new perspectives on capital sticky prices and the taylor principle abstract our main result is that dynamic new keynesian dnk models with firm specific capital feature a substantial amount of endogenous price stickiness we use this insight to assess the desirability of alternative interest rate rules and make the case for combining active monetary policy with interest rate smoothing and or some responsiveness of the nominal interest rate to real economic activity the key mechanism behind our results is also useful from a positive point of view the feature of firm specific capital increases the empirical appealingness of dnk models as documented by a growing body of literature

investment and interest rate policy abstract the paper s theorems reverse two standard results of new keynesian economics simply by appending endogenous investment to a benchmark imperfect competition sticky price model our results are a a passive interest rate rule where the monetary authority responds to inflation by lowering the real interest rate implies local equilibrium uniqueness whereas an active rule does not generate a locally unique equilibrium b a temporary exogenous increase in the nominal interest rate causes a temporary increase in output and investment extensions of the benchmark model including generalized preferences and alternative interest rate rules are also examined journal of economic literature classification numbers e12 e31 e52

money and market incompleteness in overlapping generations models abstract this paper investigates the extent to which the character of equilibria in stochastic overlapping generations models stems from the model s generic market incompleteness in addition it addreses the question of whether money serves to complete markets in these models we show that money does not complete markets in the sense of expanding the set of state contingent commodities that an individual may trade the introduction of money effects state contingent transfers of wealth between individuals this is a generalization of a result obtained by marshall sonstelie and gilles 1987 numerical simulation of the model suggests that the risk sharing induced in the monetary economy leads to substantial increases in welfare levels relative to the nonmonetary economy

pareto improving social security reform when financial markets are incomplete this paper studies an overlapping generations model with stochastic production and incomplete markets to assess whether the introduction of an unfunded social security system leads to a pareto improvement when returns to capital and wages are imperfectly correlated a system that endows retired households with claims to labor income enhances the sharing of aggregate risk between generations our quantitative analysis shows that abstracting from the capital crowding out effect the introduction of social security represents a pareto improving reform even when the economy is dynamically efficient however the severity of the crowding out effect in general equilibrium tends to overturn these gains

funded pensions and intergenerational and international risk sharing in general equilibrium we explore intergenerational and international risk sharing in a general equilibrium multiple country model with two tier pensions systems the exact design of the pension system is key for the way in which risks are shared over generations the laissez faire market solution fails to provide an optimal allocation because the young cannot share in the financial risks however the existence of wage indexed bonds combined with a pension system with a fully funded second tier that pays defined wage indexed benefits can reproduce the first best if wage indexed bonds are not available mimicking the first best is not possible except under special circumstances we also explore whether national pension funds want to deviate from the first best by increasing domestic equity holdings with wage indexed bonds this incentive is absent while there is indeed such an incentive when wage indexed bonds do not exist

optimal portfolio choice for long horizon investors with nontradable labor income this paper examines how risky labor income and retirement affect optimal portfolio choice with idiosyncratic labor income risk the optimal allocation to stocks is unambiguously larger for employed investors than for retired investors consistent with the typical recommendations of investment advisors increasing idiosyncratic labor income risk raises investors willingness to save and reduces their stock portfolio allocation towards the level of retired investors positive correlation between labor income and stock returns has a further negative effect and can actually reduce stockholdings below the level of retired investors financial advisors typically recommend that their customers invest more in stocks than in safe assets when they are working and to shift their investments towards safe assets when they retire jagannathan and kocherlakota 1996 malkiel 1996 by contrast the standard academic models of portfolio choice merton 1969 1971 samuelson 1969 show that retirement is irrelevant for portfolio decisions if investment opportunities are constant and human capital is tradable in this case the fraction of wealth optimally invested in risky assets should be constant over the lifetime of an individual recent research building on the pioneering work by merton 1971 shows that time varying investment opportunities result in portfolio rules with an intertemporal hedging component whose magnitude depends on the investment horizon of the investor kim and omberg 1996 balduzzi and lynch 1997 brennan schwartz and lagnado 1997 brandt 1999 campbell and viceira 1999 2001 barberis 2000 with time variation in investment opportunities retirement and death play an instrumental role as events that exogenously fix the individual s investment horizon more importantly retirement also marks the time at which individuals stop working and thereafter must live off their lifetime savings and possibly transfers from this perspective retirement matters for portfolio choice

a new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the business cycle abstract this paper introduces a general procedure for decomposition of non stationary time series into a permanent and transitory component allowing both components to be stochastic the permanent component is shown to be a random walk with drift and the transitory or cyclical component is a stationary process with mean zero the decomposition methodology which depends only on past data and therefore is computable in real time is applied to the problem of measuring and dating business cycles in the portwar u s economy we find that measured expansions and contractions are of roughly equivalent duration and that our dating of cyclical episodes tends to lead the traditional nber dating and to a lesser extent the growth cycle chronology of zarnowitz and boschan 1977

new measures of the output gap based on the forward looking new keynesian phillips curve abstract forward looking versions of the new keynesian phillips curve imply that the output gap the deviation of the actual output from its natural level due to nominal rigidities drives the dynamics of inflation relative to expected inflation we exploit this to set up a bivariate unobserved component model for extracting new estimates of the output gap in the us the gap estimates are large and persistent even after allowing for correlated trend and cycle shock we then augment our model to use the information in the unemployment rate the estimates confirm the presence of a large and persistent cyclical component

the design of monetary and fiscal policy a global perspective abstract we study the emergence of multiple equilibria in models with capital and bonds under various monetary and fiscal policies we show that the presence of capital is indeed another independent source of local and global multiplicities even under active policies that yield local determinacy we also show how a very similar mechanism generates multiplicities in models with bonds and distortionary taxation we then explore the design of monetary policies that avoid multiple equilibria we show that interest rate policies that respond to the output gap while potentially a source of significant inefficiencies may be effective in preventing multiple equilibria and costly oscillatory equilibrium dynamics

price indexation habit formation and the generalized taylor principle abstract we prove that the generalized taylor principle under which the nominal interest rate reacts more than one for one to a change in inflation in the long run is a necessary and under some extra mild restrictions on parameters sufficient condition for determinacy in a sticky price model with interest rate smoothing in monetary policy partial dynamic price indexation and habit formation in consumption

asset prices and consumption in a model of perpetual youth i construct a general equilibrium overlapping generations model with heterogeneous agents and obtain analytical solutions to asset prices consumption and asset demands individuals have constant absolute risk aversion and a constant probability of dying agents have three stages in their lives in the first stage agents are young and constrained from investing in stocks in the second stage they work and in the third they retire i analyze asset prices numerically and with comparative statics changing any exogenous parameter has large effects on asset prices when there are large demographic changes to the population constrained from investing in stocks

learning about monetary policy rules abstract we study macroeconomic systems with forward looking private sector agents and a monetary authority that is trying to control the economy through the use of a linear policy feedback rule we use stability under recursive learning a la evans and honkapohja learning and expectations in macroeconomics princeton university press princeton new jersey 2001 as a criterion for evaluating monetary policy rules in this context we find that considering learning can alter the evaluation of alternative policy rules

money and redistribution revisionist notes on a problem of samuelson abstract this paper disputes the view that money remedies a friction of overlapping generations its arguments are based upon the numerical example of samuelson 1958 it shows that there is a one to one mapping from equilibria in a system of complete timeless markets to the sequential equilibria usually studied friction is absent in that sense further monetary injection is not unique in converting inefficiency to efficiency the same conversion is possible in markets for consumption loans the common factor of both conversions is redistribution of wealth prior to trade such redistributions correspond to redistributions of numeraire in complete timeless markets

forecasting output gaps in the g 7 countries the role of correlated innovations and structural breaks trend gdp and output gaps play an important role in fiscal and monetary policy formulation often including the need for forecasts in this article we focus on forecasting trend gdp and output gaps with beveridge nelson trend cycle decompositions trend cycle decompositions and investigate how these are affected by assumptions concerning correlated innovations and structural breaks we evaluate expanding window one step ahead forecasts indirectly for the g 7 countries on the basis of real gdp growth rate forecasts we find that correlated innovations affect real gdp growth rate forecasts positively while allowing for structural breaks works for some countries but not for all in the face of uncertainty the evidence supports that in making forecasts of trends and output gap policy makers should focus on allowing for the correlation of shocks as an order of priority higher than unknown structural breaks

is it one break or ongoing permanent shocks that explains u s real gdp the relative importance of permanent versus cyclical shocks to gdp has been found to depend on the presence or absence of a single break in mean growth we estimate unobserved components models conditional on a trend break having occurred in any specified quarter and use the bayesian model averaging to combine the conditional estimates we estimate a break occurred around 2006 1 allowing for a break significantly reduces estimates of trend variance however enough spread remains in the posterior distribution to indicate that available data does not definitively settle the question of the relative importance of trend versus cycle

policy regimes policy shifts and u s business cycles abstract using an estimated dsge model with monetary and fiscal policy interactions and allowing for equilibrium indeterminacy we find that a passive monetary and passive fiscal policy regime prevailed in the pre volcker period this gave rise to self fulfilling beliefs and unconventional transmission mechanisms of policy shifts unanticipated increases in interest rates increased inflation and output while unanticipated increases in lump sum taxes decreased inflation and output we show that had the monetary policy regime of the post volcker era been in place pre volcker inflation volatility would have been lower by 25 and the rise of inflation in the 1970s would not have occurred

intergenerational risksharing and equilibrium asset prices in the presence of overlapping generations a social security system with contingent taxes and benefits can affect both asset prices and intergenerational risksharing in a simple model with two risky factors of production human capital owned by the young and physical capital owned by all older generations a social security system that optimally shares risks exposes future generations to a share of the risk in physical capital such a system reduces precautionary saving and increases the riskbearing capacity of the economy under plausible conditions it increases the riskless interest rate and lowers the price and risk premium of physical capital

let s take a break trends and cycles in us real gdp abstract trend cycle decompositions for us real gdp such as the unobserved components models the beveridge nelson decomposition the hodrick prescott filter and others yield very different cycles which bear little resemblance to the nber chronology ascribes much movements to the trend leaving little to the cycle and some imply a negative correlation between the noise to the cycle and the trend we argue that these features are artifacts created by the neglect of a change in the slope of the trend function once this is accounted for all methods yield the same cycle with a trend that is non stochastic except for a few periods around 1973 the cycle is more important in magnitude than previously reported and it accords well with the nber chronology our results are corroborated using an alternative trend cycle decomposition based on a generalized unobserved components models with errors having a mixture of normals distribution for both the slope of the trend function and the cyclical component

the cyclical component of u s economic activity quarterly data on industrial production and deflated gross national product in the united states from 1947 through 1985 are decomposed into independent nonstationary trend and stationary cycle components using kalman filtering and smoothing techniques estimates of the model parameters imply that at least half of the quarterly innovation in u s economic activity can be attributed to a stationary cyclical component that persists over periods of time as long as five years this finding is inconsistent with the hypothesis that most of the apparent variation in u s economic activity can be attributed to a nonstationary trend component

investment and interest rate policy a discrete time analysis this paper analyzes the restrictions necessary to ensure that the interest rate policy rule used by the central bank does not introduce local real indeterminacy into the economy it conducts the analysis in a calvo style sticky price model a key innovation is to add investment spending to the analysis in this environment local real indeterminacy is much more likely in particular all forward looking interest rate rules are subject to real indeterminacy

firm specific capital nominal rigidities and the taylor principle in the presence of firm specific capital the taylor principle can generate multiple equilibria sveen and weinke new perspectives on capital sticky prices and the taylor principle j econ theory 123 2005 21 39 obtain that result in the context of a calvo style sticky price model one potential criticism is that the price stickiness which is needed for our theoretical result to be relevant from a practical point of view is somewhat to the high part of available empirical estimates in the present paper we show that if nominal wages are not fully flexible which is an uncontroversial empirical fact then the taylor principle fails already for some minor degree of price stickiness we use our model to explain the consequences of both nominal rigidities for the desirability of alternative interest rate rules

does it matter for equilibrium determinacy what price index the central bank targets what inflation rate should the central bank target we address determinacy issues related to this question in a two sector model in which prices can differ in equilibrium we assume that the degree of nominal price stickiness can vary across the sectors and that labor is immobile the contribution of this paper is to demonstrate that a modified taylor principle holds in this environment if the central bank elects to target sector one and if it responds with a coefficient greater than unity to price movements in this sector then this policy rule will ensure determinacy across all sectors the results of this paper have at least two implications first the equilibrium determinacy criterion does not imply a preference to any particular measure of inflation second since the taylor principle applies at the sectoral level there is no need for a taylor principle at the aggregate level