introduction to dynamic general equilibrium this introduces the symposium on dynamic general equilibrium 2009 elsevier inc all rights reserved jel classification e10 e20 e30

do central bank forecasts influence private agents forecasting performance versus signals focusing on a set of central banks that publish their internal macroeconomic forecasts in real time enables one to shed light on the expectations channel of monetary policy the main contribution of this paper is to assess whether central bank forecasts influence private forecasts the response is positive for inflation forecasts in sweden the uk and japan to disentangle the sources of influence of central banks two concepts are proposed endogenous influence which is due to more accurate central bank forecasts and exogenous influence which is due to central bank signals on either future policy decisions or private information original empirical evidence on the central bank forecasting performance relative to private agents is provided and estimates show that in sweden more accurate inflation forecasts generate specific central bank influence that is different from the influence from signals the publication of forecasts may therefore refer to two central banking strategies that aim to shape private expectations forecasting or policymaking

rationing by waiting and the value of time results from a natural experiment the authors analyze data from a natural experiment with rationing by waiting in the situation motorists were confronted with a choice between waiting in line for low priced gasoline or purchasing at a higher price without waiting they view this as a revealed preference experiment and use their choices to estimate the value of time spent waiting as a function of individual characteristics in most cases the estimates of the value of time are quite similar to individuals after tax wages 13 references 7 tables

implications of consumer heterogeneity in time series estimates of us money demand the money demand function has traditionally been estimated with income and interest rates typically employing quite lengthy time series controversy however surrounds the importance of heterogeneous agents in monetary economics and throughout macroeconomics more generally in particular if proportions of agents with different traits and hence different money demands are changing over time ignoring those changes may bias estimated income and interest elasticities this concern as well as that of appropriate functional form is explored here controlling for consumer heterogeneity has surprising effects on the estimated elasticities of traditional variables

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

experimental evidence on the persistence of output and inflation this article presents experimental evidence from a monetary sticky price economy in which output and inflation depend on expected future inflation rational inflation expectations do not allow for persistent deviations of output and inflation following a monetary shock in the experimental sessions however output and inflation display considerable persistence and regular cyclical patterns

the value of time hypothesis and the demand for money some new evidence for the uk this paper presents some results for a version of the value of time model of the demand for money using uk date the model performs quite well and the value of time hypothesis appears to be confirmed

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

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

fomc forecasts as a focal point for private expectations we explore empirically the theoretical prediction that public information acts as a focal point in the context of the u s monetary policy we aim at establishing whether the publication of federal open market committee fomc inflation forecasts affects the cross sectional dispersion of private inflation expectations our main finding is that publishing fomc inflation forecasts has a negative effect on the cross sectional dispersion of private current year inflation forecasts this effect is found to be robust to another survey data set and to various macroeconomic controls moreover we find that the dispersion of private inflation forecasts is not affected by the dispersion of views among fomc members

lifetime consumption and investment retirement and constrained borrowing retirement flexibility and inability to borrow against future labor income can significantly affect optimal consumption and investment with voluntary retirement there exists an optimal wealth to wage ratio threshold for retirement and human capital correlates negatively with the stock market even when wages have zero or slightly positive market risk exposure consequently investors optimally invest more in the stock market than without retirement flexibility both consumption and portfolio choice jump at the endogenous retirement date the inability to borrow limits hedging and reduces the value of labor income the wealth to wage ratio threshold for retirement and the stock investment

adaptive learning forecast based instrument rules and monetary policy abstract this paper argues that recently popular forecast based instrument rules for monetary policy may fail to stabilize economic fluctuations in a new keynesian model of output gap and inflation determination in which private agents face multi period decision problems but have non rational expectations and learn over time if the monetary authority adopts a forecast based instrument rule and responds to observed private forecasts then this class of policies frequently induce divergent learning dynamics a central bank that correctly understands private behavior can mitigate such instability by responding to the determinants of private forecasts this suggests gathering information on the determinants of expectations to be useful

liquidity traps learning and stagnation we examine global economic dynamics under learning in a new keynesian model in which the interest rate rule is subject to the zero lower bound under normal monetary and fiscal policy the intended steady state is locally but not globally stable large pessimistic shocks to expectations can lead to deflationary spirals with falling prices and falling output to avoid this outcome we recommend augmenting normal policies with aggressive monetary and fiscal policy that guarantee a lower bound on inflation in contrast policies geared toward ensuring an output lower bound are insufficient for avoiding deflationary spirals

the role of unemployment insurance in an economy with liquidity constraints and moral hazard the potential welfare benefits of unemployment insurance along with the optimal replacement ratio are studied using a quantitative dynamic general equilibrium model to provide a role for unemployment insurance agents in our economy face exogenous idiosyncratic employment shocks and are unable to borrow or insure themselves through private markets in the absence of moral hazard replacement ratios as high as 65 are optimal and the welfare benefits of unemployment insurance are quite large however if there is moral hazard and the replacement ratio is not set optimally but is instead set to an empirically plausible value the economy can be much worse off than it would be without unemployment insurance

heterogeneous expectations optimal monetary policy and the merit of policy inertia the design and analysis of optimal monetary policy is usually guided by the paradigm of homogeneous rational expectations instead we examine the dynamic consequences of design and implementation strategies when the actual economy features expectational heterogeneity agents have either rational or adaptive expectations consequently the central bank s ability to achieve price stability under heterogeneous expectations depends on its objective and implementation strategy an expectations based reaction function which appropriately conditions on private sector expectations performs exceptionally well however once the objective introduces policy inertia popular strategies have similar determinacy properties but they are less operational this finding calls for new implementation strategies under interest rate stabilization

saving and investing for early retirement a theoretical analysis we study optimal consumption and portfolio choice in a framework where investors adjust their labor supply through an irreversible choice of their retirement time we show that investing for early retirement tends to increase savings and reduce an agent s effective relative risk aversion thus increasing her stock market exposure contrary to common intuition an investor might find it optimal to increase the proportion of financial wealth held in stocks as she ages and accumulates assets even when her income and the investment opportunity set are constant the model predicts a decrease in risk aversion following strong market gains like those observed in the nineties

scale economies the value of time and the demand for money longitudinal evidence from firms compustat data on 12 000 firms for the years 1961 92 indicate that large firms hold less cash as a percentage of sale than small ones whether comparisons are made within or across industries the clasticity of cash balance with respect to sales is about 0 8 firms headquartered in counties with high wages hold more money for a given level of sales a finding consistent with the idea that time can substitute for mony in the provision of transactions services the estimates are consistent with both scale economies in the holding of money and secular declines in velocity

central bank communication design in a lucas phelps economy abstract in a lucas phelps island economy an island has access to many informative signals about demand conditions each signal incorporates both public and private information the correlation of a signal s realizations across the economy determines its publicity if information sources differ in their publicity then price formation and expectations formation processes separate causing output gaps to open an output stabilizing central bank prefers averagely public information and sometimes limits the clarity of its policy announcements to achieve this the bank s incentive to engage privately in costly information acquisition and transmission is strongest not for the most influential signals but instead for those which drive the largest wedge between prices and expectations signals that are far from averagely public

a new keynesian model with heterogeneous expectations abstract within a new keynesian model we incorporate bounded rationality at the individual agent level and we determine restrictions on expectations operators sufficient to imply aggregate is and as relations of the same functional form as those under rationality this result provides dual implications the strong nature of the restrictions required to achieve aggregation serve as a caution to researchers imposing heterogeneous expectations at an aggregate level may be ill advised on the other hand accepting the necessary restrictions provides for tractable analysis of expectations heterogeneity as an example we consider a case where a fraction of agents are rational and the remainder are adaptive and find specifications that are determinate under rationality may possess multiple equilibria in case of expectations heterogeneity

the value of time and the transactions demand for money this paper reexamines the hypothesis of dean s dutton and william p gramm and edi karni that the wage rate influences the demand for money as a proxy for the value of transactions time it develops value of time transactions models which yield demand for money equations that have a real wage rate argument and compares it to a non value of time alternative that does not the author finds that the value of time models perform well and that the value of time effect is empirically significant copyright 1990 by ohio state university press

on the behavioral and rational foundations of economic dynamics abstract existing uncertainties about the correct explanations for economic growth and business cycles cannot be settled by aggregative analysis within the neoclassical framework current disputes in theory rest largely on ad hoc casually empirical assumptions about departures from perfect rationality under uncertainty such disputes can only be settled by painstaking microeconomic empirical study of human decision making and problem solving microeconomic research of the kinds that are required can receive powerful guidance from the theories of human thinking that have been developed and tested over the past twenty five years by cognitive psychologists

unemployment risks and optimal retirement in an incomplete market we develop a new approach for solving the optimal retirement problem for an individual with an unhedgeable income risk the income risk stems from a forced unemployment event which occurs as an exponentially distributed random shock the optimal retirement problem is to determine an individual s optimal consumption and investment behaviors and optimal retirement time simultaneously we introduce a new convex duality approach for reformulating the original retirement problem and provide an iterative numerical method to solve it reasonably calibrated parameters say that our model can give an explanation for lower consumption and risky investment behaviors of individuals and for relatively higher stock holdings of the poor we also analyze the sensitivity of an individual s optimal behavior in changing her wealth level investment opportunity and the magnitude of preference for postretirement leisure finally we find that our model explains a countercyclical pattern of the number of unemployed job leavers

endogenous adverse selection and unemployment insurance in this paper we consider how the presence of private information may explain the failure of the private sector to provide unemployment insurance in particular we show how the interaction of private information regarding employees preferences for work with the unobservable level of effort exerted on the job may explain the absence of private unemployment insurance we also reflect on the implications of our findings for the role of the public sector in providing unemployment insurance

the declining credit quality of u s corporate debt myth or reality in recent years the number of downgrades in corporate bond ratings has exceeded the number of upgrades leading some to conclude that the credit quality of u s corporate debt has declined however an alternative explanation of this apparent decline in credit quality is that the rating agencies are now using more stringent standards in assigning ratings an ordered probit analysis of a panel of firms from 1978 through 1995 suggests that rating standards have indeed become more stringent implying that at least part of the downward trend in ratings is the result of changing standards bond ratings play a key role in corporate financing and investment decisions a corporation that can issue higher rated bonds usually receives better terms than one that can issue only lower rated bonds by law or policy some investors can purchase only bonds with an investment grade rating a restriction which in some asset pricing models would affect the relative prices of financial assets numerous articles in the popular press have presumed that the credit quality of the debt of u s corporations has been declining over the last couple of decades the comprehensive study by lucas and lonski 1992 of moody s rating changes of corporate debt is consistent with this presumption to cite their statistics in 1970 moody s downgraded 21 issues and upgraded 23 issues but over the following years the number of bonds downgraded began to exceed by substantial margins the number of bonds upgraded and by 1990 moody s downgraded 301 issues and upgraded only 61 their study includes both investment and noninvestment grade bonds but internal data from donaldson lufkin jenrette confirm that this trend also applies to investment grade bonds alone in a somewhat different context grundy 1997 documents similar trends in the ratings of preferred shares over the 1965 to 1990 period as the credit quality of a firm s corporate debt decreases that firm will face a greater probability of financial distress which at the extreme translates into bankruptcy there is some debate as to the effect of financial dis

the retirement consumption puzzle and involuntary early retirement evidence from the british household panel survey this article uses data from the british household panel survey bhps to shed further light on the fall in consumption at retirement the retirement consumption puzzle comparing food spending of men retiring involuntarily early through ill health or redundancy with spending of men who retire voluntarily it finds a significant fall in spending only for those who retire involuntarily this is consistent with the observed fall in spending being linked to a negative wealth shock for some retirees

macroeconomic expectations of households and professional forecasters economists have long emphasized the importance of expectations in determining macroeconomic outcomes yet there has been almost no recent effort to model actual empirical expectations data instead m acroeconomists usually simply assume that expectations are rational this paper shows that while empirical household expectations are not rational in the usual sense expectational dynamics are well captured by a model in which households views derive from news reports of the views of professional forecasters which in turn may be rational the model s estimates imply that people only occasionally pay attention to news reports this inattention generates stickyness in aggregate expectations with important macroeconomic consequences

central bank communication and the liquidity trap central bank communication plays an important role in shaping market participants expectations this paper studies a simple nonlinear model of monetary policy where agents have incomplete information about the economic environment it shows that agents learning and the dynamics of the economy are heavily affected by central bank s transparency about its policy rule a monetary authority that does not communicate its rule can induce learning equilibria where the economy experiences prolonged periods of deflation and slow growth more generally small expectational errors can result in complex economic dynamics inducing welfare reducing fluctuations on the contrary central bank communication helps stabilizing expectations around the inflation target equilibrium

labor supply flexibility and portfolio choice in a life cycle model abstract this paper examines the effect of the labor leisure choice on portfolio and consumption decisions over an individual s life cycle the model incorporates the fact that individuals may have considerable flexibility in varying their work effort including their choice of when to retire given this flexibility the individual simultaneously determines optimal levels of current consumption labor effort and an optimal financial investment strategy at each point in his life cycle we show that labor and investment choices are intimately related the ability to vary labor supply ex post induces the individual to assume greater risks in his investment portfolio ex ante

the demand for currency in the united states the idea of totally deregulating the financial system and implementing monetary policy through currency control has received renewed attention an important aspect concernin g the desirability of using currency as the instrument of policy is t he behavior of the demand for currency this paper investigates the d emand for currency over the period 1921 80 and finds that currency be haves in a systematic and explainable manner over this period copyright 1988 by ohio state university press

the value of time and recent u s money demand instability much controversy has surrounded the u s money demand relationship or more precisely its stability this is rather disappointing in light of the central importance of money demand estimates for the formulation and implementation of effective monetary policy and for almost all theories of aggregate economic activity to date the vast majority of alternative money demand specifications have generally failed to produce a stable money demand function throughout the 1970s and 1980s

a simple recursive forecasting model abstract we compare the performance of alternative recursive forecasting models a simple constant gain algorithm used widely in the learning literature both forecasts well out of sample and also provides the best fit to the survey of professional forecasters

are credit ratings procyclical abstract this paper studies the influence of the state of the business cycle on credit ratings in particular we assess whether rating agencies are excessively procyclical in their assignment of ratings our analysis is based on a model of ratings determination that takes into account factors that measure the business and financial risks of firms in addition to indicators of macroeconomic conditions utilizing annual data on all us firms rated by standard poor s we find that ratings do not generally exhibit excess sensitivity to the business cycle in addition we document that previously reported findings of a secular tightening of ratings standards are not robust to a more complete accounting of systematic changes to measures of risk

optimal retirement with unemployment risks abstract this paper investigates the optimal retirement of an individual in the presence of involuntary unemployment risks and borrowing constraints in a complete market with frictions we use an intensity model and loading factors to illustrate the involuntary unemployment risks and frictions in unemployment insurance markets using reasonably calibrated parameters we observe that high involuntary unemployment intensity and loading factors could be important explanations for the empirical findings emphasized in recent studies we also find that an individual with high leisure demand after retirement reduces consumption during retirement and increases stockholdings as retirement time approaches

a generalization of yaari s result on annuitization with optimal retirement abstract in this paper we generalize the following result of yaari 1965 on annuitization with an agent s optimal retirement it is optimal for individuals to annuitize all of their wealth in the absence of bequest motive we have other results that refine or extend the result of yaari 1965 full annuitization can be viewed as an american type option that allows an economic agent to exchange the value of labor income with the extra leisure that is brought about by annuitizing all of her wealth when the agent s wealth is above a certain wealth threshold annuitization is triggered otherwise it is not accordingly wealth plays a key role in controlling the distance to full annuitization

limited participation and consumption saving puzzles a simple explanation and the role of insurance in this paper we show that the existence of a large negative wealth shock and insufficient insurance against such a shock could explain both the limited stock market participation puzzle and the low consumption high savings puzzle we then conduct an empirical analysis on the relation between household portfolio choices and access to private insurance and various types of government safety nets the empirical results demonstrate that a lack of insurance against large negative wealth shocks is positively correlated with lower participation rates and higher saving rates overall the evidence suggests an important role of insurance in household investment and savings decisions

monetary policy expectations and commitment commitment in monetary policy leads to equilibria that are superior to those from optimal discretionary policies a number of interest rate reaction functions and instrument rules have been proposed to implement or approximate commitment policy we assess these rules in terms of whether they lead to a rational expectations equilibrium that is both locally determinate and stable under adaptive learning by private agents a reaction function that appropriately depends explicitly on private sector expectations performs particularly well on both counts

is there a retirement savings puzzle in this paper we ask whether households are saving enough for their retirement we use data on income expenditure and expenditure components to analyse patterns of behaviour at and around the time of retirement for successive date of birth cohorts we compare periods of unemployment to periods of retirement and separate expenditures into categories reflecting work related expenditures basic necessities and other goods we find that income typically falls by more at unemployment than retirement but the reverse is true for expenditure we observe falls in expenditure at retirement for all expenditure categories using a stochastic life cycle model including mortality rates we assess the anticipated impact of retirement on consumption against that of unemployment the inter relationship between goods and leisure explains a large part of the persistent fall in expenditure at retirement we argue that the only way in which the life cycle hypothesis could be reconciled with the remaining unanticipated dip in consumption would be with the systematic arrival of unexpected adverse information at the time of retirement