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Working Paper
Central Bank Digital Currency: Central Banking for All?
The introduction of a central bank digital currency (CBDC) allows the central bank to engage in large-scale intermediation by competing with private financial interme-diaries for deposits. Yet, since a central bank is not an investment expert, it cannot invest in long-term projects itself, but relies on investment banks to do so. We derive an equivalence result that shows that absent a banking panic, the set of allocations achieved with private financial intermediation will also be achieved with a CBDC. Dur-ing a panic, however, we show that the rigidity of the central bank’s contract ...
Working Paper
Computing DSGE models with recursive preferences and stochastic volatility
This paper compares different solution methods for computing the equilibrium of dynamic stochastic general equilibrium (DSGE) models with recursive preferences such as those in Epstein and Zin (1989 and 1991) and stochastic volatility. Models with these two features have recently become popular, but we know little about the best ways to implement them numerically. To fill this gap, we solve the stochastic neoclassical growth model with recursive preferences and stochastic volatility using four different approaches: second- and third-order perturbation, Chebyshev polynomials, and value ...
Working Paper
Can currency competition work?
Can competition work among privately issued fiat currencies such as Bitcoin or Ethereum? Only sometimes. To show this, we build a model of competition among privately issued fiat currencies. We modify the current workhorse of monetary economics, the Lagos-Wright environment, by including entrepreneurs who can issue their own fiat currencies in order to maximize their utility. Otherwise, the model is standard. We show that there exists an equilibrium in which price stability is consistent with competing private monies but also that there exists a continuum of equilibrium trajectories with the ...
Working Paper
Political Distribution Risk and Aggregate Fluctuations
We argue that political distribution risk is an important driver of aggregate fluctuations. To that end, we document significant changes in the capital share after large political events, such as political realignments, modifications in collective bargaining rules, or the end of dictatorships, in a sample of developed and emerging economies. These policy changes are associated with significant fluctuations in output and asset prices. Using a Bayesian proxy-VAR estimated with U.S. data, we show how distribution shocks cause movements in output, unemployment, and sectoral asset prices. To ...
Working Paper
Comparing dynamic equilibrium economies to data
This paper studies the properties of the Bayesian approach to estimation and comparison of dynamic equilibrium economies. Both tasks can be performed even if the models are nonnested, misspecified, and nonlinear. First, the authors show that Bayesian methods have a classical interpretation: asymptotically the parameter point estimates converge to their pseudotrue values, and the best model under the Kullback-Leibler will have the highest posterior probability. Second, they illustrate the strong small sample behavior of the approach using a well-known application: the U.S. cattle cycle. ...
Working Paper
Supply-side policies and the zero lower bound
This paper examines how supply-side policies may play a role in fighting a low aggregate demand that traps an economy at the zero lower bound (ZLB) of nominal interest rates. Future increases in productivity or reductions in mark-ups triggered by supply-side policies generate a wealth effect that pulls current consumption and output up. Since the economy is at the ZLB, increases in the interest rates do not undo this wealth effect, as we will have in the case outside the ZLB. The authors illustrate this mechanism with a simple two-period New Keynesian model. They discuss possible objections ...
Working Paper
Estimating dynamic equilibrium economies: linear versus nonlinear likelihood
This paper compares two methods for undertaking likelihood-based inference in dynamic equilibrium economies: a sequential Monte Carlo filter proposed by Fernndez-Villaverde and Rubio-Ramrez (2004) and the Kalman filter. The sequential Monte Carlo filter exploits the nonlinear structure of the economy and evaluates the likelihood function of the model by simulation methods. The Kalman filter estimates a linearization of the economy around the steady state. The authors report two main results. First, both for simulated and for real data, the sequential Monte Carlo filter delivers a ...
Working Paper
The Causal Effects of Lockdown Policies on Health and Macroeconomic Outcomes
We assess the causal impact of epidemic-induced lockdowns on health and macroeconomic outcomes and measure the trade-off between containing the spread of an epidemic and economic activity. To do so, we estimate an epidemiological model with time-varying parameters and use its output as information for estimating SVARs and LPs that quantify the causal effects of nonpharmaceutical policy interventions. We apply our approach to Belgian data for the COVID-19 epidemic during 2020. We find that additional government mandated mobility curtailments would have reduced deaths at a very small cost in ...
Working Paper
Estimating nonlinear dynamic equilibrium economies: a likelihood approach
This paper presents a framework to undertake likelihood-based inference in nonlinear dynamic equilibrium economies. The authors develop a sequential Monte Carlo algorithm that delivers an estimate of the likelihood function of the model using simulation methods. This likelihood can be used for parameter estimation and for model comparison. The algorithm can deal both with nonlinearities of the economy and with the presence of non-normal shocks. The authors show consistency of the estimate and its good performance in finite simulations. This new algorithm is important because the existing ...
Working Paper
A Model of the Gold Standard
The gold standard emerged as the international monetary system by the end of the 19th century. We formally study its properties in a micro-founded model and find that the scarcity of the world gold stock not only results in a suboptimal output of goods that are purchased with money but also subjects the domestic economy of a country to external shocks. The creation of inside money in the form of private credit instruments adds to the money supply, usually resulting in a Pareto improvement, but opens the door to the international transmission of banking crises. These properties of the gold ...