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Working Paper
Policy and welfare effects of within-period commitment
I study the implications of different institutional frameworks for the conduct of fiscal policy, under the assumption that the government cannot commit to future policy choices. The environments analyzed vary on whether the government is endowed with the ability to commit to beginning-of-period policy announcements or not. If it cannot, then there are two variants, depending on which actions private agents take before observing the government?s policy choice. How the three possible cases rank in terms of tax rates and welfare varies substantially with the economy?s fundamentals and whether ...
Journal Article
Lessons from the recent recession: the faster they grow, the harder they fall
U.S. gross domestic product (GDP) contracted significantly and persistently during the recent financial crisis and recession. Lessons can be learned from comparing the U.S. experience with that of other industrialized countries.
Is Inflation on the Way Out or Here to Stay?
An analysis suggests certain economic factors, such as excess savings, and stubborn price increases in services are risks that might delay or potentially reverse the decline in overall inflation.
Working Paper
Fiscal Dominance
Who prevails when fiscal and monetary authorities disagree about the value of public expenditure and how much to discount the future? When the fiscal authority sets debt as its main policy instrument it achieves fiscal dominance, rendering the preferences of the central bank, and thus its independence, irrelevant. When the central bank sets the nominal interest rate it renders fiscal impatience (its debt bias) irrelevant, but still faces its expenditure bias. I find that the expenditure bias is about an order of magnitude more severe than the debt bias and has a major impact on welfare ...
Journal Article
Fiscal policy in the Great Recession and lessons from the past
The recent behavior of key fiscal policy variables draws some parallels with the U.S. experience in the Civil War and the two world wars. A specific concern is the possibility of high inflation to finance the accumulated debt.
Working Paper
Government policy response to war-expenditure shocks
A theory of government policy determination, based on intertemporal distortion-smoothing and limited commitment, matches the set of stylized facts of U.S. wartime policy.
Journal Article
Labor market update
There has been a significant and steady drop in the unemployment rate since late 2009, but unemployment duration remains high and employment as a percentage of the working-age population has not recovered.
Working Paper
Dynamic optimal insurance and lack of commitment
This paper analyzes dynamic risk-sharing contracts between profit-maximizing insurers and risk-averse agents who face idiosyncratic income uncertainty and may self-insure through savings. We study Markov-perfect insurance contracts in which neither party can commit beyond the current period. We show that the limited commitment assumption on the insurer's side is only restrictive when he is endowed with a rate of return advantage and the agent has sufficiently large initial assets. In such a case, the consumption profile is distorted relative to the first-best. In a Markov-perfect equilibrium, ...
Working Paper
Implications of Inflation Dynamics for Monetary Policy Strategies
This paper considers robust monetary policy strategies both in situations of low demand and low inflation and when economic developments pose a tradeoff between inflation and output stabilization. We proceed in two parts. First, our quantitative analysis suggests that asymmetric average inflation targeting can provide modest benefits over other inflation-targeting strategies when the risks associated with the effective lower bound remain significant. Second, motivated by the recent experience of persistent supply shocks and rapid increases in inflation, we describe the main qualitative ...
Journal Article
The U.S. Financial Landscape on the Eve of the Pandemic
During the 2007-08 financial crisis, the Federal Reserve stepped in to prevent a possible panic. How did this affect the U.S. financial system in later years?