Search Results
Working Paper
Nonlinear adventures at the zero lower bound
Motivated by the recent experience of the U.S. and the Eurozone, the authors describe the quantitative properties of a New Keynesian model with a zero lower bound (ZLB) on nominal interest rates, explicitly accounting for the nonlinearities that the bound brings. Besides showing how such a model can be efficiently computed, the authors found that the behavior of the economy is substantially affected by the presence of the ZLB. In particular, the authors document 1) the unconditional and conditional probabilities of hitting the ZLB; 2) the unconditional and conditional probabilty distributions ...
Working Paper
Dealing with consumer default: bankruptcy vs. garnishment
What are the positive and normative implications of eliminating bankruptcy protection for indebted individuals? Without bankruptcy protection, creditors can collect on defaulted debt to the extent permitted by wage garnishment laws. The elimination lowers the default premium on unsecured debt and permits low-net-worth individuals suffering bad earnings shocks to smooth consumption by borrowing. There is a large increase in consumer debt financed essentially by super-wealthy individuals, a modest drop in capital per worker, and a higher frequency of consumer default. Average welfare rises by 1 ...
Briefing
Mortgage Spreads and the Yield Curve
Mortgage spreads — the 30-year mortgage fixed rate minus the 10-year Treasury rate — have a history of increasing sharply in times of economic stress. While often viewed as a measure of financial stress, I argue they are mostly explained by changes in expected mortgage duration arising from changes in the yield curve. Economic stress leads to a downward-sloping yield curve, which increases expected refinance activity, shortening mortgage durations. This shorter duration makes mortgages prices reflect short (rather than long) Treasury rates. But with a downward-sloping yield curve, this ...
Briefing
Tracking College Tuition Growth
Previous research analyzed the rapid tuition growth that occurred from the late 1980s to 2010. That research indicates that several key factors drove the rise in college tuition: large expansions in the federal student loan program, a dramatic increase in the college-earnings premium, steady increases in average parental income, and state support of public schools that did not keep pace with tuition. Where that analysis stops, this analysis begins, showing that tuition growth slowed markedly from 2010 to 2022. We highlight several factors contributing to this pivot, interpreting those factors ...
Working Paper
Incarceration, Earnings, and Race
Briefing
Do Student Loans Drive Up College Tuition?
To what extent do student loans drive up college tuition? In ongoing research, we find the answer has varied substantially over time. Following large expansions in student loan limits in 1993 and 2007, our results show further increases in loan limits would have essentially zero effect. In contrast, in the years before those expansions, our estimates indicate tuition would have increased $0.10 for every $1 increase in borrowing limits.
Working Paper
Efficient Computation with Taste Shocks
Taste shocks result in nondegenerate choice probabilities, smooth policy functions, continuous demand correspondences, and reduced computational errors. They also cause significant computational cost when the number of choices is large. However, I show that, in many economic models, a numerically equivalent approximation may be obtained extremely efficiently. If the objective function has increasing differences (a condition closely tied to policy function monotonicity) or is concave in a discrete sense, the proposed algorithms are O(n log n) for n states and n choice--a drastic improvement ...
Briefing
GameStop, AMC and the Self-Fulfilling Beliefs of Stock Buyers
The recent stock market gyrations of GameStop and AMC Entertainment illustrate that companies' fates can sometimes hinge on self-fulfilling beliefs. Pessimistic expectations can raise the specter of bankruptcy, while optimistic expectations can allow for survival and eventual success. We show how it is sometimes possible for small coalitions of buyers — such as those that formed on the online forum Reddit — to tip the balance in favor of an optimistic scenario. By doing so, a coalition can reap large profits and fundamentally improve a company's prospects.
Journal Article
Computing Dynamic Heterogeneous-Agent Economies: Tracking the Distribution
Theoretical formulations of dynamic heterogeneous-agent economies typically include a distribution as an aggregate state variable. This paper introduces a method for computing equilibrium of these models by including a distribution directly as a state variable if it is finite-dimensional or a fine approximation of it if it is infinite-dimensional. The method accurately computes equilibrium in an extreme calibration of Huffman's (1987) overlapping-generations economy where quasi-aggregation, the accurate forecasting of prices using a small state space, fails to obtain. The method also ...