Search Results
Working Paper
What about Japan?
As a result of the BoJ's large-scale asset purchases, the consolidated Japanese government borrows mostly at the floating rate from households and invests in longer-duration risky assets to earn an extra 3% of GDP. We quantify the impact of Japan's low-rate policies on its government and households. Because of the duration mismatch on the government balance sheet, the government's fiscal space expands when real rates decline, allowing the government to keep its promises to older Japanese households. A typical younger Japanese household does not have enough duration in its portfolio to ...
Working Paper
What about Japan?
As a result of the Bank of Japan's large-scale asset purchases, the consolidated Japanese government borrows mostly at the floating rate from households and invests in longer-duration risky assets to earn an more than 3% of GDP in expectation. We quantify the impact of Japan's low-rate policies on its government and households. Because of the duration mismatch on the government balance sheet, the government's fiscal space expands when real rates decline, allowing the government to keep its promises to older Japanese households. A typical younger Japanese household does not have enough ...
Journal Article
Aggregate returns to scale: why measurement is imprecise
The extent to which there are aggregate returns to scale at the level of aggregate production has important implications both for the types of shocks generating business cycles and for optimal policy. However, prior attempts to measure the extent of these returns using instrumental variable techniques have yielded quite imprecise estimates. In this article, we show that the production shocks implied by a range of returns to scale that encompasses both large increasing returns and large decreasing returns are almost identical. This makes clear that there is a fundamental reason for the ...
Report
Reputation with multiple relationships: reviving reputation models of debt
A traditional explanation for why sovereign governments repay debts is that they want to keep a good reputation so they can easily borrow more. Bulow and Rogoff have challenged this explanation. They argue that, in complete information models, government borrowing requires direct legal sanctions. We argue that, in incomplete information models with multiple trust relationships, large amounts of government borrowing can be supported by reputation alone.
Report
Self-fulfilling debt crises
We characterize the values of government debt and the debt's maturity structure under which financial crises brought on by a loss of confidence in the government can arise within a dynamic, stochastic general equilibrium model. We also characterize the optimal policy response of the government to the threat of such a crisis. We show that when the country's fundamentals place it inside the crisis zone, the government is motivated to reduce its debt and exit the crisis zone because this leads to an economic boom and a reduction in the interest rate on the government's debt. We show that this ...
Journal Article
The macroeconomic effects of world trade in financial assets
This article analyzes some of the potential effects of increased international financial integration within a simple two-country model. In the model, the article considers a switch in the menu of internationally traded financial securities from bonds to complete contingent claims and examines the impact of this switch on the stochastic properties, including the cross-country correlations, of standard macroeconomic aggregates like output, consumption, and labor effort, as well as the trade balance.
Report
The role of institutions in reputation models of sovereign debt
A standard explanation for why sovereign governments repay their debts is that they must maintain a good reputation to easily borrow more. We show that the ability of reputation to support debt depends critically on the assumptions made about institutions. At one extreme, we assume that bankers can default on payments they owe to governments. At the other, we assume that bankers are committed to honoring contracts made with governments. We show that if bankers can default, then a government gets enduring benefits from maintaining a good relationship with bankers and its reputation can support ...
Working Paper
What about Japan?
Over the last decade, the Japanese public sector has primarily borrowed at floating rates while investing in longer-duration risky assets, earning an annual return exceeding 6% of GDP above its funding costs. We quantify the impact of Japan’s low-rate policies on its government and households. The government duration mismatch expands fiscal space when real rates fall, helping the government fulfill promises to older households. A typical younger Japanese household does not have enough duration in its portfolio to continue to finance its spending plan and will be worse off. Low-rate policies ...
Report
Efficient non-contractible investments
This paper addresses the question of whether agents will invest efficiently in attributes that will increase their productivity in subsequent matches with other individuals. We present a two-sided matching model in which buyers and sellers make investment decisions prior to a matching stage. Once matched, the buyer and seller bargain over the transfer price. In contrast to most matching models, preferences over possible matches are affected by decisions made before the matching process. We show that if bargaining respects the existence of outside options (in the sense that the resulting ...
Journal Article
Incorporating concern for relative wealth into economic models
This article develops a simple model that captures a concern for relative standing, or status. This concern is instrumental, in the sense that individuals do not get utility directly from their relative standing, but, rather, the concern is induced because their relative standing affects their consumption of standard commodities. The article investigates the consequences of a concern for relative wealth in models in which individuals are making labor/leisure decisions. The analysis shows how individuals' decisions are affected by the aggregate income distribution and how the concern for ...