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Report
Shotgun Wedding: Fiscal and Monetary Policy
This paper describes interactions between monetary and fiscal policies that affect equilibrium price levels and interest rates by critically surveying theories about (a) optimal anticipated inflation, (b) optimal unanticipated inflation, and (c) conditions that secure a “nominal anchor” in the sense of a unique price level path. We contrast incomplete theories whose inputs are budget-feasible sequences of government issued bonds and money with complete theories whose inputs are bond-money strategies described as sequences of functions that map time t histories into time t government ...
Working Paper
Drifts and volatilities: monetary policies and outcomes in the post WWII U.S.
For a VAR with drifting coefficients and stochastic volatilities, the authors present posterior densities for several objects that are of interest for designing and evaluating monetary policy. These include measures of inflation persistence, the natural rate of unemployment, a core rate of inflation, and "activism coefficients" for monetary policy rules. Their posteriors imply substantial variation of all of these objects for post WWII U.S. data. After adjusting for changes in volatility, persistence of inflation increases during the 1970s then falls in the 1980s and 1990s. Innovation ...
Discussion Paper
Monetary and fiscal policy in a two-sector aggregative model
Working Paper
Time Averaging Meets Labor Supplies of Heckman, Lochner, and Taber
We add endogenous career lengths to the Heckman, Lochner, and Taber (1998a) (HLT) model with its credit markets and within-period labor supply indivisibilities, all of which are essential features of Ljungqvist and Sargent (2006) “time-averaging.” A benchmark social security system puts all workers at corner solutions of their retirement decisions. That lets our model reproduce most outcomes in HLT’s model with its inelastic labor supply and mandatory retirement date for all types of workers. Eight types of workers are indexed by pairs of innate abilities and choices of education ...
Working Paper
Identification and estimation of a model of hyperinflation with a continuum of "sunspot" equilibrium
This paper constructs a model with two structural equations: the Government budget constraint and a linear version of Cagan's portfolio balance equation. The model contains a continuum of equilibria with "sunspot equilibria." Closed forms for the solutions are found. Even though there is a continuum of equilibria, the model is overidentified econometrically, so that the model restricts time series data on price levels and currency stocks. We describe how the free parameters of the model can be estimated, including some parameters that serve to index particular members of the continuum of ...
Working Paper
Managing expectations and fiscal policy
This paper studies an optimal fiscal policy problem of Lucas and Stokey (1983) but in a situation in which the representative agent's distrust of the probability model for government expenditures puts model uncertainty premia into history-contingent prices. This situation gives rise to a motive for expectation management that is absent within rational expectations and a novel incentive for the planner to smooth the shadow value of the agent's subjective beliefs to manipulate the equilibrium price of government debt. Unlike the Lucas and Stokey (1983) model, the optimal allocation, tax rate, ...
Working Paper
The ends of four big inflations