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Author:Azariadis, Costas 

Working Paper
Earnings and wealth inequality and income taxation: quantifying the tradeoffs of switching to a proportional income tax in the U.S.
This paper quantifies the steady-state aggregate, distributional, and mobility effects of switching the U.S. to a proportional income tax system.
AUTHORS: Castaneda, Ana; Azariadis, Costas; Ambrose, Brent W.
DATE: 1998

Working Paper
Self-fulfilling credit cycles
This paper argues that self-fulfilling beliefs in credit conditions can generate endoge- nously persistent business cycle dynamics. We develop a tractable dynamic general equi- librium model in which heterogeneous firms face idiosyncratic productivity shocks. Capital from less productive firms is lent to more productive ones in the form of credit secured by collateral and also as unsecured credit based on reputation. A dynamic complemen- tarity between current and future credit constraints permits uncorrelated sunspot shocks to trigger persistent aggregate fluctuations in debt, factor productivity and output. In a calibrated version we compare the features of sunspot cycles with those generated by shocks to economic fundamentals.
AUTHORS: Azariadis, Costas; Kaas, Leo
DATE: 2012

Working Paper
Trend-reverting fluctuations in the life-cycle model
Aggregate time series provide evidence of short term dynamic adjustment that appears to be governed by complex or negative real eigenvalues. This finding is at odds with the predictions of reasonably parameterized, convex one-sector growth models with complete markets. We study life cycle economies in which aggregate saving depends non-trivially on the distribution of wealth among cohorts. If consumption goods are weak gross substitutes near the steady state price vector, we prove that the unique equilibrium of a life cycle exchange economy converges to the unique non-monetary steady state via damped oscillations. We also discuss examples and extensions. ; Earlier title: Complex Eigenvalues and Trend-Reverting Fluctuations
AUTHORS: Azariadis, Costas; Bullard, James B.; Ohanian, Lee E.
DATE: 2001

Working Paper
Capital misallocation and aggregate factor productivity
We propose a sectoral?shift theory of aggregate factor productivity for a class of economies with AK technologies, limited loan enforcement, and a constant production possibilities frontier. Both the growth rate and TFP respond to random and persistent endogenous fluctuations in the sectoral distribution of physical capital which, in turn, responds to reversible exogenous shifts in relative sector productivities. Surplus capital from less productive sectors is lent to more productive ones in the form of secured collateral loans, as in Kiyotaki?Moore (1997), and also as unsecured reputational loans suggested in Bulow?Rogoff (1989). Endogenous debt limits slow down capital reallocation, preventing the equalization of risk?adjusted equity yields across sectors. Economy?wide factor productivity and the aggregate growth rate are both negatively correlated with the dispersion of sectoral rates of return, sectoral TFP and sectoral growth rates. We also find highly volatile limit cycles in economies with small amounts of collateral.
AUTHORS: Azariadis, Costas; Kaas, Leo
DATE: 2012

Working Paper
The optimal inflation target in an economy with limited enforcement
We formulate the central bank?s problem of selecting an optimal long-run inflation rate as the choice of a distorting tax by a planner who wishes to maximize discounted stationary utility for a heterogeneous population of infinitely-lived households in an economy with constant aggregate income and public information. Households are segmented into cash agents, who store value in currency alone, and credit agents who have access to both currency and loans. The planner?s problem is equivalent to choosing inflation and nominal interest rates consistent with a resource constraint, and with an incentive constraint that ensures credit agents prefer the superior consumption- smoothing power of loans to that of currency. We show that the optimum inflation rate is positive, because inflation reduces the value of the outside option for credit agents and raises their debt limits.
AUTHORS: Antinolfi, Gaetano; Azariadis, Costas; Bullard, James B.
DATE: 2012

Working Paper
Incomplete Credit Markets and Monetary Policy
We study monetary policy when private credit markets are incomplete. The macroeconomy we study has a large private credit market, in which participant households use non-state contingent nominal contracts (NSCNC). A second, small group of households only uses cash, supplied by the monetary authority, and cannot participate in the credit market. There is an aggregate shock. We find that, despite the substantial heterogeneity, the monetary authority can provide for optimal risk-sharing in the private credit market and thus overcome the NSCNC friction via a counter-cyclical price level rule. The counter-cyclical price level rule is not unique. To pin down a unique monetary policy rule, we consider two secondary goals for the monetary authority, (i) expected inflation targeting and, (ii) nominal GDP targeting. We examine the impact of each of these approaches on the price level rule and other nominal variables in the economy.
AUTHORS: Azariadis, Costas; Bullard, James B.; Singh, Aarti; Suda, Jacek
DATE: 2015-05-27

Working Paper
Self-Fulfilling Credit Cycles
In U.S. data 1981?2012, unsecured firm credit moves procyclically and tends to lead GDP, while secured firm credit is acyclical; similarly, shocks to unsecured firm credit explain a far larger fraction of output fluctuations than shocks to secured credit. In this paper we develop a tractable dynamic general equilibrium model in which unsecured firm credit arises from self-enforcing borrowing constraints, preventing an efficient capital allocation among heterogeneous firms. Unsecured credit rests on the value that borrowers attach to a good credit reputation which is a forward-looking variable. We argue that self-fulfilling beliefs over future credit conditions naturally generate endogenously persistent business cycle dynamics. A dynamic complementarity between current and future borrowing limits permits uncorrelated sunspot shocks to unsecured debt to trigger persistent aggregate fluctuations in both secured and unsecured debt, factor productivity and output. We show that these sunspot shocks are quantitatively important, accounting for around half of output volatility.
AUTHORS: Azariadis, Costas; Kaas, Leo; Wen, Yi
DATE: 2015-03-20

Working Paper
A two-sector model of endogenous growth with leisure externalities
This paper considers the impact of leisure preference and leisure externalities on growth and labor supply in a Lucas [12] type model, as in Gmez [7], with a separable non-homothetic utility and the assumption that physical and human capital are both necessary inputs in both the goods and the education sectors. In spite of the non-concavities due to the leisure externality, the balanced growth path is always unique, which guarantees global stability for comparative-static exercises. We find that small differences in preferences toward leisure or in leisure externalities can generate substantial differences in hours worked and growth, which may play a significant role in explaining differences in growth paths between the US and Europe, in addition to the mechanisms uncovered in Prescott [16] relying on differing marginal tax rates on labor income. Our model indicates, however, that a higher preference for leisure or leisure externality implies less growth but also less education attainment, which seems counterfactual.
AUTHORS: Azariadis, Costas; Chen, Been-Lon; Lu, Chia-Hui; Wang, Yin-Chi
DATE: 2012

Working Paper
Capital misallocation and aggregate factor productivity
We propose a sectoral?shift theory of aggregate factor productivity for a class of economies with AK technologies, limited loan enforcement, a constant production possibilities frontier, and finitely many sectors producing the same good. Both the growth rate and total factor productivity in these economies respond to random and persistent endogenous fluctuations in the sectoral distribution of physical capital which, in turn, responds to persistent and reversible exogenous shifts in relative sector productivities. Surplus capital from less productive sectors is lent to more productive ones in the form of secured collateral loans, as in Kiyotaki?Moore (1997), and also as unsecured reputational loans suggested in Bulow?Rogoff (1989). Endogenous debt limits slow down capital reallocation, preventing the equalization of risk? adjusted equity yields across sectors. Economy?wide factor productivity and the aggregate growth rate are both negatively correlated with the dispersion of sectoral rates of return, sectoral TFP and sectoral growth rates. If sector productivities follow a symmetric two?state Markov process, many of our economies converge to a limit cycle alternating between mild expansions and abrupt contractions. We also find highly periodic and volatile limit cycles in economies with small amounts of collateral.
AUTHORS: Azariadis, Costas; Kaas, Leo
DATE: 2009

Working Paper
Endogenous credit limits with small default costs
We analyze an exchange economy of unsecured credit where borrowers have the option to declare bankruptcy in which case they are temporarily excluded from financial markets. Endogenous credit limits are imposed that are just tight enough to prevent default. Economies with temporary exclusion differ from their permanent exclusion counterparts in two important properties. If households are extremely patient, then the first?best allocation is an equilibrium in the latter economies but not necessarily in the former. In addition, temporary exclusion permits multiple stationary equilibria, with both complete and with incomplete consumption smoothing.
AUTHORS: Azariadis, Costas; Kaas, Leo
DATE: 2012

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