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Risk Loving and Fat Tails in the Wealth Distribution
We study the dynamic properties of the wealth distribution in an overlapping generations model with warm-glow bequests and heterogeneous attitudes towards risk. Some dynasties of agents are risk averters, and others are risk lovers. Agents can invest in two types of Lucas trees. The two types of trees are symmetric in the sense that one type has a high return in states where the other has a return of zero. This symmetry allows risk averters to perfectly ensure their future income and eliminates aggregate uncertainty in the model. Furthermore, risk lovers take extreme portfolio positions, ...
Working Paper
Finite-Order VAR Representation of Linear Rational Expectations Models: With Some Lessons for Monetary Policy
This paper considers the characterization via finite-order VARs of the solution of a large class of linear rational expectations (LRE) models. I propose a unified approach that uses a companion Sylvester equation to check the existence and uniqueness of a solution to the canonical (first-order) LRE model in finite-order VAR form and a quadratic matrix equation to characterize it decoupling the backward- and forward-looking aspects of the model. I also investigate the fundamentalness of the shocks recovered. Solving LRE models by this procedure is straightforward to implement, general in its ...
Working Paper
Monetary Policy and Macroeconomic Stability Revisited
A large literature with canonical New Keynesian models has established that the Fed's policy change from a passive to an active response to inflation led to U.S. macroeconomic stability after the Great Inflation of the 1970s. We revisit this view by estimating a staggered price model with trend inflation using a Bayesian method that allows for equilibrium indeterminacy and adopts a sequential Monte Carlo algorithm. {{p}} The model empirically outperforms a canonical New Keynesian model and demonstrates an active response to inflation even in the Great Inflation era, during which the U.S. ...
Working Paper
Inflation Gap Persistence, Indeterminacy, and Monetary Policy
Empirical studies have documented that the persistence of the gap between inflation and its trend declined after the Volcker disinflation. Previous research into the source of the decline has offered competing views while sidestepping the possibility of equilibrium indeterminacy. This paper examines the source by estimating a medium-scale DSGE model using a Bayesian method that allows for indeterminacy. The estimated model shows that the Fed's change from a passive to an active policy response to the inflation gap or a decrease in firms' probability of price change can fully account for the ...
Working Paper
A Generalized Approach to Indeterminacy in Linear Rational Expectations Models
We propose a novel approach to deal with the problem of indeterminacy in Linear Rational Expectations models. The method consists of augmenting the original state space with a set of auxiliary exogenous equations to provide the adequate number of explosive roots in presence of indeterminacy. The solution in this expanded state space, if it exists, is always determinate, and is identical to the indeterminate solution of the original model. The proposed approach accommodates determinacy and any degree of indeterminacy, and it can be implemented even when the boundaries of the determinacy region ...
Working Paper
A Matter of Perspective: Mapping Linear Rational Expectations Models into Finite-Order VAR Form
This paper considers the characterization of the reduced-form solution of a large class of linear rational expectations models. I show that under certain conditions, if a solution exists and is unique, it can be cast in finite-order VAR form. I also investigate the conditions for the VAR form to be stationary with a well-defined residual variance-covariance matrix in equilibrium, for the shocks to be recoverable, and for local identification of the structural parameters for estimation from the sample likelihood. An application to the workhorse New Keynesian model with accompanying Matlab ...
Working Paper
Solving for Optimal Simple Rules in Rational-Expectations Models
This paper presents techniques to solve for optimal simple monetary policy rules in rational expectations models, assuming discretion. The techniques described are notable for the flexibility they provide over the structure of the policy rule being solved for. Specifically, not all state variables need enter the policy rule allowing rules optimal conditional on a given information set to be easily constructed. The algorithms described are compared to related solution methods, and applied to the model in Clarida, Gali, and Gertler (1999).
Working Paper
Global Dynamics in a Search and Matching Model of the Labor Market
We study global and local dynamics of a simple search and matching model of the labor market. We show that the model can be locally indeterminate or have no equilibrium at all, but only for parameterizations that are empirically implausible. In contrast to the local results, we show that the model exhibits chaotic and periodic dynamics for reasonable parameter values both in backward and forward time. In contrast to earlier work, we establish these results analytically without placing numerical restrictions on the parameters.
Working Paper
Revisiting Risky Money
Risk was first incorporated into monetary aggregation over thirty-five years ago,using a stochastic version of the workhorse money-in-the-utility-function model.Nevertheless, the mathematical foundations of this stochastic model remain shaky.To firm the foundations, this paper employs a slightly richer probability conceptthan standard Borel-measurability, which enables me to prove the existence of awell-behaved solution and to derive stochastic Euler equations. This measurabilityapproach is long-established albeit less common in economics, possibly because the derivation of stochastic Euler ...
Working Paper
Organizational Equilibrium with Capital
This paper proposes a new equilibrium concept - organizational equilibrium - for models with state variables that have a time inconsistency problem. The key elements of this equilibrium concept are: (1) agents are allowed to ignore the history and restart the equilibrium; (2) agents can wait for future agents to start the equilibrium. We apply this equilibrium concept to a quasi-geometric discounting growth model and to a problem of optimal dynamic fiscal policy. We find that the allocation gradually transits from that implied by its Markov perfect equilibrium towards that implied by the ...