Search Results
Working Paper
Trading down and the business cycle
The authors document two facts: First, during recessions consumers trade down in the quality of the goods and services they consume. Second, the production of low-quality goods is less labor intensive than that of high-quality goods. Therefore, when households trade down, labor demand falls, increasing the severity of recessions. The authors find that the trading-down phenomenon accounts for a substantial fraction of the fall in U.S. employment in the recent recession. They study two business cycle models that embed quality choice and find that the presence of quality choice magnifies the ...
Working Paper
Affine term structure pricing with bond supply as factors
This paper presents a theoretical model for analyzing the effect of the maturity structure of government debt on the yield curve. It is an ATSM (affine term structure model) in which the factors for the yield curve include, in addition to the short rate, the government bond supply for each maturity. The supply shock is not restricted to be perfectly correlated across maturities. The effect on the yield curve of a bond supply shock that is local to a maturity is largest at the maturity. This hump-shaped response of the yield curve persists in spite of the absence of preferred-habitat investors.
Working Paper
Introducing financial frictions and unemployment into a small open economy model
The current financial crisis has made it abundantly clear that business cycle modeling can no longer abstract from financial factors. It is also clear that the current standard approach of modeling labor markets without explicit unemployment has its limitations. We extend what is becoming the standard new Keynesian model in three dimensions. First, we incorporate financial frictions in the accumulation and management of capital. Second, we model the labor market using a search and matching framework. Third, we extend the model into a small open economy setting. Finally, we estimate the model ...
Working Paper
The great housing boom of China
China's housing prices have been growing nearly twice as fast as national income in the past decade despite (1) a phenomenal rate of return to capital and (2) an alarmingly high vacancy rate. This paper interprets such a prolonged paradoxical housing boom as a rational bubble that emerges naturally from China's large-scale economic transition, featuring an exceptionally high rate of return to capital driven by massive resource reallocation. Because such primarily resource-reallocation-driven high capital returns are not sustainable in the long run, expectations of high future demand for ...
Working Paper
Inflation dynamics during the financial crisis
Firms with limited internal liquidity significantly increased prices in 2008, while their liquidity unconstrained counterparts slashed prices. Differences in the firms' price-setting behavior were concentrated in sectors likely characterized by customer markets. The authors develop a model in which firms face financial frictions while setting prices in a customer-markets setting. Financial distortions create an incentive for firms to raise prices in response to adverse demand or financial shocks. These results reflect the firms' reaction to preserve internal liquidity and avoid accessing ...
Working Paper
Moral hazard, investment, and firm dynamics
We present a dynamic general equilibrium model with heterogeneous firms. Owners of firms delegate investment decisions to managers, whose consumption and investment decisions are private information. We solve the optimal contracts and characterize the implied general equilibrium. Our calibrated model has implications on the cross-sectional distribution and time-series dynamics of firms' investment, managers' compensation, and dividend payout policies. Risk sharing requires that managers' equity shares decrease with firm sizes. That, in turn, implies it is harder to prevent private benefit in ...
Working Paper
Optimal unemployment insurance and cyclical fluctuations
The authors study the design of optimal unemployment insurance in an environment with moral hazard and cyclical fluctuations. The optimal unemployment insurance contract balances the insurance motive to provide consumption for the unemployed with the provision of incentives to search for a job. This balance is affected by aggregate conditions, as recessions are characterized by reductions in job finding rates. We show how benefits should vary with aggregate conditions in an optimal contract. In a special case of the model, the optimal contract can be solved in closed form. We show how this ...
Working Paper
Involuntary unemployment and the business cycle
We propose a monetary model in which the unemployed satisfy the official U.S. definition of unemployment: people without jobs who are (1) currently making concrete efforts to find work and (2) willing and able to work. In addition, our model has the property that people searching for jobs are better off if they find a job than if they do not (that is, unemployment is involuntary). We integrate our model of involuntary unemployment into the simple new Keynesian framework with no capital and use the resulting model to discuss the concept of the nonaccelerating inflation rate of unemployment. We ...
Working Paper
Monetary policy and stock market booms
Historical data and model simulations support the following conclusion: Inflation is low during stock market booms, so an interest rate rule that is too narrowly focused on inflation destabilizes asset markets and the broader economy. Adjustments to the interest rate rule can remove this source of welfare-reducing instability. For example, allowing an independent role for credit growth (beyond its role in constructing the inflation forecast) would reduce the volatility of output and asset prices.
Working Paper
DSGE models for monetary policy analysis
Monetary DSGE models are widely used because they fit the data well and can be used to address important monetary policy questions. We provide a selective review of these developments. Policy analysis with DSGE models requires using data to assign numerical values to model parameters. The paper describes and implements Bayesian moment matching and impulse response matching procedures for this purpose.