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Journal Article
Pension systems and aggregate shocks
The U.S. Social Security Trust Fund faces depletion over the coming decades, and there is a near consensus that social security reform is necessary. Under one suggestion for partial privatization, current surpluses would fund private, individual retirement accounts, and the private savings would make up for future benefit cuts. ; Moving away from social security, however, causes some people to point toward excessive risks associated with private savings. But social security cannot be completely riskless either because its long-term viability depends on such volatile factors as productivity ...
Journal Article
How resilient is the modern economy to energy price shocks?
While many empirical economists claim that energy price shocks drive U.S. business cycles, economists using dynamic stochastic general equilibrium (DSGE) models believe that business cycles are caused mainly by productivity shocks. ; The authors reconcile the two views by constructing a DSGE model that incorporates energy use into the production function. Calibrating the model properties to match annual U.S. data from 1970 to 2005, they undertake two different experiments. The first incorporates a negative correlation between energy prices shocks and productivity as observed before 1985, and ...
Journal Article
Macroeconomic models with heterogeneous agents and housing
The housing sector?s important role in the U.S. economy is hard to miss: Real estate held in household portfolios in 2004 was worth $17 trillion, and the mortgage market now totals more than $7.5 trillion. ; To understand how this sector and related government policies affect households and the economy, economists attempt to incorporate housing and housing finance into heterogeneous agent models?macroeconomic models that capture the economic and demographic diversity among households. This article provides a progress report on this line of research via a discussion of four papers, presented ...
Journal Article
Equity home bias: Can information cost explain the puzzle?
Most stock market investors believe that the ideal equity portfolio should be well diversified to lower overall portfolio risk. International financial markets offer a means for diversification, but most investors do not exploit this risk-sharing opportunity and instead hold large shares of their portfolios in domestic stocks-a tendency called home bias. ; To measure how severe home bias is, the author introduces a method of quantifying it. A simple asset allocation model is used to determine the shadow cost of foreign investment-that is, the perceived annual cost of foreign equity necessary ...
Working Paper
What determines the output drop after an energy price increase: household or firm energy share?
During the past thirty-five years, energy use as a fraction of output has dropped significantly at both the household and the firm levels. Therefore, we investigate a dynamic stochastic generalized equilibrium model economy's response to an energy price hike for different firm and household energy shares. Simulation results indicate that the economy's output response is mainly determined by the firm energy share. Increasing the household energy share while keeping firm energy share constant actually decreases the output response.
Working Paper
Home bias in financial markets: robust satisficing with info gaps
The observed patterns of equity portfolio allocation around the world are at odds with predictions from a capital asset pricing model (CAPM). What has come to be called the ?home-bias? phenomenon is that investors tend to hold a disproportionately large share of their equity portfolio in home country stocks as compared with predictions of the CAPM. This paper provides an explanation of the home-bias phenomenon based on information-gap decision theory. The decision concept that is used here is that profit is satisficed and robustness to uncertainty is maximized rather than expected profit ...
Working Paper
Productivity, energy prices, and the Great Moderation: a new link
We study how total factor productivity (TFP), energy prices, and the Great Moderation are linked. First we estimate a joint stochastic process for the energy price and TFP and establish that until the second quarter of 1982, energy prices negatively affected productivity. This spillover has since disappeared. Second, we show that within the framework of a dynamic stochastic general equilibrium model, the disappearance of this energy-productivity spillover generates the significantly lower volatility of output and its components. Specifically, the change in the joint stochastic process ...
Working Paper
Private international debt with risk of repudiation
The risk of repudiation plays a central role in the size and nature of international capital flows. In this paper the author addresses the question of whether, in a world of international capital flows with risk of default, strategic externalities provide a rationale for regulation of international borrowing. The author models centralized arrangements of international debt in which only governments borrow and lend internationally and decentralized arrangements in which individuals have access to international markets. The author shows that a centralized setup allows more international risk ...
Working Paper
Energy price shocks and the macroeconomy: the role of consumer durables
So far, the literature on dynamic stochastic general equilibrium models with energy price shocks uses energy on the production side only. In these models, energy shocks are responsible for only a negligible share of output fluctuations. We study the robustness of this finding by explicitly modeling private consumption of energy at the household level in addition to energy use at the firm level to account for total energy use in the economy. Additionally, we distinguish between investment in consumer durables and investment in capital goods. The model economy is calibrated to match total ...
Working Paper
U.S. tax policy and health insurance demand: can a regressive policy improve welfare?
The U.S. tax policy on health insurance is regressive because it favors only those offered group insurance through their employers, who tend to have a relatively high income. Moreover, the subsidy takes the form of deductions from the progressive income tax system, giving high-income earners a larger subsidy. To understand the effects of the policy, we construct a dynamic general equilibrium model with heterogenous agents and an endogenous demand for health insurance. We use the Medical Expenditure Panel Survey to calibrate the process for income, health expenditures, and health insurance ...