenue neutral

the spirit of capitalism and stock market prices in existing theory wealth is no more valuable than its implied consumption rewards in reality investors acquire wealth not just for its implied consumption but for the resulting social status max m weber 1958 refers to this desire for wealth as the spirit of capitalism the authors examine both analytically and empirically implications of weber s hypothesis for consumption savings and stock prices when investors care about relative social status propensity to consume and risk taking behavior will depend on social standards and stock prices will be volatile the spirit of capitalism seems to be a driving force behind stock market volatility and economic growth copyright 1996 by american economic association

status the distribution of wealth private and social attitudes to risk this paper supposes an individual cares about his her own wealth not only directly but also via the relative standing that this wealth induces the implications for risk taking are investigated in particular such a model provides a natural explanation of the concave convex concave utility described by friedman and savage however there are a number of key differences between the present model and any model based on own wealth alone for example an equilibrium wealth distribution here may have a middle class further the status interaction involves an externality and an equilibrium wealth distribution may be pareto inefficient but also about the implied relative standing in the distribution of wealth has a long but checkered history an early exponent of such ideas was of course veblen 1899 it is indeed a notion which most economists reject albeit usually without explicit comment a notable and articulate exception however is frank 1985 for example see also the references frank cites on pp 33 34 it is however a notion with substantial intuitive appeal and it seems useful to ascertain its consequences before coming to a final judgement as to its merits the present paper is concerned with deriving the consequences of such valuation of status for risk taking what seems to be the sharpest possible model is adopted here this assumes that what is essentially ordinal rank in the wealth distribution enters von neumann morgenstern utility as an argument in addi tion to wealth itself thus higher wealth increases utility not only directly but also indirectly via higher status in the interests of both simplicity and drama it is typically assumed here that all individuals have identical utility functions which are concave in wealth but convex in status section 2 discusses how the model provides a natural explanation of the fundamental phenomenon addressed by friedman and savage 1948 that individuals may simultaneously purchase insurance and participate in lotteries although each individual here has a utility function which is concave in wealth itself utility can nevertheless be convex in wealth over some range when the indirect effect via status is included this effect is enhanced by the convexity of utility in status but will follow in any case if increasing wealth entails moving up in status much more rapidly than losing wealth entails moving down it is shown

the role of automatic stabilizers in the u s business cycle most countries have automatic rules in their tax and transfer systems that are partly intended to stabilize economic uctuations this paper measures how eective they are at lowering the volatility of u s economic activity we identify seven potential stabilizers in the data and include four theoretical channels through which they may operate in a business cycle model calibrated to the u s data the model is used to compare the volatility of output in the data with counterfactuals where some or all of the stabilizers are shut down our rst nding is that proportional taxes like sales property and corporate income taxes contribute little to stabilization our second

top managerial prestige power and tender offer response a study of elite social networks and target firm cooperation during takeovers in this paper we explore the following research question when faced with a tender offer why do some firms resist and others cooperate in the past researchers have suggested that the manner in which firms respond to takeover attempts may be in part a function of managers personal motivations we contribute to this line of research by questioning whether other factors might be involved specifically we examine whether cooperation may be a function of the friendliness of the bidding company and the social networks shared by executives in the two firms i e bidder and target we examine how the power and connections of managers affect their responses to tender offers our results suggest that these factors do indeed play a role we found for example that target managers are more likely to cooperate under two conditions 1 if they have less prestigious connections than managers in the bidding firm and 2 if the target and bidding firms share numerous ties to the same prestigious networks in

nobel lecture the economic way of looking at behavior an important step in extending the traditional theory of individual rational choice to analyze social issues beyond those usually considered by economists is to incorporate into the theory a much richer class of attitudes preferences and calculations while this approach to behavior builds on an expanded theory of individual choice it is not mainly concerned with individuals it uses theory at the micro level as a powerful tool to derive implications at the group or macro level the lecture describes the approach and illustrates it with examples drawn from my past and current work

the division of labor coordination costs and knowledge this paper considers specialization and the division of labor a more extensive division of labor raises productivity because returns to the time spent on tasks are usually greater to workers who concentrate on a narrower range of skills the traditional discussion of the division of labor emphasizes the limitations to specialization imposed by the extent of the market we claim that the degree of specialization is more often determined by other considerations especially emphasized are various costs of coordinating specialized workers who perform complementary tasks and the amount of general knowledge available