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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

Working Paper
Putty-clay capital and energy
Kehoe, Patrick J.; Atkeson, Andrew (1995)
We evaluate the ability of models with putty-clay capital and stochastic energy prices to account for the dynamics of energy use and output. Economists have noted a close relationship between changes in the price of energy and changes in output. Moreover, they have documents that this relationship is asymmetric: energy price increases are associated with large output charges while energy prices decreases are associated with small output changes. Finally, following energy price changes, energy use adjusts slowly over time. Standard models with putty-putty capital fail to reproduce the features ...
Working Papers , Paper 548

Report
The advantage of transparency in monetary policy instruments
Atkeson, Andrew; Kehoe, Patrick J. (2006)
Monetary policy instruments differ in tightness - how closely they are linked to inflation - and transparency - how easily they can be monitored. Tightness is always desirable in a monetary policy instrument; when is transparency? When a government cannot commit to follow a given policy. We apply this argument to a classic question: Is the exchange rate or the money growth rate the better monetary policy instrument? We show that if the instruments are equally tight and a government cannot commit to a policy, then the exchange rate's greater transparency gives it an advantage as a monetary ...
Staff Report , Paper 297

Report
A Neoclassical Model of the World Financial Cycle
Bai, Yan; Kehoe, Patrick J.; Lopez, Pierlauro; Perri, Fabrizio (2025-03-21)
Emerging markets face large and persistent fluctuations in sovereign spreads. To what extent are these fluctuations driven by local shocks versus financial conditions in advanced economies? To answer this question, we develop a neoclassical business cycle model of a world economy with an advanced country, the North, and many emerging market economies, the South. Northern households invest in domestic stocks, domestic defaultable bonds, and international sovereign debt. Over the 2008-2016 period, the global cycle phase, the North accounts for 68% of Southern spreads’ fluctuations. Over the ...
Staff Report , Paper 666

Report
On the denomination of government debt: a critique of the portfolio balance approach
Kehoe, Patrick J.; Backus, David K. (1988)
We show that some classes of sterilized interventions have no effect on equilibrium prices and quantities. The proof does not require complete markets, Ricardian equivalence, monetary neutrality, or the law of one price. Moreover, regressions of exchange rates or interest differentials on variables measuring debt?s currency composition contain no information about the effectiveness of such interventions. Other interventions require changes in monetary and fiscal policy; their effects depend, generally, on the influence of these changes on the economy and not on the intervention alone. In ...
Staff Report , Paper 116

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

Report
Bailouts, time inconsistency, and optimal regulation
Kehoe, Patrick J.; Chari, V. V. (2013)
We develop a model in which, in order to provide managerial incentives, it is optimal to have costly bankruptcy. If benevolent governments can commit to their policies, it is optimal not to interfere with private contracts. Such policies are time inconsistent in the sense that, without commitment, governments have incentives to bail out firms by buying up the debt of distressed firms and renegotiating their contracts with managers. From an ex ante perspective, however, such bailouts are costly because they worsen incentives and thereby reduce welfare. We show that regulation in the form of ...
Staff Report , Paper 481

Conference Paper
Optimal fiscal and monetary policy: some recent results
Kehoe, Patrick J.; Chari, V. V.; Christiano, Lawrence J. (1991)
Proceedings

Working Paper
The advantage of transparent instruments of monetary policy
Kehoe, Patrick J.; Atkeson, Andrew (2001)
A classic question in international economics is whether it is better to use the exchange rate or the money growth rate as the instrument of monetary policy. A common argument is that the exchange rate has a natural advantage since exchange rates provide signals of policymakers? actions that are easier to monitor than those provided by money growth rates. We formalize this argument in a simple model in which the government chooses which instrument it will use to target inflation. In it, the exchange rate is more transparent than the money growth rate in that the exchange rate is easier for ...
Working Papers , Paper 614

Report
How to advance theory with structural VARs: use the Sims-Cogley-Nason approach
Kehoe, Patrick J. (2006)
The common approach to evaluating a model in the structural VAR literature is to compare the impulse responses from structural VARs run on the data to the theoretical impulse responses from the model. The Sims-Cogley-Nason approach instead compares the structural VARs run on the data to identical structural VARs run on data from the model of the same length as the actual data. Chari, Kehoe, and McGrattan (2006) argue that the inappropriate comparison made by the common approach is the root of the problems in the SVAR literature. In practice, the problems can be solved simply. Switching from ...
Staff Report , Paper 379

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