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Working Paper
Time-varying risk, interest rates and exchange rates in general equilibrium
Kehoe, Patrick J.; Alvarez, Fernando; Atkeson, Andrew (2005)
Time-varying risk is the primary force driving nominal interest rate differentials on currency-denominated bonds. This finding is an immediate implication of the fact that exchange rates are roughly random walks. We show that a general equilibrium monetary model with an endogenous source of risk variation?a variable degree of asset market segmentation?can produce key features of actual interest rates and exchange rates. The endogenous segmentation arises from a fixed cost for agents to exchange money for assets. As inflation varies, the benefit of asset market participation varies, and that ...
Working Papers , Paper 627

Working Paper
The time consistency of monetary and fiscal policies
Neumeyer, Pablo Andrés; Kehoe, Patrick J.; Alvarez, Fernando (2002)
Are optimal monetary and fiscal policies time consistent in a monetary economy? Yes, but if and only if under commitment the Friedman rule of setting nominal interest rates to zero is optimal. This result is of applied interest because the Friedman rule is optimal for the standard preferences used in applied work, those consistent with the growth facts. (Replaced by Staff Report No: 305)
Working Papers , Paper 616

Report
The Monetary and Fiscal History of Brazil, 1960-2016
Kehoe, Patrick J.; Ayres, Joao Luiz; Guillen, Diogo; Garcia, Marcio (2018-12-20)
Brazil has had a long period of high inflation. It peaked around 100 percent per year in 1964, decreased until the first oil shock (1973), but accelerated again afterward, reaching levels above 100 percent on average between 1980 and 1994. This last period coincided with severe balance of payments problems and economic stagnation that followed the external debt crisis in the early 1980s. We show that the high-inflation period (1960-1994) was characterized by a combination of fiscal deficits, passive monetary policy, and constraints on debt financing. The transition to the low-inflation period ...
Staff Report , Paper 575

Report
Time-varying risk, interest rates, and exchange rates in general equilibrium
Atkeson, Andrew; Kehoe, Patrick J.; Alvarez, Fernando (2008)
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 ...
Staff Report , Paper 371

Report
Business cycle accounting
Chari, V. V.; Kehoe, Patrick J.; McGrattan, Ellen R. (2006)
We propose a simple method to help researchers develop quantitative models of economic fluctuations. The method rests on the insight that many models are equivalent to a prototype growth model with time-varying wedges which resemble productivity, labor and investment taxes, and government consumption. Wedges corresponding to these variables - efficiency, labor, investment, and government consumption wedges - are measured with data and then fed back into the model in order to assess the fraction of various fluctuations accounted for by these wedges. Applying this method to U.S. data for the ...
Staff Report , Paper 328

Working Paper
On the need for a new approach to analyzing monetary policy
Kehoe, Patrick J.; Atkeson, Andrew (2008)
Working Papers , Paper 662

Working Paper
Money, interest rates, and exchange rates with endogenously segmented asset markets
Kehoe, Patrick J.; Alvarez, Fernando; Atkeson, Andrew (2000)
This paper analyzes the effects of money injections on interest rates and exchange rates in a model in which agents must pay a Baumol-Tobin style fixed cost to exchange bonds and money. Asset markets are endogenously segmented because this fixed cost leads agents to trade bonds and money only infrequently. When the government injects money through an open market operation, only those agents that are currently trading absorb these injections. Through their impact on these agents? consumption, these money injections affect real interest rates and real exchange rates. We show that the model ...
Working Papers , Paper 605

Journal Article
If exchange rates are random walks, then almost everything we say about monetary policy is wrong
Atkeson, Andrew; Kehoe, Patrick J.; Alvarez, Fernando (2008-07)
The key question asked by standard monetary models used for policy analysis is, How do changes in short-term interest rates affect the economy? All of the standard models imply that such changes in interest rates affect the economy by altering the conditional means of the macroeconomic aggregates and have no effect on the conditional variances of these aggregates. We argue that the data on exchange rates imply nearly the opposite: the observation that exchange rates are approximately random walks implies that fluctuations in interest rates are associated with nearly one-for-one changes in ...
Quarterly Review , Issue Jul , Pages 2-9

Report
Evolution of Modern Business Cycle Models: Accounting for the Great Recession
Kehoe, Patrick J.; Pastorino, Elena; Midrigan, Virgiliu (2018-06-14)
Modern business cycle theory focuses on the study of dynamic stochastic general equilibrium models that generate aggregate fluctuations similar to those experienced by actual economies. We discuss how this theory has evolved from its roots in the early real business cycle models of the late 1970s through the turmoil of the Great Recession four decades later. We document the strikingly different pattern of comovements of macro aggregates during the Great Recession compared to other postwar recessions, especially the 1982 recession. We then show how two versions of the latest generation of real ...
Staff Report , Paper 566

Report
Credit Frictions in the Great Recession
Pastorino, Elena; Lopez, Pierlauro; Midrigan, Virgiliu; Kehoe, Patrick J. (2020-12-15)
Although a credit tightening is commonly recognized as a key determinant of the Great Recession, to date, it is unclear whether a worsening of credit conditions faced by households or by firms was most responsible for the downturn. Some studies have suggested that the household-side credit channel is quantitatively the most important one. Many others contend that the firm-side channel played a crucial role. We propose a model in which both channels are present and explicitly formalized. Our analysis indicates that the household-side credit channel is quantitatively more relevant than the ...
Staff Report , Paper 617

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