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Working Paper
External and Public Debt Crises
The recent debt crises in Europe and the U.S. states feature similar sharp increases in spreads on government debt but also show important differences. In Europe, the crisis occurred at high government indebtedness levels and had spillovers to the private sector. In the United States, state government indebtedness was low, and the crisis had no spillovers to the private sector. We show theoretically and empirically that these different debt experiences result from the interplay between differences in the ability of governments to interfere in private external debt contracts and differences in the flexibility of state fiscal institutions.
AUTHORS: Arellano, Cristina; Wright, Mark L. J.; Atkeson, Andrew
DATE: 2015-07-02
Journal Article
Taxing capital income: a bad idea
Under a narrow set of assumptions, Chamley (1986) established that the optimal tax rate on capital income is eventually zero. This study examines and extends that result by relaxing Chamley?s assumptions, one by one, to see if the result still holds. It does. This study unifies the work of other researchers, who have confirmed the result independently using different types of models and approaches. This study uses just one type of model (discrete time) and just one approach (primal). Chamley?s result holds when agents are heterogeneous rather than identical, the economy?s growth rate is endogenous rather than exogenous, the economy is open rather than closed, and agents live in overlapping generations rather than forever. (With this last assumption, the result holds under stricter conditions than with the others.)
AUTHORS: Chari, V. V.; Atkeson, Andrew; Kehoe, Patrick J.
DATE: 1999-07
Journal Article
Are Phillips curves useful for forecasting inflation?
This study evaluates the conventional wisdom that modern Phillips curve-based models are useful tools for forecasting inflation. These models are based on the non-accelerating inflation rate of unemployment (the NAIRU). The study compares the accuracy, over the last 15 years, of three sets of inflation forecasts from NAIRU models to the naive forecast that at any date inflation will be the same over the next year as it has been over the last year. The conventional wisdom is wrong; none of the NAIRU forecasts is more accurate than the naive forecast. The likelihood of accurately predicting a change in the inflation rate from these three forecasts is no better than the likelihood of accurately predicting a change based on a coin flip. The forecasts include those from a textbook NAIRU model, those from two models similar to Stock and Watson's, and those produced by the Federal Reserve Board.
AUTHORS: Atkeson, Andrew; Ohanian, Lee E.
DATE: 2001-01
Journal Article
If exchange rates are random walks, then almost everything we say about monetary policy is wrong
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 conditional variances and nearly no changes in conditional means. In this sense, standard monetary models capture essentially none of what is going on in the data. We thus argue that almost everything we say about monetary policy using these models is wrong.
AUTHORS: Kehoe, Patrick J.; Atkeson, Andrew; Alvarez, Fernando
DATE: 2008-07
Conference Paper
The optimal degree of monetary policy discretion
AUTHORS: Atkeson, Andrew; Kehoe, Patrick J.; Athey, Susan
DATE: 2003
Working Paper
The optimal degree of discretion in monetary policy
How much discretion should the monetary authority have in setting its policy? This question is analyzed in an economy with an agreed-upon social welfare function that depends on the randomly fluctuating state of the economy. The monetary authority has private information about that state. In the model, well-designed rules trade off society's desire to give the monetary authority discretion to react to its private information against society's need to guard against the time inconsistency problem arising from the temptation to stimulate the economy with unexpected inflation. Although this dynamic mechanism design problem seems complex, society can implement the optimal policy simply by legislating an inflation cap that specifies the highest allowable inflation rate. The more severe the time inconsistency problem, the more tightly the cap constrains policy and the smaller is the degree of discretion. As this problem becomes sufficiently severe, the optimal degree of discretion is none.
AUTHORS: Athey, Susan; Atkeson, Andrew; Kehoe, Patrick J.
DATE: 2004
Conference Paper
The transition to a new economy after the Second Industrial Revolution
During the Second Industrial Revolution, 1860?1900, many new technologies, including electricity, were invented. After this revolution, however, several decades passed before these new technologies diffused and measured productivity growth increased. We build a quantitative model of technology diffusion which we use to study this transition to a new economy. We show that the model implies both slow diffusion and a delay in growth similar to that in the data. Our model casts doubt, however, on the conjecture that this experience is a useful parallel for understanding the productivity paradox following the Information Technology Revolution.
AUTHORS: Kehoe, Patrick J.; Atkeson, Andrew
DATE: 2002-11
Working Paper
Pricing-to-market, trade costs, and international relative prices
Data on international relative prices from industrialized countries show large and systematic deviations from relative purchasing power parity. We embed a model of imperfect competition and variable markups in some of the recently developed quantitative models of international trade to examine whether such models can reproduce the main features of the fluctuations in international relative prices. We find that when our model is parameterized to match salient features of the data on international trade and market structure in the U.S., it reproduces deviations from relative purchasing power parity similar to those observed in the data because firms choose to price-to-market. We then examine how pricing-to-market depends on the presence of international trade costs and various features of market structure.
AUTHORS: Burstein, Ariel; Atkeson, Andrew
DATE: 2007
Working Paper
The transition to a new economy after the Second Industrial Revolution
During the Second Industrial Revolution, 1860?1900, many new technologies, including electricity, were invented. These inventions launched a transition to a new economy, a period of about 70 years of ongoing, rapid technical change. After this revolution began, however, several decades passed before measured productivity growth increased. This delay is paradoxical from the point of view of the standard growth model. Historians hypothesize that this delay was due to the slow diffusion of new technologies among manufacturing plants together with the ongoing learning in plants after the new technologies had been adopted. The slow diffusion is thought to be due to manufacturers? reluctance to abandon their accumulated expertise with old technologies, which were embodied in the design of existing plants. Motivated by these hypotheses, we build a quantitative model of technology diffusion which we use to study this transition to a new economy. We show that it implies both slow diffusion and a delay in growth similar to that in the data.
AUTHORS: Kehoe, Patrick J.; Atkeson, Andrew
DATE: 2001
Working Paper
On the optimality of transparent monetary policy
We analyze the optimal design of monetary rules. We suppose there is an agreed upon social welfare function that depends on the randomly fluctuating state of the economy and that the monetary authority has private information about that state. We suppose the government can constrain the policies of the monetary authority by legislating a rule. In general, well-designed rules trade-off the need to constrain policymakers from the standard time consistency problem arising from the temptation for unexpected inflation with the desire to give them flexibility to react to their private information. Surprisingly, we show that for a wide variety of circumstances the optimal rule gives the monetary authority no flexibility. This rule can be interpreted as a strict inflation targeting rule where the target is a prespecified function of publicly observed data. In this sense, optimal monetary policy is transparent.
AUTHORS: Kehoe, Patrick J.; Athey, Susan; Atkeson, Andrew
DATE: 2001