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Working Paper
What we don’t know doesn’t hurt us: rational inattention and the permanent income hypothesis in general equilibrium
Young, Eric R.; Wang, Gaowang; Luo, Yulei; Nie, Jun (2014-11-01)
This paper derives the general equilibrium effects of rational inattention (or RI; Sims 2003,2010) in a model of incomplete income insurance (Huggett 1993, Wang 2003). We show that,under the assumption of CARA utility with Gaussian shocks, the permanent income hypothesis (PIH) arises in steady state equilibrium due to a balancing of precautionary savings and impatience. We then explore how RI affects the equilibrium joint dynamics of consumption, income and wealth, and find that elastic attention can make the model fit the data better. We finally show that the welfare costs of incomplete ...
Research Working Paper , Paper RWP 14-14

Working Paper
The market resources method for solving dynamic optimization problems
Kabukcuoglu, Ayse; Martinez-Garcia, Enrique (2016-06-01)
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.
Globalization Institute Working Papers , Paper 274

Working Paper
Should Capital Be Taxed?
Chien, YiLi; Wen, Yi; Chen, Yunmin; Yang, C.C. (2020-12-10)
We design an infinite-horizon heterogeneous-agents and incomplete-markets model to demonstrate analytically that in the absence of any redistributional effects of government policies, optimal capital tax is zero despite capital overaccumulation under precautionary savings and borrowing constraints. Our result indicates that public debt is a better tool than capital taxation to restore aggregate productive efficiency.
Working Papers , Paper 2020-033

Working Paper
A Generalized Time Iteration Method for Solving Dynamic Optimization Problems with Occasionally Binding Constraints
Kabukcuoglu, Ayse; Martinez-Garcia, Enrique (2020-08-21)
We study a generalized version of Coleman (1990)’s time iteration method (GTI) for solving dynamic optimization problems. Our benchmark framework is an irreversible investment model with labor-leisure choice. The GTI algorithm is simple to implement and provides advantages in terms of speed relative to Howard (1960)’s improvement algorithm. A second application on a heterogeneous-agents incomplete-markets model further explores the performance of GTI.
Globalization Institute Working Papers , Paper 396

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

Report
An anatomy of U.S. personal bankruptcy under Chapter 13
Eraslan, Hulya; Koşar, Gizem; Li, Wenli; Sarte, Pierre-Daniel G. (2016-01-01)
We build a structural model of Chapter 13 bankruptcy that captures salient features of personal bankruptcy under Chapter 13. We estimate our model using a novel data set that we construct from bankruptcy court dockets recorded in Delaware in 2001 and 2002. Our estimation results highlight the importance of debtor?s choice of repayment plan length for Chapter 13 outcomes under the restrictions imposed by the bankruptcy law. We use the estimated model to conduct policy experiments to evaluate the impact of more stringent provisions of Chapter 13 that impose additional restrictions on the length ...
Staff Reports , Paper 764

Working Paper
Benchmarking Global Optimizers
Arnoud, Antoine; Guvenen, Fatih; Kleineberg, Tatjana (2023-12-15)
We benchmark six global optimization algorithms by comparing their performance on challenging multidimensional test functions as well as on a method of simulated moments estimation of a panel data model of earnings dynamics. Five of the algorithms are from the popular NLopt open-source library: (i) Controlled Random Search with local mutation (CRS), (ii) Improved Stochastic Ranking Evolution Strategy (ISRES), (iii) Multi-Level Single-Linkage (MLSL), (iv) Stochastic Global Optimization (StoGo), and (v) Evolutionary Strategy with Cauchy distribution (ESCH). The sixth algorithm is TikTak, which ...
Working Papers , Paper 801

Working Paper
Implementing the Modified Golden Rule? Optimal Ramsey Capital Taxation with Incomplete Markets Revisited
Chien, YiLi; Chen, Yunmin; Yang, C.C. (2020-04-15)
What is the prescription of Ramsey capital taxation in the long run? Aiyagari (1995) addressed the question in a heterogeneous-agent incomplete-markets (HAIM) economy, showing that a positive capital tax should be imposed to implement the so-called modified golden rule (MGR). This paper revisits the long-standing issue. Working with commonly used separable isoelastic preferences, we show (i) the multiplier on the resource constraint of the Ramsey problem must diverge in the limit if a Ramsey steady state exists, (ii) there is no Ramsey steady state when the elasticity of intertemporal ...
Working Papers , Paper 2017-003

Working Paper
Optimal monetary policy under model uncertainty without commitment
Orlik, Anna; Presno, Ignacio (2013-10-27)
This paper studies the design of optimal time-consistent monetary policy in an economy where the planner trusts its own model, while a representative household uses a set of alternative probability distributions governing the evolution of the exogenous state of the economy. In such environments, unlike in the original studies of time-consistent monetary policy, managing households' expectations becomes an active channel of optimal policymaking per se, a feature that the paternalistic government seeks to exploit. We adapt recursive methods in the spirit of Abreu, Pearce, and Stacchetti (1990) ...
Working Papers , Paper 13-20

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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