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Working Paper
Macroeconomic implications of competitive college admissions
We present a public higher education model in which there exist indivisibilities in educational investment. Consequently, when demand for educational services exceed supply, a screening mechanism, which may potentially be imperfect, is required to choose the student body. We demonstrate how distortions or biases in screening--caused by parental factors--interact with the distribution of income to help explain the considerable differences across countries in the share of resources devoted to public higher education. Moderate degrees of admission bias lower the share of resources devoted to ...
Working Paper
Recent U.S. macroeconomic stability: good policies, good practices or good luck?
The volatility of U.S. real GDP growth since 1984 has been markedly lower than that over the previous quarter-century. In this paper, we utilize frequency-domain and VAR methods to distinguish among several competing explanations for this phenomenon: improvements in monetary policy, better business practices, and a fortuitous reduction in exogenous disturbances. We find that reduced innovation variances account for much of the decline in aggregate output volatility. Our results support the "good-luck" hypothesis as the leading explanation for the decline in aggregate output volatility, ...
Conference Paper
No-arbitrage Taylor rules - comments
Working Paper
Optimal monetary policy with staggered wage and price contracts
We formulate an optimizing-agent model in which both labor and product markets exhibit monopolistic competition and staggered nominal contracts. The unconditional expectation of average household utility can be expressed in terms of the unconditional variances of the output gap, price inflation, and wage inflation. Monetary policy cannot replicate the Pareto-optimal equilibrium that would occur under completely flexible wages and prices; that is, the model exhibits a tradeoff between stabilizing the output gap, price inflation, and wage inflation. The Pareto optimum is attainable only if ...
Journal Article
Inflation targeting and the anchoring of inflation expectations in the western hemisphere
We investigate the extent to which long-run inflation expectations are well anchored in three Western Hemisphere countries - Canada, Chile, and the United States - using a high-frequency event-study analysis. Specifically, we use daily data on far-ahead forward inflation compensation - the difference between forward rates on nominal and inflation-indexed bonds - as an indicator of financial market perceptions of inflation risk and the expected level of inflation at long horizons. For the United States, we find that far-ahead forward inflation compensation has reacted significantly to ...
Working Paper
Imperfect credibility and inflation persistence
In this paper, we formulate a dynamic general equilibrium model with staggered nominal contracts, in which households and firms use optimal filtering to disentangle persistent and transitory shifts in the monetary policy rule. The calibrated model accounts quite well for the dynamics of output and inflation during the Volcker disinflation, and implies a sacrifice ratio very close to the estimated value. Our approach indicates that inflation persistence and substantial costs of disinflation can be generated in an optimizing-agent framework, without relaxing the assumption of rational ...
Working Paper
Higher-Order Perturbation Solutions to Dynamic, Discrete-Time Rational Expectations Models
We present an algorithm and software routines for computing nth order Taylor series approximate solutions to dynamic, discrete-time rational expectations models around a nonstochastic steady state. The primary advantage of higher-order (as opposed to first- or second-order) approximations is that they are valid not just locally, but often globally (i.e., over nonlocal, possibly very large compact sets) in a rigorous sense that we specify. We apply our routines to compute first- through seventh-order approximate solutions to two standard macroeconomic models, a stochastic growth model and a ...
Working Paper
What determines public support for affirmative action?
We present a model of public higher education finance in which demand for educational services can exceed supply because of indivisibilities in educational investment. In such situations, a screening mechanism--which may be imperfect because of direct or indirect discrimination--is required for allocation. We show how changes in the education premium affect political support for affirmative action policies. When the education premium is relatively low, the matching efficiency gains provided by affirmative action policies are relatively high compared to the opportunity cost of not acquiring ...
Working Paper
Inferences from parametric and non-parametric covariance matrix estimation procedures
We propose a parametric spectral estimation procedure for contructing heteroskedasticity and autocorrelation consistent (HAC) covariance matrices. We establish the consistency of this procedure under very general conditions similar to those considered in previous research. We also perform Monte Carlo simulations to evaluate the performance of this procedure in drawing reliable inferences from linear regression estimates. These simulations indicate that the parametric estimator matches, and in some cases greatly exceeds, the performance of the prewhitened kernel estimator proposed by Andrews ...
Working Paper
A guide to FRB/Global
This paper describes the structure and illustrates the key features of FRB/Global, a large-scale macroeconomic model used in analyzing exogenous shocks and alternative policy responses in foreign economies and in examining the impact of these external shocks on the U.S. economy. FRB/Global imposes fiscal and national solvency constraints and utilizes error-correction mechanisms in the behavioral equations to ensure the long-run stability of the model. In FRB/Global, expectations play an important role in determining financial market variables and domestic expenditures. Simulations can be ...