Search Results
Working Paper
The Poverty of Macroeconomics --- What the Chemical Revolution Tells Us about Neoclassical Production Function
Quantitative macroeconomics is often portrayed as a science—because of its intensive use of high-powered mathematics—with the possible limitation of being unable to conduct controlled experiments. To qualify as a science, however, theories in that discipline must meet a minimum number of criteria: (i) It has explanatory power to explain phenomena; (ii) it has predictive power to yield quantifiable and falsifiable statements about new phenomenon; and (iii) it has operational power to change the world. A scientific theory consists of axioms and working hypotheses that facilitate the ...
Working Paper
Attention and a Paradox of Uncertainty
I show that macroeconomic uncertainty during recessions can arise from people paying more attention to aggregate events. When information is dispersed, people's attempts to acquire more information can lead to higher aggregate volatility, forecast dispersion, and uncertainty about aggregate output. Information rigidity is reduced, consistent with evidence in forecast surveys, and distinct from the prediction of exogenous volatility shocks. When the model is calibrated to U.S. data, endogenous attention accounts for half of the observed fluctuations in volatility, forecast dispersion, and ...
Working Paper
Attention and Fluctuations in Macroeconomic Uncertainty
I show that economic agents’ attention to macroeconomic events can increase macroeconomic uncertainty during recessions. Agents face uncertainty about the aggregate state of the economy, receive dispersed information about it, and can pay attention to acquire more information. When the economy is in a bad state, agents choose to pay more attention, and their collective response increases three common measures of uncertainty: (i) aggregate output volatility, (ii) forecast dispersion about output, and (iii) subjective uncertainty about output. Uncertainty driven by agents’ attention implies ...
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
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 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
The Chicago Fed DSGE Model: Version 2
The Chicago Fed dynamic stochastic general equilibrium (DSGE) model is used for policy analysis and forecasting at the Federal Reserve Bank of Chicago. This guide describes its specification, estimation, dynamic characteristics, and how it is used to forecast the U.S. economy. In many respects the model resembles other medium-scale New Keynesian frameworks, but there are several features which distinguish it: the monetary policy rule includes anticipated future deviations, productivity is driven by both neutral and investment specific technical change, multiple price and wage indices identify ...
Working Paper
Credit Search and Credit Cycles
The supply and demand of credit are not always well aligned and matched, as is reflected in the countercyclical excess reserve-to-deposit ratio and interest spread between the lending rate and the deposit rate. We develop a search-based theory of credit allocations to explain the cyclical fluctuations in both bank reserves and the interest spread. We show that search frictions in the credit market can not only naturally explain the countercyclical bank reserves and interest spread, but also generate endogenous business cycles driven primarily by the cyclical utilization rate of credit ...
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 ...