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

growth miracles and failures in a markov switching classification model of growth abstract in this paper economic growth is interpreted as a sequence of transitions between distinct growth regimes that countries visit with different frequencies countries featuring similar growth dynamics are endogenously grouped into three different clusters the first cluster comprises successful countries that are characterized by lengthy periods of high or very high growth moderately successful countries in the second cluster experience both periods of reasonable growth and periods of stagnation whereas failing countries in the third cluster suffer from highly volatile growth rates with frequent episodes of crisis successful countries are characterized by better initial conditions policies and institutions compared to the other countries neither initial conditions nor institutions distinguish moderately successful from failing countries what makes them different is policy in the form of investments into infrastructure and human capital trade liberalization and limited policy volatility

the forward fiscal guidance puzzle and a resolution abstract the forward fiscal guidance puzzle pertains to new keynesian models when monetary policy is temporarily caught in a liquidity trap 1 expected future fiscal shocks have an unbelievably large effect on current inflation and 2 the effect on current inflation is larger the further out is the shock expected to occur we illustrate the problem analytically then we use blue chip inflation forecasts to argue that the effects on inflation expectations should be small and finally we analyze two potential resolutions to the puzzle the first is the fiscal theory of the price level in a calibrated model with price inertia investment and long term debt we show that the fiscal theory resolves the second aspect of the puzzle but certainly not the first in our preferred resolution we return to a ricardian fiscal policy and we assume that the probability of a return to the taylor rule depends on the rate of inflation the model s predictions are in line with the evidence from the blue chip forecasts this article is part of a special issue entitled fiscal and monetary policies

the quantitative analytics of the basic neomonetarist model this paper constructs a dynamic macroeconomic model with less than perfect price flexibility which has a classical side consistent with real business cycle theory augmented by investment adjustment costs increasing returns to scale and a new flexible formalization of imperfect competition something akin to the classical dichotomy is justified by a mode of approximation appropriate for a model in which one state variable adjusts quickly while another state variable adjusts slowly even with investment adjustment costs monetary expansions are found to raise the real interest rate the determinants of real rigidity and the macroeconomic rate of price adjustment are investigated copyright 1995 by ohio state university press

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

dampened expectations in the phillips curve a note abstract dampened inflation expectations have a significant impact on the new keynesian phillips curve this dampening not only flattens the long run phillips curve but it can also lead to a bias in the estimation of its short run slope it also affects the response of a small nk model to demand shocks and affects the optimal monetary policy in particular the price targeting result of the ramsey policy is violated when there is dampening

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

managing expectations instruments vs targets should policymakers offer forward guidance in terms of a path for an instrument such as interest rates or a target for an outcome such as unemployment we study how the optimal approach depends on a departure from rational expectations people have a limited understanding of the behavior of others and of the general equilibrium ge effects of policy the bite of such bounded rationality on implementability and welfare is minimized by target based guidance if and only if ge feedbacks are strong enough this offers a rationale for why central banks should shine the spotlight on unemployment when faced with a prolonged liquidity trap a steep keynesian cross or a large financial accelerator

are supply shocks contractionary at the zlb evidence from utilization adjusted tfp data abstract the basic new keynesian model predicts that positive supply shocks are less expansionary at the zero lower bound zlb compared to periods of active monetary policy we test this prediction empirically using fernald s 2014 utilization adjusted total factor productivity series which we take as a measure of exogenous productivity in contrast to the predictions of the model positive productivity shocks are estimated to be more expansionary at the zlb compared to normal times we find that there is no significant difference in the response of expected inflation to a productivity shock at the zlb compared to normal times

bounds on elasticities with optimization frictions a synthesis of micro and macro evidence on labor supply how can price elasticities be identified when agents face optimization frictions such as adjustment costs or inattention i derive bounds on structural price elasticities that are a function of the observed effect of a price change on demand the size of the price change and the degree of frictions the degree of frictions is measured by the utility losses agents tolerate to deviate from the frictionless optimum the bounds imply that frictions affect intensive margin elasticities much more than extensive margin elasticities i apply these bounds to the literature on labor supply the utility costs of ignoring the tax changes used to identify intensive margin labor supply elasticities are typically less than 1 of earnings as a result small frictions can explain the differences between micro and macro elasticities extensive and intensive margin elasticities and other disparate findings pooling estimates from existing studies i estimate a hicksian labor supply elasticity of 0 33 on the intensive margin and 0 25 on the extensive margin after accounting for frictions

consumer spending and the economic stimulus payments of 2008 abstract we measure the change in household spending caused by receipt of the economic stimulus payments of 2008 using questions added to the consumer expenditure survey and variation from the ran

attenuating the forward guidance puzzle implications for optimal monetary policy abstract we examine the implications of less powerful forward guidance for optimal policy using a sticky price model with an effective lower bound elb on nominal interest rates as well as a discounted euler equation and a discounted phillips curve when the private sector agents discount future economic conditions more in making their decisions today a future rate cut becomes less effective in stimulating current economic activity under a wide range of plausible degrees of discounting it is optimal for the central bank to compensate for the reduced effect of a future rate cut by keeping the policy rate at the elb for longer

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

comment on the limits of forward guidance by jeffrey r campbell filippo ferroni jonas d m fisher and leonardo melosi abstract this note discusses the article the limits of forward guidance by jeffrey r campbell filippo ferroni jonas d m fisher and leonardo melosi the authors make an excellent contribution to the literature on solving the forward guidance puzzle by proposing that central bank communication is imperfect noisy and thus announcements of the monetary policy stance many periods ahead have a limited impact on agents decisions by estimating a rich dsge model using a wide set of us data including interest rate futures they quantify the precision of the fed s communication we show that estimating a linear model without explicitly accounting for the elb constraint may lead to biased results that overstate the imperfections of central bank communication

animal spirits risk premia and monetary policy at the zero lower bound abstract in this paper we investigate the risk related effects of monetary policy in normal times as well as in periods where the zero lower bound zlb binds in a stylized macroeconomic model with boundedly rational beliefs in our model financial market participants use heuristics to assess the risk premium over the policy rate in accordance to an implicit taylor rule that measures the stance of conventional monetary policy and which serves as an informative instrument during times when the funds rate is constrained by the zlb in such a case conventional monetary policy is exhausted so that the central bank is forced to use unconventional types of policy we propose alternative monetary policy measures to help the economy out of the liquidity trap which take into account this assumed form of bounded rationality

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

monetary news shocks we pursue an empirical strategy to identify a monetary news shock in the u s economy we use a monetary policy residual along with other variables in a vector autoregression var and identify a monetary news shock as the linear combination of reduced form innovations that is orthogonal to the current residual and that maximizes the sum of contributions to its forecast error variance over a finite horizon real gdp declines in a persistent manner after a positive monetary news shock this contraction in economic activity is accompanied by a fall in inflation and a rapid increase in the nominal interest rate

the incidence and persistence of corruption in economic development abstract economic development and bureaucratic corruption are determined jointly in a dynamic general equilibrium model of growth bribery and tax evasion corruption arises from the incentives of public and private agents to conspire in the concealment of information from the government these incentives depend on aggregate economic activity which in turn depends on the incidence of corruption the model produces multiple development regimes transition between which may or may not occur in accordance with recent empirical evidence the relationship between corruption and development is predicted to be negative

forward guidance communication commitment or both abstract forward guidance has been suggested as a form of commitment odyssean by the policymaker or as a way of conveying information delphic i analyze the interaction between households and the central bank as a game in which the central bank sends messages without private information the set of equilibrium payoffs is independent of any announcements pure odyssean forward guidance is redundant with private information communication can have social value forward guidance is well suited to leverage preexisting credibility to communicate a central bank s private information about its own preferences or beliefs

pegging the interest rate on bank reserves a resolution of new keynesian puzzles and paradoxes abstract introducing bank reserves or money into the basic new keynesian nk model offers a resolution of nk puzzles and paradoxes the resulting models deliver local equilibrium determinacy under an exogenous interest rate on reserves and an exogenous nominal stock of reserves even for an arbitrarily small monetary friction this leads to a resolution of the forward guidance puzzle the fiscal multiplier puzzle and the paradox of flexibility as the monetary friction becomes vanishingly small the models converge to the basic nk model and serve to select a particular equilibrium of that model which also offers a resolution of the paradox of toil

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

self fulfilling debt crises what can monetary policy do this paper examines the potential for monetary policy to avoid self fulfilling sovereign debt crises we combine a version of the slow moving debt crisis model proposed by lorenzoni and werning 2014 with a standard new keynesian model monetary policy could preclude a debt crisis through raising inflation and output and lowering the real interest rate these reduce the real value of outstanding debt and the cost of new borrowing and increase tax revenues and seigniorage we determine the optimal path of inflation required to avoid a self fulfilling debt crisis stronger price rigidity implies more sustained inflation

the reaction of household consumption to predictable changes in social security taxes the key implication of rational expectations and the basic life cycle permanent income hypothesis that predictable changes in income have no effect on the growth rate of consumption expenditures is examined this implication is important for understanding the effectiveness and optimal timing of fiscal policy the causes and propagation of business cycles and the effects of income fluctuations on the growth rate of the economy using household level consumption data from the consumer expenditure survey whether expenditures on nondurable goods increase contemporaneously with predictable changes in social security tax withholding is tested it is found that households do change their consumption expenditures in response to the predictable fluctuations in income induced by the social security tax system

forward guidance and the role of central bank credibility under heterogeneous beliefs abstract this paper studies the macroeconomic effects of central bank forward guidance when central bank credibility is endogenous we take a stylized new keynesian model with an occasionally binding effective lower bound constraint on nominal interest rates and heterogeneous and boundedly rational households central bank forecasts follow a bivariate var not taking into account the time variation in the distribution of aggregate expectations in this framework we extend the central bank s toolkit to allow for the publication of its own forecasts delphic guidance and the commitment to a future path of the nominal interest rate odyssean guidance we find that both delphic and odyssean forward guidance increase the likelihood of recovery from a liquidity trap even though odyssean guidance alone appears more powerful in inducing recovery we find it to increase ex post macroeconomic volatility and thus reduce welfare

evaluating central banks tool kit past present and future abstract we develop a structural dsge model to systematically study the principal tools of unconventional monetary policy quantitative easing qe forward guidance and negative interest rate policy nirp as well as the interactions between them to generate the same output response the requisite nirp and forward guidance interventions are twice as large as a conventional policy shock which seems implausible in practice in contrast qe via an endogenous feedback rule can alleviate the constraints on conventional policy posed by the zero lower bound quantitatively qe1 qe3 can account for two thirds of the observed decline in the shadow federal funds rate in spite of its usefulness qe does not come without cost a large balance sheet has consequences for different normalization plans the efficacy of nirp and the effective lower bound on the policy rate

evaluating the macroeconomic effects of the ecb s unconventional monetary policies we quantify the macroeconomic effects of the european central bank s unconventional monetary policies using a dynamic stochastic general equilibrium model which includes a set of shadow interest rates extracted from the yield curve these shadow rates provide unconstrained measures of the overall stance of monetary policy counterfactual analyses show that without unconventional measures the euro area would have suffered i a substantial loss of output since the great recession and ii a period of deflation from mid 2015 to early 2017 specifically year on year inflation and gdp growth would have been on average about 0 61 and 1 09 below their actual levels over the period 2014q1 17q2 respectively

trade as a threshold variable for multiple regimes abstract this paper employs the data sorting method developed by hansen econometrica 68 2000 575 which allows the data to endogenously select regimes using different variables it is shown that openness as measured by the trade share to gdp is a threshold variable that can cluster middle income countries into two distinct regimes that obey different statistical models our result suggests that openness may not be as crucial in the growth process of low and high income countries but it is instrumental in identifying middle income countries into high and low growth groups

monetary policy announcements and expectations evidence from german firms abstract we assess empirically whether monetary policy announcements impact firm expectations two features of our data set are key first we rely on a survey of production and price expectations of german firms that is expectations of actual price setters second we observe the day on which firms submit their answers to the survey we compare the responses of firms before and after monetary policy surprises and obtain two results first firm expectations respond to policy surprises second the response becomes weaker as the surprise becomes bigger a contractionary surprise of moderate size reduces firm expectations while a moderate expansionary surprise raises them large surprises both negative and positive fail to alter expectations consistent with this result we find that many of the ecb s announcements of non conventional policies did not affect expectations significantly overall our results are consistent with the notion that monetary policy surprises generate an information effect which is endogenous to the size of the policy surprise

a further look at the propagation of monetary policy shocks in hank we provide quantitative guidance on whether and to what extent different elements of heterogeneous agent new keynesian hank models amplify or dampen the response of aggregate consumption to a monetary policy shock we emphasize four findings first the introduction of capital adjustment costs does not affect the aggregate response but does change the transmission mechanism so that a larger share of indirect effects originates from equity prices rather than from labor income second incorporating estimated unequal incidence functions for aggregate labor income fluctuations leads to either amplification or dampening depending on the data and estimation methods third distribution rules for monopoly profits that allocate a larger share to liquid assets lead to greater amplification fourth assumptions about the fiscal reaction to a monetary policy shock have a stronger effect on the aggregate consumption response than any of the other three elements

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

solving the incomplete markets model with aggregate uncertainty using the krusell smith algorithm and non stochastic simulations abstract this article describes the approach to computing the version of the stochastic growth model with idiosyncratic and aggregate risk that relies on collapsing the aggregate state space down to a small number of moments used to forecast future prices one innovation relative to most of the literature is the use of a non stochastic simulation routine

the effects of monetary policy news and surprises there is substantial agreement in the monetary policy literature over the effects of exogenous monetary policy shocks the shocks that are investigated however almost exclusively represent unanticipated changes in policy which surprise the private sector and which are typically found to have a delayed and sluggish effect on output in this paper we estimate a new keynesian model that incorporates news about future policies to try to disentangle the anticipated and unanticipated components of policy shocks the paper shows that the conventional estimates confound two distinct effects on output an effect due to unanticipated or surprise shocks which is smaller and more short lived than the response usually obtained in the literature and a large delayed and persistent effect due to anticipated policy shocks or news news shocks play a larger role in influencing the business cycle than unanticipated policy shocks although the overall fraction of economic fluctuations that can be attributed to monetary policy remains limited

central bank communication and monetary policy a survey of theory and evidence over the last two decades communication has become an increasingly important aspect of monetary policy these real world developments have spawned a huge new scholarly literature on central bank communication mostly empirical and almost all of it written in this decade we survey this ever growing literature the evidence suggests that communication can be an important and powerful part of the central bank s toolkit since it has the ability to move financial markets to enhance the predictability of monetary policy decisions and potentially to help achieve central banks macroeconomic objectives however the large variation in communication strategies across central banks suggests that a consensus has yet to emerge on what constitutes an optimal communication strategy

estimating the effects of forward guidance in rational expectations models abstract simulations of forward guidance in rational expectations models should be assessed using the modest policy interventions framework introduced by eric leeper and tao zha that is the estimated effects of a policy intervention should be considered reliable only if that intervention is unlikely to trigger a revision in private sector beliefs about the way that monetary policy will be conducted i show how to constrain simulations of forward guidance to ensure that they are regarded as modest policy interventions and illustrate the technique using a medium scale dsge model estimated on us data i find that many experiments that generate the large responses of macroeconomic variables deemed implausible by many economists the so called forward guidance puzzle are not modest policy interventions those experiments should therefore be treated with caution since they may prompt agents to believe that there has been a change in the monetary policy regime that is not accounted for within the model more reliable results can be obtained by constraining the experiment to be a modest policy intervention in the cases i study the quantitative effects on macroeconomic variables are more plausible when this constraint is imposed

household heterogeneity and the transmission of foreign shocks abstract we study the role of heterogeneity in the transmission of foreign shocks we build a heterogeneous agent new keynesian small open model economy hanksome that experiences a current account reversal households portfolio composition and the extent of foreign currency borrowing are key determinants of the magnitude of the contraction in consumption associated with a sudden stop in capital inflows the contraction is more severe when households are leveraged and owe debt in foreign currency in this setting the revaluation of foreign debt causes a larger contraction in aggregate consumption when debt and leverage are concentrated among poorer households closing the output gap via an exchange rate devaluation may therefore be detrimental to household welfare due to the heterogeneous impact of the foreign debt revaluation our hanksome framework can rationalize the observed fear of floating in emerging market economies even in the absence of contractionary devaluations

real balance effects and monetary policy i introduction modern literature on monetary policy rules employs new keynesian optimizing models that do not explicitly include monetary aggregates see e g rotemberg and woodford 1997 clarida et al 1999 taylor 1999 in these models the demand for output derives from the log linearization of the standard euler equation characterizing household s saving decisions the real money stock does not enter the is relation and therefore monetary policy affects output and inflation only through its effect on the real interest rate when the nominal interest rate is the policy instrument it is not necessary to specify a money market equilibrium condition see romer 2000 the practice of neglecting monetary aggregates in monetary policy analysis has recently been questioned by meltzer 1999 mccallum 2001 and nelson 2002 2003 in particular mccallum 2001 points out that although no explicit term involving money appears in the standard new keynesian setup long run inflation can still be pinned down by the economy steady state nominal money growth rate moreover mccallum 2000 2001 andres et al 2001 kremer et al 2003 woodford 2003 ireland 2004a and collard and dellas 2005 analyze the case in which the resources used by consumers in conducting transactions are modeled by a nonseparable function of consumption and real money balances meltzer 1999 2001 argues that changes in real monetary base generate effects on real aggregate demand not summarized by the real interest rate on short term securities nelson 2003 emphasizes the role of money in the transmission mechanism both as a proxy for a whole spectrum of rates of return and as an indicator variable which contains information about the state of the economy the main aim of the present article is to provide additional microfoundations for an explicit role for money in the current macroeconomic debate in particular i derive a real balance effect that explicitly enters the is relation within an optimizing general equilibrium framework of the new keynesian type according to de scitovszky 1941 haberler 1946 pigou 1943 and patinkin 1965 a change in real money balances has an impact on the real financial wealth of consumers and therefore affects consumption and output notably this effect is not considered in traditional models there is in fact empirical evidence showing that real monetary base growth is a significant determinant of consumption and output gap in both the united states and in the united kingdom see chari et al 1995 meltzer 1999 nelson 2002 the present article extends the dynamic stochastic new keynesian setup with money in the utility function by introducing overlapping generations as modeled by yaari 1965 and blanchard 1985 there are good reasons to base the demand side of the economy on a discrete time stochastic monetary version of the yaari blanchard model first this kind of extension allows one to maintain the main characteristics of the so called new neoclassical synthesis that is forward looking behavior of optimizing agents and incomplete nominal adjustment of prices featured in new keynesian theories goodfriend and king 1997 second the derivation of the real balance effect does not require nonseparability in the utility function thus the implications are analytically more tractable 1 third my framework is more general because it includes the immortal representative agent setup as a particular case my analysis attempts to examine whether the presence of an explicit real balance effect in the is relation helps evaluate the role for money in designing monetary policy rules i focus on basic issues concerning the design of monetary policy rules specifically i investigate whether it is necessary for monetary policy to overreact to inflation by raising the nominal interest rate by more than the observed increase in inflation to rule out equilibrium multiplicity

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

unemployment fears and deflationary spirals the interaction of incomplete markets and sticky nominal wages is shown to magnify business cycles even though these two features in isolation dampen them during recessions fears of unemployment stir up precautionary sentiments which induces agents to save more the additional savings may be used as investments in both a productive asset equity and an unproductive asset money but even a small rise in money demand has important consequences the desire to hold money puts deflationary pressure on the economy which provided that nominal wages are sticky increases wage costs and reduces firm profits lower profits repress the desire to save in equity which increases the fear of unemployment and so on this is a powerful mechanism which causes the model to behave differently from both its complete markets version and a version with incomplete markets but without aggregate uncertainty in contrast to previous results in the literature agents uniformly prefer non trivial levels of unemployment insurance

high frequency identification of monetary non neutrality the information effect we present estimates of monetary non neutrality based on evidence from high frequency responses of real interest rates expected inflation and expected output growth our identifying assumption is that unexpected changes in interest rates in a 30 minute window surrounding scheduled federal reserve announcements arise from news about monetary policy in response to an interest rate hike nominal and real interest rates increase roughly one for one several years out into the term structure while the response of expected inflation is small at the same time forecasts about output growth also increase the opposite of what standard models imply about a monetary tightening to explain these facts we build a model in which fed announcements affect beliefs not only about monetary policy but also about other economic fundamentals our model implies that these information effects play an important role in the overall causal effect of monetary policy shocks on output

income and wealth heterogeneity in the macroeconomy how do movements in the distribution of income and wealth affect the macroeconomy we analyze this question using a calibrated version of the stochastic growth model with partially uninsurable idiosyncratic risk and movements in aggregate productivity our main finding is that in the stationary stochastic equilibrium the behavior of the macroeconomic aggregates can be almost perfectly described using only the mean of the wealth distribution this result is robust to substantial changes in both parameter values and model specification our benchmark model whose only difference from the representative agent framework is the existence of uninsurable idiosyncratic risk displays far less cross sectional dispersion and skewness in wealth than u s data however an extension that relies on a small amount of heterogeneity in thrift does succeed in replicating the key features of the wealth data furthermore this extension features aggregate time series that depart significantly from permanent income behavior

public acceptability of personal carbon trading and carbon tax abstract climate change is one of the greatest challenges confronting the international community requiring action to achieve deep cuts in carbon emissions the implementation of potentially uncomfortable but necessary policy measures is though critically dependent upon public acceptability this paper reports a novel application of stated preference techniques to explore the influence of key design attributes on the acceptability of a personal carbon trading scheme in isolation and when compared to a carbon tax illustrative forecasts from the models developed indicate the importance of design attributes especially the basis of the initial permit allocation for personal carbon trading and the use to which revenues are put for carbon tax results indicate that the best scheme designs could be acceptable to a majority of respondents

estimating four hicksian welfare measures for a public good a contingent valuation investigation using equivalent loss the mone tary loss equivalent to a proposed amenity reduc tion el and equivalent gain the gain equivalent to a proposed amenity increase eg alongside traditional welfare measures in a contingent valu ation study of traffic disamenity we report an ex periment designed to test theoretical explanations of the well known disparity between compensat ing surplus and equivalent surplus measures of welfare no compelling evidence is found in favor of loss aversion as a cause of the disparity mean while as valuation measures the performance of el is similar to the traditional willingness to pay for a gain while eg performs poorly jel q26

the solow model with ces technology nonlinearities and parameter heterogeneity this paper examines whether nonlinearities in the aggregate production function can explain parameter heterogeneity in the solow growth regressions nonlinearities in the production technology are introduced by replacing the commonly used cobb douglas cd aggregated production specification with the more general constant elasticity of substitution ces specification we first justify our choice of production function by showing that cross country regressions favour the ces over the cd technology then by using an endogenous threshold methodology we show that the solow model with ces technology is consistent with the existence of multiple regimes copyright 2004 john wiley sons ltd

openness in services trade and economic growth abstract we examine the relationship between openness in services trade both telecommunication and financial and economic growth via the threshold regression model to test for a differential impact between low and high income countries results confirm the existence of a two regime split

distribution and development in a model of misgovernance abstract this paper presents an analysis of bureaucratic corruption income inequality and economic development the analysis is based on a dynamic general equilibrium model in which bureaucrats are appointed by the government to implement a redistributive programme of taxes and subsidies designed to benefit the poor corruption is reflected in bribery and tax evasion as bureaucrats conspire with the rich in providing false information to the government in accordance with empirical evidence the model predicts a positive relationship between corruption and inequality and a negative relationship between corruption and development

valuing aircraft noise stated choice experiments reflecting inter temporal noise changes from airport relocation the relocation of athens airport provided a rare experimental context in which residents experienced significant changes in noise levels due to the introduction or removal of aircraft noise this paper reports the results from surveys around both airport locations using stated choice experiments to estimate values for aircraft noise the respondents were offered actual inter temporal noise change scenarios rather than hypothetical variations which is uncommon in the literature incorporating the presence or absence of an airport and other relevant transport attributes that also changed with the airport relocation whilst there is some variation in the valuation of the airport closure and opening when these values are adjusted to reflect the actual change in decibels there is remarkably little difference between the old and new airports however a significant variation in aircraft noise values is identified between different areas with respect to education and to a lesser extent income our preferred estimate of the monthly household willingness to pay for terminating aircraft noise exposure is 13 12 and for avoiding the onset of aircraft noise is 9 53

econometric policy evaluation note for successive values of the endogenous variables y with the x treated as deterministic forcing variables here 0 is a parameter vector and the et are random shocks lucas correctly observed that such a formulation is inconsistent with a view of agents as optimizers except in special cases in which the future is irrelevant to present decisions it makes no sense to think of agents as optimizing if they know that their budget constraints are liable to shift arbitrarily i e in a way which is not characterized probabilistically as government policy changes lucas was led to augment the foregoing equation by adding to the system a government policy function

solving heterogeneous agent models by projection and perturbation the paper proposes a numerical solution method for general equilibrium models with a continuum of heterogeneous agents that combines elements of projection and of perturbation methods the basic idea is to solve first for the stationary solution of the model without aggregate shocks but with fully specified idiosyncratic shocks afterwards one computes a first order perturbation of the solution in the aggregate shocks this approach allows to include a high dimensional representation of the cross sectional distribution in the state vector the method is applied to a model of household saving with uninsurable income risk and liquidity constraints techniques are discussed to reduce the dimension of the state space such that higher order perturbations are feasible

preferences over wealth experimental evidence abstract preferences over wealth are a channel to explain why households in the aggregate are less responsive when real interest rates fall following such preferences they save more than would be optimal in a standard model however little is known about preferences over wealth empirically we run an intentionally simple lab experiment on intertemporal spending and saving decisions with 180 students under a positive discount factor zero interest and linear utility maximizing behaviour would imply spending any funds instantaneously while half of the participants behave optimally we find a robust pattern where participants on average form and maintain a stock of wealth consistent with wealth entering the utility function directly

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

monetary policy when households have debt new evidence on the transmission mechanism in response to an unanticipated change in interest rates households with mortgage debt adjust their expenditure signicantly especially on durable goods renters react to a lesser extent and outright home owners do not react at all all housing tenure groups experience a signicant change in disposable income over and above the direct impact on mortgage repayments the response of house prices is sizable driving a signicant adjustment in loanto income ratios but little change in loan to value ratios a simple collateral constraint model augmented with durable goods and a renting decision generates predictions consistent with these novel empirical ndings and suggests that heterogeneity in housing debt positions plays an important role in the transmission of monetary policy

the missing link monetary policy and the labor share the textbook new keynesian nk model implies that the labor share is pro cyclical conditional on a monetary policy shock we present evidence that a monetary policy tightening robustly increased the labor share and decreased real wages and labor productivity during the great moderation period in the us the euro area the uk australia and canada we show that this is inconsistent not only with the basic nk model but with a wide variety of nk models commonly used for monetary policy analysis and where the direct link between the labor share and the markup can be broken down

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

unconventional monetary policy and bank risk taking abstract we analyze the presence of bank risk taking associated with unconventional monetary policy in the united states between 2008 and 2015 using corporate syndicated loan data at the bank firm level we measure monetary policy using the identification through heteroskedasticity approach with a var model to identify the risk taking channel we control for time varying heterogeneity in credit demand and supply our results indicate that accommodating monetary conditions are associated with overall lower loan spreads however the spread reduction is lower for riskier firms suggesting that there is no risk taking behavior in the syndicated loan market during the ump period

changes in the federal reserve communication strategy a structural investigation this paper structurally investigates the changes in the fed s communication strategy since the mid 1990s through the lens of anticipated and unanticipated disturbances to a taylor rule the anticipated disturbances are identified using treasury bond yield data in estimating a dynamic stochastic general equilibrium dsge model with a term structure of interest rates our estimation results show that the fed s decisions were unanticipated for market participants until 1999 but thereafter a larger portion of its future policy actions tended to be communicated in advance we also find that the relative contribution of the anticipated monetary policy disturbances to macroeconomic fluctuations became larger after 1999 the bond yield data is indispensable to these results since it contains crucial information on an expected future path of the federal funds rate

a structural decomposition of the us yield curve abstract by expanding the macro part of macro finance models historical fluctuations in us bond yields turn out to be largely consistent with the rational expectations hypothesis we estimate a medium scale macro finance dsge model of the term structure to establish this our finding contrasts with existing macro finance models and suggests that their small scale or non structural perspective on the macroeconomy mutes expectations thereby underestimating the expectations hypothesis potential out of sample forecasts are competitive with more flexible term structure models given the empirical validation we interpret various episodes through the lens of the model and investigate which structural shocks cause the yield curve to contain information about future growth

do all countries grow alike abstract this paper investigates the driving forces of output change in 77 countries during the period 1970 2000 a flexible modeling strategy is adopted that accounts for i the inefficient use of resources and ii different production technologies across countries the proposed model can identify technical efficiency and input change for each of three endogenously determined regimes membership in these regimes is estimated rather than determined ex ante this framework enables explorations into the determinants of output growth and convergence issues in each regime

communication about future policy rates in theory and practice a survey we discuss the theoretical rationale for central bank communication about future policy rates either as part of inflation targeting or in the form of forward guidance we also summarize both actual central bank communication about future policy rates and empirical evidence on the effectiveness of these types of communication we argue that there is a disconnect between the theory and practice of forward guidance as theory assumes commitment on the part of the central bank while in practice central banks generally do not commit future theoretical research on forward guidance should therefore take the absence of commitment by central banks into account

on the output effects of barriers to trade we study the macroeconomic effects of international trade policy by integrating a hecksher ohlin trade model into an optimal growth framework the model predicts that a more open economy will have higher factor productivity furthermore there is a selective development trap to which countries may or may not converge depending on policy income at the development trap falls as trade barriers increase hence cross country differences in barriers to trade may help explain the dispersion of per capita income observed across countries the effects are quantified and we show that protectionism can explain a relevant fraction of tfp and long run income differentials across countries we study the effects of international trade policy on output to do so we analyze a standard neoclassical growth model where countries can trade intermediate goods the markets of these goods are structured as in the also standard hecksher ohlin trade model thus trade happens owing to comparative advantage which emerges from differences in factor endowments across countries 2 we focus on the case of a small price taking economy one can solve for equilibrium sequentially first each period s output and trade can be treated as a static problem and its solution can be summarized by a mapping from capital and labor to the output of the final good then using that endogenous mapping as if it were an exogenous production function one can solve the intertemporal decisions of agents in the economy in that way a potentially complex dynamic trade problem is avoided it turns out that the equilibrium mapping linking inputs and final output is affected by tariffs as the gains from trade impact not only welfare but also the availability and price of intermediate inputs and hence productivity

macroeconomic stability and the distribution of growth rates it is often argued that macroeconomic instability can form a binding constraint on economic growth drawing on a new index of stability threshold estimation is used to divide developing economies into two growth regimes depending on a threshold level of stability for the more stable group of countries the output benefits of investment are greater conditional convergence is faster and measures of institutional quality have more explanatory power suggesting that instability forms a binding constraint for the less stable group macroeconomic stability is also shown to dominate several other candidates for identifying distinct growth regimes

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

lending effects of the ecb s asset purchases abstract between 2010 and 2012 the european central bank absorbed 218 billion worth of government securities from five emu countries under the securities markets programme smp detailed security holdings data at the bank level affirms an effective lending stimulus due to the smp exposed banks contract household lending but increase commercial lending substantially holding non smp securities from stressed emu countries amplifies the commercial lending response the smp also improved liquidity buffers and profitability without compromising credit quality

valuations of aircraft noise experiments in stated preference the aim of this paper is to report new evidence relating to residents valuations of aircraft noise in three countries with an emphasis on a comparison of the valuations obtained using two contrasting approaches one might be regarded as a standard stated choice approach offering pairwise comparisons of two alternatives characterised by a limited number of attributes the other choice format adopted is innovative in drawing inspiration from the priority evaluator approach to embed aircraft movements alongside a wide range of other local factors that impact on residents quality of life the paper addresses the differences in the results of the two approaches and explores the possible explanations for these variations although not conclusive there is a suspicion that strategic bias may have influenced the results and we urge further research regarding incentives to such bias

can more public information raise uncertainty the international evidence on forward guidance abstract central banks have used different types of forward guidance this paper reports cross country evidence showing that in general forward guidance mutes the response of government bond yields to macroeconomic news however calendar based guidance with a short horizon counter intuitively raises it using a stylized model where agents learn from market signals it shows that the public release of more precise information about future rates lowers the informativeness of market signals and as a consequence may increase uncertainty and amplify the reaction of expectations to macroeconomic news

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

uncovered interest parity forward guidance and the exchange rate under uncovered interest parity uip the size of the effect on the real exchange rate of an anticipated change in real interest rate differentials is invariant to the horizon at which the change is expected empirical evidence using us euro area and uk data points to a substantial deviation from that invariance prediction expectations of interest rate differentials in the near distant future are shown to have much larger smaller effects on the real exchange rate than is implied by uip some possible explanations are discussed