what accounts for the changes in u s fiscal policy transmission using vector autoregressions on u s time series for 1957 79 and 1983 2004 we find government spending shocks to have stronger effects on output consumption and wages in the earlier period we try to account for this observation within a dsge model featuring price rigidities and limited asset market participation specifically we estimate the structural parameters of the model for both periods by matching impulse responses model based counterfactual experiments suggest that most of the changes in fiscal policy transmission are accounted for by increased asset market participation and the more active monetary policy of the volcker greenspan period

to float or to fix evidence on the impact of exchange rate regimes on growth we study the relationship between exchange rate regimes and economic growth for a sample of 183 countries over the post bretton woods period using a new de facto classification of regimes based on the actual behavior of the relevant macroeconomic variables in contrast with previous studies we find that for developing countries less flexible exchange rate regimes are associated with slower growth as well as with greater output volatility for industrial countries regimes do not appear to have any significant impact on growth the results are robust to endogeneity corrections and a number of alternative specifications borrowed from the growth literature

nonseparable preferences frisch labor supply and the consumption multiplier of government spending one solution to a fiscal policy puzzle this paper proposes a theoretical explanation of the positive consumption multipliers of government spending often found in the data the explanation requires two ingredients first labor demand expands e g prices are sticky second general nonseparable preferences over consumption and leisure should be such that the two goods are substitutes that is frisch labor supply elasticity is lower than the constant consumption elasticity this implies that constant consumption labor supply shifts left existing empirical evidence on the relative magnitudes of the two elasticities supports this hypothesis the parametric conditions under which the result occurs are consistent with restrictions of concavity and noninferiority of consumption and leisure

third country effects on the exchange rate abstract predictive regressions for bilateral exchange rates are typically run on variables from the associated bilateral pairs of countries these regressions characteristically have low explanatory power which leaves room for an omitted variables interpretation we test whether these omitted variables are from third countries when third country macro factors are added to bilateral exchange rate regressions they enter significantly and increase the adjusted r 2 a three country exchange rate model illustrates potential channels for third country spillovers to affect the bilateral rate

animal spirits in a monetary model abstract we integrate keynesian economics with general equilibrium theory in a new way we develop a simple graphical apparatus the is lm nac framework that can be used by policy makers to understand how policy affects the economy a new element the no arbitrage condition nac curve connects the interest rate to current and expected future values of the stock market and it explains how animal spirits influence economic activity our framework provides a rich new approach to policy analysis that explains the short run and long run effects of 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

targeted transfers and the fiscal response to the great recession abstract between 2007 and 2009 government expenditures increased rapidly across the oecd countries while economic research on the impact of government purchases has flourished in the data most of the increase in expenditures was in government transfers after documenting this fact we argue that future research should focus on the positive impact of transfers towards this we present a model in which there is no representative agent and ricardian equivalence does not hold because of uncertainty imperfect credit markets and nominal rigidities targeted lump sum transfers are expansionary both because of a neoclassical wealth effect and because of a keynesian aggregate demand effect

asset prices in a huggett economy this paper explores asset pricing in economies where there is no direct insurance against idiosyncratic risks but other assets can be used for self insurance subject to exogenously imposed borrowing limits we analyze an endowment economy based on huggett 1993 11 both with and without aggregate risk our main innovation is that we obtain full analytical tractability by studying the case with maximally tight borrowing constraints we illustrate by looking at riskless bonds equity and the term structure of interest rates and we show that the model can reproduce many features of observed asset prices when idiosyncratic risks are quantitatively reasonable

taylor rules and the euro this paper uses real time data to analyze whether the variables that normally enter central banks interest ratesetting rules which we call taylor rule fundamentals can provide evidence of out of sample predictability for the united states dollar euro exchange rate from the inception of the euro in 1999 to the end of 2007 the major result of the paper is that the null hypothesis of no predictability can be rejected against an alternative hypothesis of predictability with taylor rule fundamentals for a wide variety of specifications that include inflation and a measure of real economic activity in the forecasting regression we also present less formal evidence that with real time data the taylor rule provides a better description of ecb than of fed policy during this period while the evidence of predictability is only found for specifications that do not include the real exchange rate in the forecasting regression the results are robust to whether or not the coefficients on inflation and the real economic activity measure are constrained to be the same for the u s and the euro area and to whether or not there is interest rate smoothing the evidence of predictability is stronger for realtime than for revised data about the same with inflation forecasts as with inflation rates and weakens if output gap growth is included in the forecasting regression bad news about inflation and good news about real economic activity both lead to out of sample predictability through forecasted exchange rate appreciation

household balance sheet channels of monetary policy a back of the envelope calculation for the euro area abstract this paper formulates a back of the envelope approach to study the effects of monetary policy on household consumption expenditures we analyze several transmission mechanisms operating through direct partial equilibrium channels intertemporal substitution and net interest rate exposure and indirect general equilibrium channels net nominal exposure as well as wealth collateral and labor income channels the strength of these forces varies across households depending on their marginal propensities to consume their balance sheet composition the sensitivity of their own earnings to fluctuations in aggregate labor income and the responsiveness of aggregate earnings asset prices and inflation to monetary policy shocks we quantify all these channels in the euro area by combining micro data from the hfcs and the eu lfs with structural vars estimated on aggregate time series we find that the indirect labor income channel and the housing wealth effect are strong drivers of the aggregate consumption response to monetary policy and explain the cross country heterogeneity in these responses

changes in the output euler equation and asset markets participation recent estimates of the output euler equation for the united states indicate that the elasticity of aggregate demand to interest rates is not significantly different from zero we first argue that this result may hide a structural break the estimated elasticity is a convolution of two coefficients with opposite signs across the samples 1965 1979 and 1982 2003 the sign of the coefficient in the earlier sample is inconsistent with standard economic theory and intuition we outline a model with limited asset markets participation that can generate this change in sign when asset market participation changes from low to high and provide institutional evidence for such a change in the united states in the late 70s and early 80s

public debt and redistribution with borrowing constraints we build a model with financial imperfections and heterogeneous agents and analyse the effects of two types of fiscal policy revenue neutral intratemporal redistribution and debt financed tax cuts which we interpret as intertemporal redistribution under flexible prices the two policies are either neutral or display effects that are at odds with the empirical evidence with sticky prices ricardian equivalence always fails a robin hood revenue neutral redistribution to borrowers is expansionary on aggregate activity a uniform debt financed tax cut has a positive present value multiplier on consumption stemming from intertemporal substitution by the savers who hold the public debt

the optimal composition of public spending in a deep recession abstract we study optimal fiscal policy in an economy plunged into a deep recession characterized by a liquidity trap and in which the government can allocate spending both to consumption and investment goods public investment increases the stock of public capital subject to a time to build constraint the zero lower bound on the nominal interest rate binds as a result of a large shock that increases households desire to save in the risk free asset pushing the natural rate of interest below zero under nominal rigidities and sub optimal monetary policy the shock leads to a large decline in private consumption and investment we show that the optimal response to such a shock is to temporarily raise public spending above the level that would be dictated by classical principles and to tilt its composition towards public investment this compositional shift lasts well after the natural rate has ceased to be negative our results suggest that the american recovery and reinvestment act of 2009 was insufficiently oriented towards public investment

household expenditure and the income tax rebates of 2001 using questions expressly added to the consumer expenditure survey we estimate the change in consumption expenditures caused by the 2001 federal income tax rebates and test the permanent income hypothesis we exploit the unique randomized timing of rebate receipt across households households spent 20 to 40 percent of their rebates on nondurable goods during the three month period in which their rebates arrived and roughly two thirds of their rebates cumulatively during this period and the subsequent three month period the implied effects on aggregate consumption demand are substantial consistent with liquidity constraints responses are larger for households with low liquid wealth or low income

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

optimal monetary policy and financial stability in a non ricardian economy this paper develops a model with discontinuous asset market participation in which all agents are infinitely lived and non ricardian and where heterogeneity among market participants implies financial wealth effects on aggregate consumption derivation of a welfare based loss function shows that financial stability arises as an additional and independent target besides infl ation and output stability evaluation of optimal policy under discretion and commitment reveals that price stability may no longer be optimal even absent inefficient supply shocks some fluctuations in output and infl ation are optimal as long as they reduce financial instability ignoring the heterogeneity among market participants in this economy may lead monetary policy to induce substantially higher welfare losses

finite horizons life cycle savings and time series evidence on consumption abstract this paper develops an explicitly aggregated life cycle model which allows for finite horizons and declining individual labor supply the model can generate a common upward trend in aggregate consumption labor income and nonhuman wealth without relinquishing hall s random walk at the micro level life cycle factors are shown to imply that consumption changes should be a predictable and b smoother than in the infinite horizon model econometric evidence using postwar u s data suggests that neither consumption s predictability nor its excess smoothness can be fully accounted for by life cycle considerations

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

fiscal stimulus and the role of wage rigidity abstract in this paper we study the impact of an expansion in public spending in an economy characterized by limited asset market participation and sticky wages the flexible wage version of the model implies strong expansionary effects on output and consumption but also a counterfactual increase in real wages the introduction of sticky wages besides being a realistic addition solves this problem and preserves the expansionary effects on output and consumption moreover once we introduce segmentation in the labor market sticky wages are even essential to obtain expansionary effects

monetary fiscal policy interactions and fiscal stimulus abstract increases in government spending trigger substitution effects both inter and intra temporal and a wealth effect the ultimate impacts on the economy hinge on current and expected monetary and fiscal policy behavior studies that impose active monetary policy and passive fiscal policy typically find that government consumption crowds out private consumption higher future taxes create a strong negative wealth effect while the active monetary response increases the real interest rate this paper estimates markov switching policy rules for the united states and finds that monetary and fiscal policies fluctuate between active and passive behavior when the estimated joint policy process is imposed on a conventional new keynesian model government spending generates positive consumption multipliers in some policy regimes and in simulated data in which all policy regimes are realized the paper reports the model s predictions of the macroeconomic impacts of the american recovery and reinvestment act s implied path for government spending under alternative monetary fiscal policy combinations

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

inflation persistence and optimal monetary policy in the euro area in this paper we present an optimizing agent model for the euro area to emphasize how the existence of heterogeneity in inflation persistence across regions matters for the design of monetary policy we find supporting evidence of the existence of such a heterogeneity in inflation dynamics across euro area countries in particular based on the estimation of new keynesian phillips curves for five major countries of the euro area we find that inflation in germany has a dominant forward looking component while in the other group of countries inflation show a significant inertial backward looking behavior under this circumstance we study the welfare implications of four monetary policy rules following terms of trade shocks fully optimal optimal inflation targeting hicp targeting and output gap stabilization

changing monetary policy rules learning and real exchange rate dynamics when the exchange rate is priced by uncovered interest parity and central banks set nominal interest rates according to a reaction function such as the taylor rule the real exchange rate will be determined by expected inflation and the output gap or the unemployment gap of the home and foreign countries this paper examines the implications of these taylor rule fundamentals for real exchange rate determination because the true parameters in central bank policy rules are unknown to the public and change over time the model is presented in the context of a least squares learning environment this simple learning model captures the volatility and the major swings in the real deutschemark euro dollar exchange rate from 1976 to 2007

do central banks respond to exchange rate movements some new evidence from structural estimation l auteure etudie l incidence des mouvements du taux de change sur la conduite de la politique monetaire en australie au canada en nouvelle zelande et au royaume uni elle elabore et estime un modele structurel d equilibre general a deux secteurs dans lequel les prix et les salaires sont rigides et les variations du taux de change se repercutent de facon limitee

when is the government transfer multiplier large transfers to individuals were a larger part of the 2009 u s stimulus package than government purchases using a two agent new keynesian model this paper shows analytically that the multiplier on targeted transfers to financially constrained households is i larger than the purchase multiplier if the zero lower bound zlb binds and ii is more sensitive to the degree of monetary accommodation of inflation targeted transfers provide the same boost to demand as purchases but lower aggregate supply relative to purchases as those receiving transfers want to work less when the aggregate demand curve inverts such as when the zero lower bound binds the extra inflation from lower supply boosts the multiplier this result also holds quantitatively in a medium scale version of the model

credit crises precautionary savings and the liquidity trap we use a model a la bewly huggett ayagari to explore the eects of a credit crunch on consumer spending households borrow and lend to smooth idiosyncratic income shocks facing an exogenous borrowing constraint we look at the economy response after an unexpected permananent tightening of this constraint the interest rate drops sharply in the short run and then adjusts to a lower steady state level this is due to the fact that after the shock a large fraction of agents is far below their target holdings of precautionary savings and this generates a large temporary positive shock to net lending we then look at the eects on output here two opposing forces are present as households can deleverage in two ways by consuming less and by working more we show that under a reasonable parametrization the eect on consumer spending dominates and precautionary behavior generates a recession if we add nominal rigidities two things happen i supply side responses are muted and ii there is a lower bound on the interest rate adjustment these two elements tend to amplify the recession caused by the credit tightening

consumption and real exchange rates in dynamic economies with non traded goods abstract we examine the possibility that non traded goods may account for several striking features of international macroeconomic data large persistent deviations from purchasing power parity small correlations of aggregate consumption fluctuations across countries and substantial international real interest rate differentials a dynamic exchange economy is used to show that non traded goods in principle can account for each of these phenomena in the theory there is a close relation between fluctuations in consumption ratios and those in bilateral real exchange rates but we find little evidence for this relation in time series data for eight oecd countries

the new keynesian transmission mechanism a heterogenous agent perspective we present a tractable heterogeneous agent version of the new keynesian model that allows us to study the interaction between inequality and monetary policy though formulated as a precautionary saving model a la huggett aiyagari its reduced form is a two agent model with a highly concentrated wealth distribution when prices are sticky and wages flexible as in the textbook representative agent model monetary policy affects the distribution of consumption but has no effect on output as workers choose not to change their hours worked in response to wage movements this highlights a transmission mechanism of the textbook model that we find implausible in response to a monetary stimulus the representative worker s labor supply is greatly affected by the profits she receives first the lower profits induced by higher wages raise labor supply through a wealth effect and secondly the mere presence of profits reduces the negative income effect of a wage rise when wages are rigid in contrast our model exhibits plausible responses of output and hours worked to monetary policy shocks

are low interest rates deflationary a paradox of perfect foresight analysis we argue that an influential neo fisherian analysis of the effects of low interest rates depends on using perfect foresight equilibrium analysis under circumstances where it is not plausible for people to hold expectations of that kind we propose an explicit cognitive process by which agents may form their expectations of future endogenous variables perfect foresight is justified by our analysis as a reasonable approximation in some cases but in the case of a commitment to maintain a low nominal interest rate for a long time our reflective equilibrium implies neither neo fisherian conclusions nor implausibly strong predicted effects of forward guidance

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

labor market reforms and the monetary policy environment abstract do labor market reforms initiated in periods of loose monetary policy yield different outcomes from those that were introduced in periods when monetary tightening prevailed the answer to this question is a firm yes we document the vital role of accommodative monetary policy for an increase in unemployment benefits spending on active labor market policies and labor market deregulation to boost growth and reduce unemployment it was found that if interest rates cannot be reduced then unemployment benefits should be lowered a more rigid labor market it was further found can deliver expansionary effects especially during the crisis period

temptation and forward guidance abstract motivated by the extensive experimental and empirical evidence on preference reversal in consumption choices we introduce temptation with self control preferences into a new keynesian model to study the effects of forward guidance in monetary policy and the related forward guidance puzzle in our set up the representative agent faces a trade off between the temptation for immediate satisfaction liquidate wealth with his long run best smooth consumption which he manages by exerting cognitive effort or self control for higher risk aversion in temptation than in commitment utility there is discounting in the linearized euler equation the latter makes the response of current real activity to the announcement of a future policy change declining in the forward guidance horizon which then helps solving the puzzle our framework delivers testable aggregate and policy implications that distinguish it from alternative microfoundations for discounting in the euler equation previously used to solve the puzzle

the savers spenders theory of fiscal policy the macroeconomic analysis of fiscal policy is usually based on one of two canonical models the barro ramsey model of infinitely lived families or the diamond samuelson model of overlapping generations this paper argues that neither model is satisfactory and suggests an alternative in the proposed model some consumers plan ahead for themselves and their descendants while others live paycheck to paycheck this model is easier to reconcile with the essential facts about consumer behavior and wealth accumulation and it yields some new and surprising conclusions about fiscal policy

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

banking on currency forecasts how predictable is change in money abstract the paper examines the predictive performance of four structural exchange rate models using both parametric and nonparametric techniques error correction versions of the models are fit so that plausible long run elasticities can be imposed on the fundamental variables of each model a variety of model evaluation statistics are reported our findings confirm that fundamental exchange rate models forecast no better than a random walk model for short term prediction horizons for longer horizons error correction terms can explain exchange rate movements significantly better than a no change forecast for a subset of the models and currencies we consider

german wage moderation and european imbalances feeding the global var with theory german labor market reforms in the 1990s and 2000s are generally believed to have driven the large increase in the dispersion of current account balances in the euro area we investigate this hypothesis quantitatively we develop a 3 region open economy new keynesian model with search and matching frictions from which we derive robust sign restrictions for wage bargaining and matching efficiency shocks which we term wage moderation shocks we impose these restrictions on a global var consisting of germany and 8 emu countries to identify a wage moderation shock in germany our results show that although the german current account was significantly affected by wage moderation shocks their contribution to european current account imbalances was negligible we conclude that the german labor market reforms cannot be the lone driver of european imbalances

job uncertainty and deep recessions abstract we study a model where households are subject to uninsurable unemployment risk price setting is subject to nominal rigidities and the labor market is characterized by matching frictions and inflexible wages higher risk of job loss and worsening job finding prospects during unemployment depress goods demand because of a precautionary savings motive lower goods demand reduces job vacancies and the job finding rate producing an amplification mechanism due to endogenous countercyclical income risk amplification derives from the combination of incomplete financial markets and frictional goods and labor markets the model can account for key features of the great recession

the risk free rate in heterogeneous agent incomplete insurance economies abstract why has the average real risk free interest rate been less than one percent the question is motivated by the failure of a class of calibrated representative agent economies to explain the average return to equity and risk free debt i construct an economy where agents experience uninsurable idiosyncratic endowment shocks and smooth consumption by holding a risk free asset i calibrate the economy and characterize equilibria computationally with a borrowing constraint of one year s income the resulting risk free rate is more than one percent below the rate in the comparable representative agent economy

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