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Working Paper
Money and dynamic credit arrangements with private information
The authors construct a model with private information in which consumers write dynamic contracts with financial intermediaries.
Journal Article
Intergenerational linkages and government budget policies
Journal Article
Macroeconomics with frictions
This article is a progress report on research that attempts to include one type of market incompleteness and frictions in macroeconomic models. The focus of the research is the absence of insurance markets in which individual-specific risks may be insured against. The article describes some areas where this type of research has been and promises to be particularly useful, including consumption and saving, wealth distribution, asset markets, business cycles, and fiscal policies. The article also describes work in each of these areas that was presented at a conference sponsored by the Federal ...
Journal Article
Explaining financial market facts: the importance of incomplete markets and transaction costs
In this article, I suggest that incomplete markets and transaction costs are crucial for explaining the high equity premium and the low risk-free rate. I first demonstrate the failure of the complete frictionless markets model in explaining these return puzzles and then show how introducing incomplete markets and transaction costs can lead to success. Additionally, I explain how these features lead to predictions concerning individual consumptions, wealths, portfolios, and asset market transactions that are in better agreement with the facts than the predictions of the complete frictionless ...
Journal Article
How should taxes be set?
Working Paper
Some explorations into optimal cyclical monetary policy
We consider the nature of optimal cyclical monetary policy in three different stochastic models with various shocks. The first is a pure liquidity effect model, the second is a cost of changing prices model, and the third is an optimal seignorage model. In each case we solve for the optimal monetary policy and describe how money growth and interest rates respond to shocks under the optimal policy. The shocks we consider are money demand shocks, productivity shocks, and government consumption shocks. All of the models have the feature that the Friedman rule of setting the nominal interest rate ...
Working Paper
Efficient investment in children
If children are society?s most precious resource, as many would argue, how should we invest in them? To gain insight into this question, the authors develop a dynamic, general-equilibrium model in which children differ by ability. Parents invest time and money in their offspring, depending on their altruism, to help them grow into more productive adults. The authors characterize the efficient allocation, then compare it with the outcome that arises when financial markets are incomplete. They also examine the situation where childcare markets are lacking and analyze the consequences of impure ...
Journal Article
On the contribution of technology shocks to business cycles
This article contends that the various measures of the contribution of technology shocks to business cycles calculated using the real business cycle modeling method are not corroborated. The article focuses on a different and much simpler method for calculating the contribution of technology shocks, which takes account of facts concerning the productivity/labor input correlation and the variability of labor input relative to output. Under several standard assumptions, the method predicts that the contribution of technology shocks must be large (at least 78 percent), that the labor supply ...