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Working Paper
Rational Bubbles in Non-Linear Business Cycle Models: Closed and Open Economies
This paper studies rational bubbles in non-linear dynamic general equilibrium models of the macroeconomy. The term ‘rational bubble’ refers to multiple equilibria due to the absence of a transversality condition (TVC) for capital. The lack of TVC can be due to an OLG population structure. If a TVC is imposed, the macro models considered here have a unique solution. Bubbles reflect self-fulfilling fluctuations in agents’ expectations about future investment. In contrast to explosive rational bubbles in linearized models (Blanchard (1979)), the rational bubbles in non-linear models here ...
Working Paper
Monetary Tightening, Inflation Drivers and Financial Stress
The paper explores the state–dependent effects of a monetary tightening on financial stress, focusing on a novel dimension: the nature of supply versus demand inflation at the time of policy rate hikes. We use local projections to estimate the effect of high frequency identified monetary policy surprises on a variety of financial stress measures, differentiating the effects based on whether inflation is supply–driven (e.g. due to adverse supply or cost–push shocks) or demand–driven (e.g. due to positive demand factors). We find that financial stress flares up after a policy rate hike ...
Working Paper
Equilibrium Multiplicity in Aiyagari and Krusell-Smith
Repeatedly solving the Aiyagari (1994) model with random parameters, we construct hundreds of examples with multiple stationary equilibria. We never find multiplicity with risk aversion less than ≈ 1.49, depreciation less than ≈ 0.19, or income persistence less than ≈ 0.47, and multiplicity requires a disaster state for income. In cases with multiplicity, the lowest rental rate occurs near depreciation times the capital share. It is possible for the economy, without a change in fundamentals, to transition rationally from a higher-rate equilibrium to one with a lower rental rate, lower ...
Working Paper
The St. Louis Fed DSGE Model
This document contains a technical description of the dynamic stochastic general equilibrium (DSGE) model developed and maintained by the Research Division of the St. Louis Fed as one of its tools for forecasting and policy analysis. The St. Louis Fed model departs from an otherwise standard medium-scale New Keynesian DSGE model along two main dimensions: first, it allows for household heterogeneity, in the form of workers and capitalists, who have different marginal propensities to consume (MPC). Second, it explicitly models a fiscal sector endowed with multiple spending and revenue ...
Working Paper
The Mechanics of Individually- and Socially-Optimal Decisions during an Epidemic
I present a model where work implies social interactions and the spread of a disease is described by an SIR-type framework. Upon the outbreak of a disease reduced social contacts are decided at the cost of lower consumption. Private individuals do not internalize the effects of their decisions on the evolution of the epidemic while the planner does. Specifically, the planner internalizes that an early reduction in contacts implies fewer infectious in the future and, therefore, a lower risk of infection. This additional (relative to private individuals) benefit of reduced contacts implies that ...
Working Paper
How Fast are Semiconductor Prices Falling?
The Producer Price Index (PPI) for the United States suggests that semiconductor prices have barely been falling in recent years, a dramatic contrast to the rapid declines reported from the mid-1980s to the early 2000s. This slowdown in the rate of decline is puzzling in light of evidence that the performance of microprocessor units (MPUs) has continued to improve at a rapid pace. Over the course of the 2000s, the MPU prices posted by Intel, the dominant producer of MPUs, became much stickier over the chips' life cycle. As a result of this change, we argue that the matched-model methodology ...
Journal Article
Aging and Wealth Inequality in a Neoclassical Growth Model
In this article, the author uses a version of the neoclassical growth model with overlapping generations of individuals to investigate the effect of aging on wealth inequality. When an economy?s population becomes older?that is, when the proportion of individuals 65 years of age and older increases?two effects are at work: a direct effect from the changing age composition of the population and an indirect, equilibrium effect from the change in asset holdings by owner?s age. The main result is that wealth inequality in an aging population may decrease or increase depending on the cause of the ...
Journal Article
Economic Activity during the COVID-19 Pandemic: A Model with “Acquired Immunity”
We calibrate a macroeconomic model with epidemiological restrictions using Colombian data. The key feature of our model is that a portion of the population is immune and cannot transmit the virus, which improves substantially the fit of the model to the observed contagion and economic activity data. The model implies that during 2020, government restrictions and the endogenous changes in individual behavior saved around 15,000 lives and decreased consumption by about 4.7 percent. The results suggest that most of this effect was the result of government policies.
Working Paper
Payments on Digital Platforms: Resiliency, Interoperability and Welfare
Digital platforms, such as Alibaba and Amazon, operate an online marketplace to facilitate transactions. This paper studies a platform’s business model choice between accepting cash and issuing tokens, as well as the implications for welfare, resiliency, and interoperability. A cash platform free rides on the existing payment infrastructure and profits from collecting transaction fees. A token platform earns seigniorage, albeit bearing the costs of setting up the system and holding reserves to mitigate the cyber risk. Tokens earn consumers a return, insulating transactions from the ...
Working Paper
The St. Louis Fed DSGE Model
This document contains a technical description of the dynamic stochastic general equilibrium (DSGE) model developed and maintained by the Research Division of the St. Louis Fed as one of its tools for forecasting and policy analysis. The St. Louis Fed model departs from an otherwise standard medium-scale New Keynesian DSGE model along two main dimensions: first, it allows for household heterogeneity, in the form of workers and capitalists, who have different marginal propensities to consume (MPC). Second, it explicitly models a fiscal sector endowed with multiple spending and revenue ...