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Series:Staff Report  Bank:Federal Reserve Bank of Minneapolis 

Patent data appendix for quid pro quo: Technology capital transfers for market access in China

Despite the recent rapid development and greater openness of China?s economy, FDI flows between China and technologically advanced countries are relatively small in both directions. We assess global capital flows in light of China?s quid pro quo policy of exchanging market access for transfers of technology capital?accumulated know-how such as research and development (R&D) that can be used in multiple production locations. We first provide empirical evidence of this policy and then incorporate it into a multicountry dynamic general equilibrium model. This extension leads to a significantly ...
Staff Report , Paper 488

Fixed vs. floating exchange rates: a dynamic general equilibrium analysis

In this study we contrast fixed and floating exchange rate regimes in a dynamic general equilibrium model. We find that the fundamental difference in the regimes is in the courses they imply for monetary policies. Because of policy coordination requirements, a tighter monetary policy needed to maintain a fixed exchange rate may necessitate a tightening in budget policy as well. We show that under some initial conditions voters or a social planner will favor one regime, but under other conditions they will favor the other. However, the choices of voters and a social planner are almost ...
Staff Report , Paper 194

Inferring labor income risk from economic choices: an indirect inference approach

This paper uses the information contained in the joint dynamics of households? labor earnings and consumption-choice decisions to quantify the nature and amount of income risk that households face. We accomplish this task by estimating a structural consumption-savings model using data from the Panel Study of Income Dynamics and the Consumer Expenditure Survey. Specifically, we estimate the persistence of labor income shocks, the extent of systematic differences in income growth rates, the fraction of these systematic differences that households know when they begin their working lives, and ...
Staff Report , Paper 450

Occupational Licensing and Labor Market Fluidity

We show that occupational licensing has significant negative effects on labor market fluidity defined as cross-occupation mobility. Using a balanced panel of workers constructed from the CPS and SIPP data, we analyze the link between occupational licensing and labor market outcomes. We find that workers with a government-issued occupational license experience churn rates significantly lower than those of non-licensed workers. Specifically, licensed workers are 24% less likely to switch occupations and 3% less likely to become unemployed in the following year. Moreover, occupational licensing ...
Staff Report , Paper 606

Monte Carlo simulation and numerical integration

This is a survey of simulation methods in economics, with a specific focus on integration problems. It describes acceptance methods, importance sampling procedures, and Markov chain Monte Carlo methods for simulation from univariate and multivariate distributions and their application to the approximation of integrals. The exposition gives emphasis to combinations of different approaches and assessment of the accuracy of numerical approximations to integrals and expectations. The survey illustrates these procedures with applications to simulation and integration problems in economics.
Staff Report , Paper 192

Formulating and estimating continuous time rational expectations models

This paper proposes a method for estimating the parameters of continuous time, stochastic rational expectations models from discrete time observations. The method is important since various heuristic procedures for deducing the implications for discrete time data of continuous time models, such as replacing derivatives with first differences, can sometimes give rise to very misleading conclusions about parameters. Our proposal is to express the restrictions imposed by the rational expectations model on the continuous time process generating the observable variables. Then the likelihood ...
Staff Report , Paper 75

Optimal Cooperative Taxation in the Global Economy

We use the Ramsey and Mirrlees approaches to study how fiscal and trade policy should be set cooperatively when governments must raise revenues with distorting taxes. Free trade and unrestricted capital mobility are optimal. Efficient outcomes can be implemented with taxes only on final consumption goods and labor income. We study alternative tax systems, showing that uniform taxation of household asset returns, and not taxing corporate income yields efficient outcomes. Border adjustments exempting exports from and including imports in the tax base are desirable. Destination and residence ...
Staff Report , Paper 581

Is consumption insufficiently sensitive to innovations in income?

Deaton (1986) has noted that if income is a first-order autoregressive process in first differences, then a simple version of Friedman?s permanent income hypothesis (SPIH) implies that measured U.S. consumption is insufficiently sensitive to innovations in income. This paper argues that this implication of the SPIH is a consequence of the fact that it ignores the role of the substitution effect in the consumption decision. Using a parametric version of the standard model of economic growth, the paper shows that very small movements in interest rates are sufficient to induce an empirically ...
Staff Report , Paper 106

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, 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 ...
Staff Report , Paper 388

Sustainable plans and debt

This paper presents a simple general equilibrium model of optimal taxation similar to that of Lucas and Stokey (1983), except that we let the government default on its debt. As a benchmark, we consider Ramsey equilibria in which the government can precommit its policies at the beginning of time. We then consider sustainable equilibria in which both government and private agent decision rules are required to be sequentially rational. We concentrate on trigger mechanisms which specify reversion to the finite horizon equilibrium after deviations by the government. The main result is that no ...
Staff Report , Paper 125




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