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Working Paper
Rational and near-rational bubbles without drift
This paper derives a general class of intrinsic rational bubble solutions in a standard Lucas-type asset pricing model. I show that the rational bubble component of the price-dividend ratio can evolve as a geometric random walk without drift. The volatility of bubble innovations depends exclusively on fundamentals. Starting from an arbitrarily small positive value, the rational bubble expands and contracts over time in an irregular, wholly endogenous fashion, always returning to the vicinity of the fundamental solution. I also examine a near-rational solution in which the representative agent ...
Journal Article
Persistent overoptimism about economic growth
Since 2007, Federal Open Market Committee participants have been persistently too optimistic about future U.S. economic growth. Real GDP growth forecasts have typically started high, but then are revised down over time as the incoming data continue to disappoint. Possible explanations for this pattern include missed warning signals about the buildup of imbalances before the crisis, overestimation of the efficacy of monetary policy following a balance-sheet recession, and the natural tendency of forecasters to extrapolate from recent data.
Working Paper
Endogenous Forecast Switching Near the Zero Lower Bound
A representative agent contemplates the possibility of an occasionally binding zero lower bound (ZLB) on the nominal interest rate that is driven by switching between two local equilibria, labeled the "targeted" and "deflation" solutions, respectively. This view turns out to be true in simulations, thus validating the agent's beliefs. I solve for the time series of stochastic shocks and endogenous forecast weights that allow the model to exactly replicate the observed time paths of U.S. data since 1988. The data since the start of the ZLB episode in 2008.Q4 are best described as a ...
Journal Article
Should the Fed react to the stock market?
Journal Article
Global household leverage, house prices, and consumption
Household leverage in the United States and many industrial countries increased dramatically in the decade prior to 2007. Countries with the largest increases in household leverage tended to experience the fastest rises in house prices over the same period. These same countries tended to experience the biggest declines in household consumption once house prices started falling.
Journal Article
Stock Market Valuation and the Macroeconomy
History suggests that extreme run-ups in the cyclically adjusted price-earnings ratio are a signal that the stock market may be overvalued. A simple regression model using a small set of macroeconomic explanatory variables can account for most of the run-up in the CAPE ratio since 2009, offering some justification for its current elevated level. The model predicts a modest decline in the ratio over the next decade. All else being equal, such a decline would imply lower stock returns relative to those in recent years when the ratio was rising.
Working Paper
Anchored Inflation Expectations and the Slope of the Phillips Curve
We estimate a New Keynesian Phillips curve that allows for changes in the degree of anchoring of agents' subjective inflation forecasts. The estimated slope coefficient in U.S. data is stable over the period 1960 to 2019. Out-of-sample forecasts with the model resolve both the "missing disinflation puzzle" during the Great Recession and the "missing inflation puzzle" during the subsequent recovery. Using a simple New Keynesian model, we show that if agents solve a signal extraction problem to disentangle transitory versus permanent shocks to inflation, then an increase in the policy rule ...
Journal Article
Inflation Expectations, the Phillips Curve, and Stock Prices
During the 1970s and early 1980s, rises in inflation tended to coincide with weaker economic activity and lower stock prices. But in more recent decades, rises in inflation have tended to coincide with stronger economic activity and higher stock prices. The emergence of a pattern where inflation, economic activity, and stock prices all move together over the business cycle can be traced to the beneficial effects of well-anchored inflation expectations.
Working Paper
Capital-labor substitution, equilibrium indeterminacy, and the cyclical behavior of labor income
This paper examines the quantitative relationship between the elasticity of capital-labor substitution and the conditions needed for equilibrium indeterminacy (and belief-driven fluctuations) in a one-sector neoclassical growth model. Our analysis employs a ?normalized? version of the CES production function so that all steady-state allocations and factor income shares are held constant as the elasticity of substitution is varied. We demonstrate numerically that higher elasticities cause the threshold degree of increasing returns for indeterminacy to decline monotonically, albeit very ...
Working Paper
Asset pricing with concentrated ownership of capital
This paper investigates how concentrated ownership of capital influences the pricing of risky assets in a production economy. The model is designed to approximate the skewed distribution of wealth and income in U.S. data. I show that concentrated ownership significantly magnifies the equity risk premium relative to an otherwise similar representative-agent economy because the capital owners' consumption is more strongly linked to volatile dividends from equity. A temporary shock to the technology for producing new capital (an "investment shock") causes dividend growth to be much more ...