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Report
Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime-Switching Approach
We estimate a workhorse dynamic stochastic general equilibrium (DSGE) model with an occasionally binding borrowing constraint. First, we propose a new specification of the occasionally binding constraint, where the transition between the unconstrained and constrained states is a stochastic function of the leverage level and the constraint multiplier. This specification maps into an endogenous regime-switching model. Second, we develop a general perturbation method for the solution of such a model. Third, we estimate the model with Bayesian methods to fit Mexico’s business cycle and ...
Working Paper
Tax Progressivity, Economic Booms, and Trickle-Up Economics
We propose a method to decompose changes in the tax structure into orthogonal components measuring the level and progressivity of taxes. The level shock is similar to tax shocks found in the empirical literature--increasing the tax level is contractionary. On the other hand, an increase in tax progressivity is expansionary. When tax progressivity increases, the bottom of the income distribution experiences an increase in disposable income. Agents at the low end of the income distribution who have high marginal propensity to consume offset the decrease in consumption by the savers at the high ...
Working Paper
Tax Progressivity, Economic Booms, and Trickle-Up Economics
We propose a method to decompose changes in the tax structure into a component measuring the level of taxes and a component orthogonal to the level that measures progressivity. While our focus is on the progessivity results, we find that the level shock is similar to standard tax shocks found in the empirical literature in that a rise in the level is contractionary. An increase in tax progressivity sets off an economic boom. Those at the bottom of the income distribution (who are constrained hand-to-mouth consumers) set off a consumption boom that expands the overall economy. Those at the top ...
Working Paper
Commodity Exports, Financial Frictions and International Spillovers
This paper offers a solution to the international co-movement puzzle found in open-economy macroeconomic models. We develop a small open-economy (SOE) dynamic stochastic general equilibrium (DSGE) model describing three endogenous channels that capture spillovers from the world to a commodity exporter: a world commodity price channel, a domestic commodity supply channel and a financial channel. We estimate our model with Bayesian methods on two commodity-exporting SOEs, namely Canada and South Africa. In addition to explaining international business cycle synchronization, the new model ...
Journal Article
Regional vs. Global: How Are Countries' Business Cycles Moving Together These Days?
Some countries? business cycles are in sync with the world?s, while other countries? cycles follow the ups and downs just of their neighbors?. This regional connection is even more prevalent if a region is defined not by geography but by common cultures and institutions.
Working Paper
Specification and Estimation of Bayesian Dynamic Factor Models: A Monte Carlo Analysis with an Application to Global House Price Comovement
We compare methods to measure comovement in business cycle data using multi-level dynamic factor models. To do so, we employ a Monte Carlo procedure to evaluate model performance for different specifications of factor models across three different estimation procedures. We consider three general factor model specifications used in applied work. The first is a single- factor model, the second a two-level factor model, and the third a three-level factor model. Our estimation procedures are the Bayesian approach of Otrok and Whiteman (1998), the Bayesian state space approach of Kim and Nelson ...
Working Paper
Monetary policy and the house price boom across U.S. states
The authors use a dynamic factor model estimated via Bayesian methods to disentangle the relative importance of the common component in the Office of Federal Housing Enterprise Oversight?s house price movements from state- or region-specific shocks, estimated on quarterly state-level data from 1986 to 2004. The authors find that movements in house prices historically have mainly been driven by the local (state- or region-specific) component. The recent period (2001?04) has been different, however: ?Local bubbles? have been important in some states, but overall the increase in house prices is ...
Working Paper
Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime-Switching Approach
We develop a new approach to estimating DSGE models with occasionally binding borrowing constraints and apply it to Mexico’s business cycle and financial crisis history. We propose a new endogenous regime-switching specification of the borrowing constraint, develop a general perturbation method to solve the model, and estimate it using Bayesian methods. The estimated model fits the data with well-behaved shocks, identifying three crisis episodes of varying duration and intensity: the early-1980s Debt Crisis, the mid-1990s Tequila Crisis, and the late-2000s Global Financial Crisis. The ...
Report
Optimal Policy for Macro-Financial Stability
There is a new and now large literature analyzing government policies for financial stability based on models with endogenous borrowing constraints. These normative analyses build upon the concept of constrained efficient allocation, where the social planner is constrained by the same borrowing limit that agents face. In this paper, we show that the same set of policy tools that implement the constrained efficient allocation can be used by a Ramsey planner to replicate the unconstrained allocation, thus achieving higher welfare. The constrained social planner approach may lead to inaccurate ...