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Money and interest rates with endogeneously segmented markets
This paper analyses the effects of open market operations on interest rates in a model in which agents must pay a fixed cost to exchange assets and cash. Asset markets are endogenously segmented in that some agents choose to pay the fixed cost and some do not. When the fixed cost is zero, the model reduces to the standard one in which persistent money injections increase nominal interest rates, flatten the yield curve, and lead to a downward-sloping yield curve on average. In contrast, if markets are sufficiently segmented, then persistent money injections decrease interest rates, steepen or ...
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Time-varying risk, interest rates, and exchange rates in general equilibrium
Under mild assumptions, the data indicate that fluctuations in nominal interest rate differentials across currencies are primarily fluctuations in time-varying risk. This finding is an immediate implication of the fact that exchange rates are roughly random walks. If most fluctuations in interest differentials are thought to be driven by monetary policy, then the data call for a theory which explains how changes in monetary policy change risk. Here we propose such a theory based on a general equilibrium monetary model with an endogenous source of risk variation - a variable degree of asset ...
Working Paper
Mandatory Disclosure and Financial Contagion
This paper analyzes the welfare implications of mandatory disclosure of losses at financial institutions when it is common knowledge that some banks have incurred losses but not which ones. We develop a model that features contagion, meaning that banks not hit by shocks may still suffer losses because of their exposure to banks that are. In addition, we assume banks can profitably invest funds provided by outsiders, but will divert these funds if their equity is low. Investors thus value knowing which banks were hit by shocks to assess the equity of the banks they invest in. We find that when ...
Working Paper
Labor market policies in an equilibrium search model
We explore to what extent differences in employment and unemployment across economies can be generated by differences in labor market policies. We use a version of the Lucas-Prescott equilibrium search model with undirected search and endogenous labor-force participation. Minimum wages, degree of unionization, firing taxes, and unemployment benefits are introduced and their effects analyzed. When the model is calibrated to US observations it reproduces several of the elasticities of employment and unemployment with respect to changes in policies reported in the empirical literature. We find ...
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Banking in computable general equilibrium economies: technical appendices I and II
Following are the technical appendixes for ?Banking in Computable Equilibrium Economies? by Javier Daz-Gimnez, Edward C. Prescott, Terry Fitzgerald, and Fernando Alvarez, in Journal of Economic Dynamics and Control 16 (1992), 533?59. Technical Appendix I, by Fernando Alvarez, describes the procedures used to construct the balance sheets reported in Tables 1 and 2 in page 536 and 537 of the paper. Technical Appendix II, by Terry Fitzgerald, describes the computational procedures used in this paper.
Working Paper
Fixed term employment contracts in an equilibrium search model
Fixed term employment contracts have been introduced in number of European countries as a way to provide flexibility to economies with high employment protection levels. We introduce these contracts into the equilibrium search model in Alvarez and Veracierto (1999), a version of the Lucas and Prescott island model, adapted to have undirected search and variable labor force participation. We model a contract of length J as a tax on separations of workers with tenure higher than J. We show a version of the welfare theorems, and characterize the efficient allocations. This requires solving a ...
Working Paper
Search, self-insurance and job-security provisions
We construct a general equilibrium model to evaluate the quantitative effects of severance payments in the presence of contracting and reallocational frictions. Key elements of the model are: 1) establishment level dynamics, 2) imperfect insurance markets, and 3) variable search decisions. Contrary to previous studies that analyzed severance payments in frictionless environments, we find that severance payments reduce unemployment, produce negative insurance effects and improve levels.
Working Paper
Quantitative asset pricing implications of endogenous solvency constraints
The authors study the asset pricing implications of an economy where solvency constraints are determined to efficiently deter agents from defaulting. The authors present a simple example for which efficient allocations and all equilibrium elements are characterized analytically. The main model produces large equity premia and risk premia for long-term bonds with low risk aversion and a plausibly calibrated income process. The authors characterize the deviations from independence of aggregate and individual income uncertainty that produce equity and term premia.
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The time consistency of monetary and fiscal policies
We show that optimal monetary and fiscal policies are time consistent for a class of economies often used in applied work, economies appealing because they are consistent with the growth facts. We establish our results in two steps. We first show that for this class of economies, the Friedman rule of setting nominal interest rates to zero is optimal under commitment. We then show that optimal policies are time consistent if the Friedman rule is optimal. For our benchmark economy in which the time consistency problem is most severe, the converse also holds: if optimal policies are time ...