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Working Paper
Switching Volatility in a Nonlinear Open Economy
http://fedora:8080/fcrepo/rest/objects/authors/; Benchimol, Jonathan (2020-05-28)
Uncertainty about an economy’s regime can change drastically around a crisis. An imported crisis such as the global financial crisis in the euro area highlights the effect of foreign shocks. Estimating an open-economy nonlinear dynamic stochastic general equilibrium model for the euro area and the United States including Markov-switching volatility shocks, we show that these shocks were significant during the global financial crisis compared with periods of calm. We describe how U.S. shocks from both the real economy and financial markets affected the euro area economy and how bond ...
Globalization Institute Working Papers , Paper 386

Working Paper
Contingent Debt and Performance Pricing in an Optimal Capital Structure Model with Financial Distress and Reorganization
Grochulski, Borys; Wong, Russell (2018-11-14)
Building on the trade-off between agency costs and monitoring costs, we develop a dynamic theory of optimal capital structure with financial distress and reorganization. Costly monitoring eliminates the agency friction and thus the risk of inefficient liquidation. Our key assumption is that monitoring cannot be applied instantaneously. Rather, transitions between agency and monitoring are subject to search frictions. In the optimal contract, the firm seeks a monitoring opportunity whenever it is financially distressed, i.e., when the risk of liquidation is high. If a monitoring opportunity ...
Working Paper , Paper 18-17

Journal Article
Monetary Policy in an Oil-Exporting Economy
Restrepo-Echavarria, Paulina; Bejarano, Jesús; Rodríguez, Diego; Hamann, Franz (2016)
The sudden collapse of oil prices poses a challenge to inflation-targeting central banks in oil-exporting economies. In this article, the authors illustrate this challenge and conduct a quantitative assessment of the impact of changes in oil prices in a small open economy in which oil represents an important fraction of its exports. They build a monetary, three-sector, dynamic stochastic general equilibrium model and estimate it for the Colombian economy. They model the oil sector as an optimal resource extracting problem and show that in oil-exporting economies the macroeconomic effects vary ...
Review , Volume 98 , Issue 3 , Pages 239-61

Working Paper
Growth and Welfare Gains from Financial Integration Under Model Uncertainty
Luo, Yulei; Young, Eric R.; Nie, Jun (2018-12-07)
We build a robustness (RB) version of the Obstfeld (1994) model to study the effects of financial integration on growth and welfare. Our model can account for the empirically observed heterogeneity in the relationship between growth and volatility for different countries. The calibrated model shows that financial integration leads to significantly larger gains in growth and welfare for advanced countries than developing countries, with some developing countries experiencing growth and welfare loss in financial integration. Our analytical solutions help uncover the key mechanisms by which this ...
Research Working Paper , Paper RWP 18-12

Working Paper
Risk Premia at the ZLB: A Macroeconomic Interpretation
Gourio, Francois; Ngo, Phuong (2020-01-02)
Historically, inflation is negatively correlated with stock returns, leading investors to fear inflation. We document using a variety of measures that this association became positive in the U.S. during the 2008-2015 period. We then show how an off-the-shelf New Keynesian model can reproduce this change of association due to the binding zero lower bound (ZLB) on short-term nominal interest rates during this period: in the model, demand shocks become more important when the ZLB binds because the central bank cannot respond as effectively as when interest rates are positive. This changing ...
Working Paper Series , Paper WP 2020-01

Working Paper
Goods-Market Frictions and International Trade
McCallum, Andrew H.; Krolikowski, Pawel (2019-08-01)
We add goods-market frictions to a general equilibrium dynamic model with heterogeneous exporting producers and identical importing retailers. Our tractable framework leads to endogenously unmatched producers, which attenuate welfare responses to foreign shocks but increase the trade elasticity relative to a model without search costs. Search frictions are quantitatively important in our calibration, attenuating welfare responses to tariffs by 40 percent and increasing the trade elasticity by 50 percent. Eliminating search costs raises welfare by 1 percent and increasing them by only a few ...
Working Papers , Paper 16-35R2

Working Paper
Jointly Estimating Macroeconomic News and Surprise Shocks
Kilian, Lutz; Plante, Michael D.; Richter, Alexander W. (2023-04-20)
This paper clarifies the conditions under which the state-of-the-art approach to identifying TFP news shocks in Kurmann and Sims (2021, KS) identifies not only news shocks but also surprise shocks. We examine the ability of the KS procedure to recover responses to these shocks from data generated by a conventional New Keynesian DSGE model. Our analysis shows that the KS response estimator tends to be strongly biased even in the absence of measurement error. This bias worsens in realistically small samples, and the estimator becomes highly variable. Incorporating a direct measure of TFP news ...
Working Papers , Paper 2304

Working Paper
On Monetary Policy, Model Uncertainty, and Credibility
Orlik, Anna (2022-12)
This paper studies the design of optimal time-consistent monetary policy in an economy where the planner and a representative household are faced with model uncertainty: While they are able to construct and agree on a reference model (probability distribution) governing the evolution of the exogenous state of the economy, a representative household has fragile beliefs and is averse to model uncertainty. In such environments, management of households' expectations becomes an active channel of optimal policymaking per se. A central banker who respects the fact that private sector models are ...
Finance and Economics Discussion Series , Paper 2022-082

Working Paper
Computation of Policy Counterfactuals in Sequence Space
Hebden, James; Winkler, Fabian (2024-09-01)
We propose an efficient procedure to solve for policy counterfactuals in linear models with occasionally binding constraints in sequence space. Forecasts of the variables relevant for the policy problem, and their impulse responses to anticipated policy shocks, constitute sufficient information to construct valid counterfactuals. Knowledge of the structural model equations or filtering of structural shocks is not required. We solve for deterministic and stochastic paths under instrument rules as well as under optimal policy with commitment or subgame-perfect discretion. As an application, we ...
Finance and Economics Discussion Series , Paper 2021-042r1

Working Paper
Ignorance, Uncertainty, and Strategic Consumption-Portfolio Decisions
Luo, Yulei; Nie, Jun; Wang, Haijun (2017-11-01)
This paper constructs a recursive utility version of a canonical Merton (1971) model with uninsurable labor income and unknown income growth to study how the interaction between two types of uncertainty due to ignorance affects strategic consumption-portfolio rules and precautionary savings. Specifically, after solving the model explicitly, we theoretically and quantitatively explore (i) how these ignorance-induced uncertainties interact with intertemporal substitution, risk aversion, and the correlation between the equity return and labor income, and (ii) how they jointly affect strategic ...
Research Working Paper , Paper RWP 17-13

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