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Working Paper
A model of price swings in the housing market
In this paper we use a standard neoclassical model supplemented by some frictions to understand large price swings in the housing market. We construct a two good general equilibrium model in which housing is a composite good produced using structures and land. We revisit the connection between changes in interest rates, credit conditions as measured by maximum loan-to-value ratios and expectations in influencing housing prices in a setting in which the stock of housing can be used as collateral for borrowing and credit markets are segmented. We find that changes in interest rates and credit ...
Journal Article
Monetary Policy with Declining Deficits: Theory and an Application to Recent Argentine Monetary Policy
The authors study the nature of the optimal monetary policy in a regime of fiscal dominance when the monetary authority?which can print money or issue interest-earning debt?is required to finance an exogenous sequence of transfers to the Treasury. They show that the degree of commitment on the part of the monetary authority has a significant impact on the details of the optimal policy. They apply this model to the recent experience of Argentina and find that the inflation rate experienced by Argentina during the first year of the monetary program is close to the predictions of a weakly ...
Report
Endogenous policy choice: the case of pollution and growth
What determines the relationship between pollution and growth? Are the forces that explain the behavior over time of these quantities potentially useful to understand more generally the relationship between policies and growth? In this paper, we make a first attempt to analyze the equilibrium behavior of two quantities?the level of pollution and the level of income?in a setting in which societies choose, via voting, how much to regulate pollution. Our major finding is that, consistent with the evidence, the relationship between pollution and growth need not be monotone and that the precise ...
Working Paper
Frictionless technology diffusion: the case of tractors
Empirical evidence suggests that there is a long lag between the time a new technology is introduced and the time at which it is widely adopted. The conventional wisdom is that this fact is inconsistent with the predictions of the frictionless neoclassical model. In this paper we study the specific case of the diffusion of the tractor in American agriculture between 1910 and 1960. There are three important driving forces: changes in quality, wage rates and prices of substitutes such as horses and mules. We demonstrate that once these exogenous forces are taken into account, the standard ...
Report
Labor contracts in a model of imperfect competition
We propose a definition of involuntary unemployment which differs from that traditionally used in implicit labor contract theory. We say that a worker is involuntarily unemployed if the marginal wage implied by the optimal contract exceeds the marginal rate of substitution between leisure and consumption. We construct a model where risk-neutral firms have monopoly power and show that such monopoly power is necessary for involuntary unemployment to arise in the optimal contract. We numerically compute examples and show that such unemployment occurs for a wide range of parameter values.
Working Paper
Optimal Management of an Epidemic: Lockdown, Vaccine and Value of Life
This paper analyzes the optimal management of a pandemic (stay-at-home and vaccination policies) in a dynamic model. The optimal lockdown policies respond to the spread of the virus with significant restrictions to employment, followed by partial loosening before the peak of the epidemic. Upon the availability of a vaccine, the optimal vaccination policy has an almost bang-bang property, despite the loss of immunity of the vaccinated: vaccinate at the highest possible rate, and then rapidly converge to the steady state. The model illustrates interesting trade-offs as it implies that lower ...
Report
Technology (and policy) shocks in models of endogenous growth
Our objective is to understand how fundamental uncertainty can affect the long-run growth rate and what factors determine the nature of the relationship. Qualitatively, we show that the relationship between volatility in fundamentals and policies and mean growth can be either positive or negative. We identify the curvature of the utility function as a key parameter that determines the sign of the relationship. Quantitatively, we find that when we move from a world of perfect certainty to one with uncertainty that resembles the average uncertainty in a large sample of countries, growth rates ...
Journal Article
What Determines Debt Maturity?
What determines the maturity structure of debt? In this article, I develop a simple model to explore how the optimal maturity of debt issued by a firm (or a country) depends both on the firm?s cyclical state and other features of the economic environment in which it operates. I find that firms with better current earnings and better growth prospects issue debt with longer maturity, while firms operating in more-volatile environments issue debt with shorter maturity. Yield to maturity is a poor indicator of the risk of debt issued by a firm. The reason is simple: Yield to maturity captures ...
Journal Article
Inflation, growth, and financial intermediation
Working Paper
Lifetime labor supply and human capital investment
We develop a model of retirement and human capital investment to study the effects of tax and retirement policies. Workers choose the supply of raw labor (career length) and also the human capital embodied in their labor. Our model explains a significant fraction of the US-Europe difference in schooling and retirement. The model predicts that reforms of the European retirement policies modeled after the US can deliver 15?35 percent gains in per-worker output in the long run. Increased human capital investment in and out of school accounts for most of the gains, with relatively small changes ...