Search Results
Working Paper
Optimal Credit Market Policy
We study optimal credit market policy in a stochastic, quantitative, general equilibrium, infinite-horizon economy with collateral constraints tied to housing prices. Collateral constraints yield a competitive equilibrium that is Pareto inefficient. Taxing housing in good states and subsidizing it in recessions leads to a Pareto-improving allocation for borrowers and savers. Quantitatively, the welfare gains afforded by the optimal tax are significant. The optimal tax reduces the covariance of collateral prices with consumption, and, by doing so, it increases asset prices on average, thus ...
Working Paper
Corporate Debt Maturity and Business Cycle Fluctuations
Long-term debt is the main source of firm-financing in the U.S. We show that accounting for debt maturity is crucial for understanding business cycle dynamics. We develop a macroeconomic model with defaultable long-term debt and equity adjustment costs. With long-term debt, firms have an incentive to increase leverage in order to dilute the value of outstanding debt. When equity issuance is costly, this incentive helps firms raise more debt through a debt dilution channel and mitigates the decline in net worth through a balance sheet channel, dampening the decline in investment in response to ...
Working Paper
The International Spillovers of Synchronous Monetary Tightening
We use historical data and a calibrated model of the world economy to study how a synchronous monetary tightening can amplify cross-border transmission of monetary policy. The empirical analysis shows that historical episodes of synchronous tightening are associated with tighter financial conditions and larger effects on economic activity than asynchronous ones. In the model, a sufficiently large synchronous tightening can disrupt intermediation of credit by global financial intermediaries causing large output losses and an increase in sacrifice ratios, that is, output lost for a given ...
Working Paper
Trade policies and fiscal devaluations
Fiscal devaluations—an increase in import tariffs and export subsidies (IX) or an increase in value-added taxes and payroll subsidies (VP)—have been shown to provide as much stimulus under fixed exchange rates as a currency devaluation. We find that if agents expect policies to be reversed and the tax pass-through is large, VP is contractionary and IX provides a modest boost. In our medium-scale DSGE model, both features are crucial in accounting for Germany’s underperformance in response to VP in 2007. These findings cast doubt on fiscal devaluations as a cyclical stabilization tool ...
Working Paper
Global Flight to Safety, Business Cycles, and the Dollar
We develop a two-country macroeconomic model that we fit to a set of aggregate prices and quantities for the U.S. and the rest of the world. In addition to a standard array of shocks, the model includes time variation in agents’ preference for safe bonds. We allow for a component of this time variation to be common across countries and biased toward dollar-denominated safe assets, and refer to this component as global flight to safety (GFS). We find that GFS shocks are the most important shocks driving world business cycles, and are also important drivers of activity in the U.S. and ...
Discussion Paper
Does Trade Policy Uncertainty Affect Global Economic Activity?
In this note, we first document the recent rise in trade policy uncertainty, henceforth TPU, by using two complementary measures based on text-search analysis: one focusing on newspapers articles, and another constructed from transcripts of firms' earning calls. We then use econometric evidence on the joint movements in aggregate TPU, industrial production, and other macroeconomic variables in order to provide an estimate of the effects of the recent spikes in TPU on U.S. GDP, as well as GDP in advanced foreign economies (AFEs) and emerging market economies (EMEs).
Working Paper
The Macroeconomic Effects of Trade Policy
We study the short-run macroeconomic effects of trade policies that are equivalent in a friction-less economy, namely a uniform increase in import tariffs and export subsidies (IX), an increase in value-added taxes accompanied by a payroll tax reduction (VP), and a border adjustment of corporate pro.t taxes (BAT). Using a dynamic New Keynesian open-economy framework, we summarize conditions for exact neutrality and equivalence of these policies. Neutrality requires the real exchange rate to appreciate enough to fully offset the effects of the policies on net exports. We argue that a ...