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Author:Kehoe, Patrick J. 

On the desirability of fiscal constraints in a monetary union

The desirability of fiscal constraints in monetary unions depends critically on whether the monetary authority can commit to follow its policies. If it can commit, then debt constraints can only impose costs. If it cannot commit, then fiscal policy has a free-rider problem, and debt constraints may be desirable. This type of free-rider problem is new and arises only because of a time inconsistency problem.
Staff Report , Paper 330

Working Paper
Time-varying risk, interest rates and exchange rates in general equilibrium

Time-varying risk is the primary force driving nominal interest rate differentials on currency-denominated bonds. This finding is an immediate implication of the fact that exchange rates are roughly random walks. We show that a general equilibrium monetary model with an endogenous source of risk variation?a variable degree of asset market segmentation?can produce key features of actual interest rates and exchange rates. The endogenous segmentation arises from a fixed cost for agents to exchange money for assets. As inflation varies, the benefit of asset market participation varies, and that ...
Working Papers , Paper 627

Working Paper
A critique of structural VARs using real business cycle theory

The main substantive finding of the recent structural vector autoregression literature with a differenced specification of hours (DSVAR) is that technology shocks lead to a fall in hours. Researchers have used these results to argue that business cycle models in which technology shocks lead to a rise in hours should be discarded. We evaluate the DSVAR approach by asking, is the specification derived from this approach misspecified when the data are generated by the very model the literature is trying to discard? We find that it is misspecified. Moreover, this misspecification is so great that ...
Working Papers , Paper 631

Discussion Paper
On the Importance of Easing Consumer Credit Frictions

The vast bulk of the government financial interventions during the Great Recession was directed at helping banks weather the financial crisis. The design of these programs was heavily influenced by the view that helping banks preserve their means of providing finance to firms was the most important ingredient in ensuring a quick recovery from the crisis. We argue that the cross-state patterns of employment, output and debt in the United States suggest that financial frictions that led to a tightening of credit to consumers were more important in accounting for the recession than those that ...
Economic Policy Paper , Paper 17-5

Credit Frictions in the Great Recession

Although a credit tightening is commonly recognized as a key determinant of the Great Recession, to date, it is unclear whether a worsening of credit conditions faced by households or by firms was most responsible for the downturn. Some studies have suggested that the household-side credit channel is quantitatively the most important one. Many others contend that the firm-side channel played a crucial role. We propose a model in which both channels are present and explicitly formalized. Our analysis indicates that the household-side credit channel is quantitatively more relevant than the ...
Staff Report , Paper 617

Patrick Kehoe's comment on \\"Determinants of business cycle comovement: a robust analysis\\" by Marianne Baxter and Michael Kouparitsas

This paper by Baxter and Kouparitsas is an ambitious attempt to explore which variables are robust in explaining the correlations of bilateral GDP between countries at business cycle frequencies. Most of the variables turned out to be fragile. The main contribution is to show that countries with large amounts of bilateral trade tend to have robustly higher business cycle correlations. Another interesting finding is that neither currency unions nor industrial structure are robustly related to business cycle correlations.
Staff Report , Paper 349

International business cycles with endogenous incomplete markets

Backus, Kehoe and Kydland (1992), Baxter and Crucini (1995) and Stockman and Tesar (1995) find two major discrepancies between standard international business cycle models with complete markets and the data: In the models, cross-country correlations are much higher for consumption than for output, while in the data the opposite is true; and cross-country correlations of employment and investment are negative, while in the data they are positive. This paper introduces a friction into a standard model that helps resolve these anomalies. The friction is that international loans are imperfectly ...
Staff Report , Paper 265

Working Paper
New Keynesian models: not yet useful for policy analysis

In the 1970s macroeconomists often disagreed bitterly. Macroeconomists have now largely converged on method, model design, and macroeconomic policy advice. The disagreements that remain all stem from the practical implementation of the methodology. Some macroeconomists think that New Keynesian models are on the verge of being useful for quarter-to-quarter quantitative policy advice. We do not. We argue that the shocks in these models are dubiously structural and show that many of the features of the model as well as the implications due to these features are inconsistent with microeconomic ...
Working Papers , Paper 664

Sticky price models of the business cycle: can the contract multiplier solve the persistence problem?

We construct a quantitative equilibrium model with price setting and use it to ask whether with staggered price setting monetary shocks can generate business cycle fluctuations. These fluctuations include persistent output fluctuations along with the other defining features of business cycles, like volatile investment and smooth consumption. We assume that prices are exogenously sticky for a short period of time. Persistent output fluctuations require endogenous price stickiness in the sense that firms choose not to change prices very much when they can do so. We find that for a wide range of ...
Staff Report , Paper 217

Time consistency and policy

Staff Report , Paper 115


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