The real exchange rate in sticky price models: does investment matter?
This paper re-examines the ability of sticky-price models to generate volatile and persistent real exchange rates. We use a DSGE framework with pricing-to-market akin to those in Chari, et al. (2002) and Steinsson (2008) to illustrate the link between real exchange rate dynamics and what the model assumes about physical capital. We show that adding capital accumulation to the model facilitates consumption smoothing and significantly impedes the model's ability to generate volatile real exchange rates. Our analysis, therefore, caveats the results in Steinsson (2008) who shows how real shocks ...
Fed’s New Inflation Targeting Policy Seeks to Maintain Well-Anchored Expectations
The Fed’s evolving understanding of the economy and its reassessment of the natural rate of interest have led to arguably the most significant policy change since 2012.
Understanding the Aggregate Effects of Credit Frictions and Uncertainty
We examine the interaction of uncertainty and credit frictions in a New Keynesian framework. To do so, uncertainty is modeled as time-varying stochastic volatitlity - the product of monetary policy uncertainty, financial risk (micro-uncertainty), and macrouncertainty. The model is solved using a pruned third-order approximation and estimated by the Simulated Method of Moments. We find that: 1) Micro-uncertainty aggravates the information asymmetry between lenders and borrowers, worsens credit conditions, and has first-order effects on real economic activity. 2) When credit conditions are ...
Bayesian estimation of NOEM models: identification and inference in small samples
This paper studies the (potential) weak identification of these relationships in the context of a fully specified structural model using Bayesian estimation techniques. We trace the problems to sample size, rather than misspecification bias. We conclude that standard macroeconomic time series with a coverage of less than forty years are subject to potentially serious identification issues, and also to model selection errors. We recommend estimation with simulated data prior to bringing the model to the actual data as a way of detecting parameters that are susceptible to weak identification in ...
A redux of the workhorse NOEM model with capital accumulation and incomplete asset markets
I build a symmetric two-country model that incorporates nominal rigidities, local-currency pricing and monopolistic competition distorting the goods markets. The model is similar to the framework developed in Martnez-Garca and Sndergaard (2008a, 2008b), but it also introduces frictions in the assets markets by restricting the financial assets available to two uncontingent nominal bonds in zero-net supply and by adding quadratic costs on international borrowing (see, e.g., Benigno and Thoenissen (2008) and Benigno (2009). The technical part of the paper contains three basic calculations. ...
The market resources method for solving dynamic optimization problems
We introduce the market resources method (MRM) for solving dynamic optimization problems. MRM extends Carroll?s (2006) endogenous grid point method (EGM) for problems with more than one control variable using policy function iteration. The MRM algorithm is simple to implement and provides advantages in terms of speed and accuracy over Howard?s policy improvement algorithm. Codes are available.
Episodes of Exuberance in Housing Markets: In Search of the Smoking Gun
In this paper, we examine changes in the time series properties of standard housing market indicators (real house prices, price-to-income ratios, and price-to-rent ratios) for a large set of countries to detect episodes of explosive dynamics. Dating exuberance in housing markets provides a timeline as well as empirical content to the narrative connecting housing exuberance to the global 2008?09 recession. For our investigation, we employ two recursive univariate unit root tests developed by Phillips et al. (2011) and Phillips et al. (2015). We also propose a novel extension of the Phillips et ...
Investment enhances emerging economies' living standards
Investment helps countries at all levels of economic development reap productivity gains from new technologies and improve living standards. Investing to support innovation and a skilled workforce is as crucial for China as it is for the U.S.
Technological progress is key to improving world living standards
Technological progress appears to have shifted around 2001, when the median emerging economy?s growth rate accelerated and surpassed that of advanced economies.
A Matter of Perspective: Mapping Linear Rational Expectations Models into Finite-Order VAR Form
This paper considers the characterization of the reduced-form solution of a large class of linear rational expectations models. I show that under certain conditions, if a solution exists and is unique, it can be cast in finite-order VAR form. I also investigate the conditions for the VAR form to be stationary with a well-defined residual variance-covariance matrix in equilibrium, for the shocks to be recoverable, and for local identification of the structural parameters for estimation from the sample likelihood. An application to the workhorse New Keynesian model with accompanying Matlab ...