Search Results
Working Paper
Specific factors meet intermediate inputs: implications for strategic complementarities and persistence.
A central challenge to monetary business-cycle theory is to find a solution to the problem of persistence and delay in the real effects of monetary shocks. Previous research has identified separately specific factors and intermediate inputs as two promising mechanisms for generating the persistence and delay in a staggered price-setting framework. Models based on either of these two mechanisms have also been used in the design of optimal monetary policy. ; By examining a staggered price model that features both specific factors and intermediate inputs, the author finds an offsetting ...
Working Paper
Optimal monetary policy under financial sector risk
We consider whether or not a central bank should respond directly to financial market conditions when setting monetary policy. Specifically, should a central bank put weight on interbank lending spreads in its Taylor rule policy function? ; Using a model with risk and balance sheet effects in both the real and financial sectors (Davis, "The Adverse Feedback Loop and the Effects of Risk in the both the Real and Financial Sectors" Federal Reserve Bank of Dallas, Globalization and Monetary Policy Institute Working Paper No. 66, November 2010) we find that when the conventional parameters in ...
Working Paper
Optimal Foreign Reserve Intervention and Financial Development
We document evidence of a U-shaped relationship between financial development and the adjustments of foreign exchange (FX) reserve holdings in response to a U.S. interest rate increase. Countries with intermediate levels of financial development sell reserves aggressively, while those with low or high development adjust little. Domestic interest rate responses are not systematically related to financial development. A model with borrowing constraints and foreign-currency debt rationalizes these findings: the associated pecuniary externality is maximized at intermediate levels of financial ...
Working Paper
Overconfidence in financial markets and consumption over the life cycle
Overconfidence is a widely documented phenomenon. Empirical evidence reveal two types of overconfidence in financial markets: investors both overestimate the average rate of return to their assets and underestimate uncertainty associated with the return. This paper explores implications of overconfidence in financial markets for consumption over the life cycle. The authors obtain a closed-form solution to the time-inconsistent problem facing an overconfident investor/consumer who has a CRRA utility function. They use this solution to show that overestimation of the mean return gives rise to a ...
Working Paper
Why does the cyclical behavior of real wages change over time?
This paper seeks to understand the evolution of the cyclical behavior of U.S. real wage rates from the interwar period to the post World War II period using a dynamic general equilibrium model that emphasizes demand-driven business cycle fluctuations. In the model, changes in the cyclical behavior of real wages arise endogenously from the interactions between nominal wage and price rigidities and an evolving input-output structure.
Working Paper
Learning, adaptive expectations, and technology shocks
This study explores the macroeconomic implications of adaptive expectations in a standard real business cycle model. When rational expectations are replaced by adaptive expectations, we show that the self-confirming equilibrium is the same as the steady state rational expectations equilibrium for all admissible parameters, but that dynamics around the steady state are substantially different between the two equilibria. The differences are driven mainly by the dampened wealth effect and the strengthened intertemporal substitution effect, not by the escapes emphasized by Williams (2003). As a ...
Report
Temptation and self-control: some evidence and applications
This paper studies the empirical relevance of temptation and self-control using household-level data from the Consumer Expenditure Survey. We estimate an infinite-horizon consumption-savings model that allows, but does not require, temptation and self-control in preferences. To help identify the presence of temptation, we exploit an implication of the theory that a tempted individual has a preference for commitment. In the presence of temptation, the cross-sectional distribution of the wealth-consumption ratio, in addition to that of consumption growth, becomes a determinant of the ...
Working Paper
Financial intermediaries, markets, and growth
In many models of financial intermediation, markets reduce welfare because they limit the amount of risk-sharing intermediaries can offer. In this paper we study a model in which markets also promote investment in a productive technology. A trade-off between risk sharing and growth arises endogenously. In the model, financial intermediaries provide insurance to households against a liquidity shock. Households can also invest directly on a financial market if they pay a cost. In equilibrium, the ability of intermediaries to share risk is constrained by the market. This can be beneficial ...
Discussion Paper
Chain of production as a monetary propagation mechanism
This paper studies a general equilibrium model with multiple stages of production and asynchronized price setting that provides a new explanation for the observed persistent real effects of monetary shocks. The key feature of the model is a vertical chain-of-production structure. In this model, the effects of monetary shocks on price adjustment are gradually dampened via the interactions of firms through their input-output relations and the timing of their price decisions. The model predicts that prices adjust by a smaller amount and less rapidly at later stages than at earlier stages, which ...
Working Paper
Capital and macroeconomic instability in a discrete-time model with forward-looking interest rate rules
The authors establish the necessary and sufficient conditions for local real determinacy in a discrete-time production economy with monopolistic competition and a quadratic price adjustment cost under forward-looking policy rules, for the case where capital is in exogenously fixed supply and the case with endogenous capital accumulation. Using these conditions, they show that (i) indeterminacy is more likely to occur with a greater share of payment to capital in value-added production cost; (ii) indeterminacy can be more or less likely to occur with constant capital than with variable ...