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Speech
The optimal inflation target in an economy with limited enforcement
Presented at Indiana University.
Working Paper
A two-sector model of endogenous growth with leisure externalities
This paper considers the impact of leisure preference and leisure externalities on growth and labor supply in a Lucas [12] type model, as in Gmez [7], with a separable non-homothetic utility and the assumption that physical and human capital are both necessary inputs in both the goods and the education sectors. In spite of the non-concavities due to the leisure externality, the balanced growth path is always unique, which guarantees global stability for comparative-static exercises. We find that small differences in preferences toward leisure or in leisure externalities can generate ...
Journal Article
Monetary policy as equilibrium selection
Can monetary policy guide expectations toward desirable outcomes when equilibrium and welfare are sensitive to alternative, commonly held rational beliefs? This paper studies this question in an exchange economy with endogenous debt limits in which dynamic complementarities between dated debt limits support two Pareto-ranked steady states: a suboptimal, locally stable autarkic state and a constrained optimal, locally unstable trading state. The authors identify feedback policies that reverse the stability properties of the two steady states and ensure rapid convergence to the constrained ...
Journal Article
Discretion, rules and volatility
Working Paper
The optimal inflation target in an economy with limited enforcement
We formulate the central bank's problem of selecting an optimal long-run inflation rate as the choice of a distorting tax by a planner who wishes to maximize discounted utility for a heterogeneous population of infinitely-lived households in an economy with constant aggregate income. Households are divided into cash agents, who store value in currency alone, and credit agents who have access to both currency and loans. The planner's problem is equivalent to choosing inflation and nominal rates consistent with a resource constraint along with an incentive constraint that ensures credit agents ...
Working Paper
Incomplete Credit Markets and Monetary Policy
We study monetary policy when private credit markets are incomplete. The macroeconomy we study has a large private credit market, in which participant households use non-state contingent nominal contracts (NSCNC). A second, small group of households only uses cash, supplied by the monetary authority, and cannot participate in the credit market. There is an aggregate shock. We find that, despite the substantial heterogeneity, the monetary authority can provide for optimal risk-sharing in the private credit market and thus overcome the NSCNC friction via a counter-cyclical price level rule. The ...
Working Paper
Private and public circulating liabilities
Changes in the legal and technological environment in the U.S. have created the possibility of private banknote issue, or its electronic equivalent. We wish to understand the implications of this possibility for economic performance. Accordingly, we construct and analyze a dynamic general equilibrium model in which privately-issued liabilities may circulate, either by themselves, or alongside a stock of outside money. In each case we provide results on the existence and multiplicity of equilibria, and we characterize local dynamics in a neighborhood of a steady state. Our results support ...
Working Paper
Capital misallocation and aggregate factor productivity
We propose a sectoral?shift theory of aggregate factor productivity for a class of economies with AK technologies, limited loan enforcement, a constant production possibilities frontier, and finitely many sectors producing the same good. Both the growth rate and total factor productivity in these economies respond to random and persistent endogenous fluctuations in the sectoral distribution of physical capital which, in turn, responds to persistent and reversible exogenous shifts in relative sector productivities. Surplus capital from less productive sectors is lent to more productive ones in ...
Speech
The optimal inflation target in an economy with limited enforcement
Presented at New Perspectives on Monetary Policy Design. Sponsored by the Bank of Canada and the Centre De Recerca en Economia Internacional. Barcelona, Spain.
Working Paper
Earnings and wealth inequality and income taxation: quantifying the tradeoffs of switching to a proportional income tax in the U.S.
This paper quantifies the steady-state aggregate, distributional, and mobility effects of switching the U.S. to a proportional income tax system.