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Working Paper
Optimal Contracts with Reflection
Grochulski, Borys; Zhang, Yuzhe (2016-12-01)
In this paper, we show that whenever the agent's outside option is nonzero, the optimal contract in the continuous-time principal-agent model of Sannikov (2008) is reflective at the lower bound. This means the agent is never terminated or retired after poor performance. Instead, the agent is asked to put zero effort temporarily, which brings his continuation value up. The agent is then asked to resume effort, and the contract continues. We show that a nonzero agent's outside option arises endogenously if the agent is allowed to quit and find a new firm (after a random search time of finite ...
Working Paper , Paper 16-14

Working Paper
Risk Premia at the ZLB: A Macroeconomic Interpretation
Gourio, François; Ngo, Phuong (2020-01-03)
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
Risk Management for Sovereign Debt Financing with Sustainability Conditions
Zenios, Stavros A.; Consiglio, Andrea; Athanasopoulou, Marialena; Moshammer, Edmund; Gavilan, Angel; Erce, Aitor (2019-06-01)
We develop a model of debt sustainability analysis with optimal financing decisions in the presence of macroeconomic, financial and fiscal uncertainty. We define a coherent measure of refinancing risk, and trade off the risks of debt stock and flow dynamics, subject to debt sustainability constraints and endogenous risk and term premia. We optimize both static and dynamic financing strategies, compare them with several simple rules and consol financing to demonstrate economically significant effects of optimal financing, and show that the stock-flow tradeoff can be critical for ...
Globalization Institute Working Papers , Paper 367

Working Paper
What Do LLMs Want?
Cook, Thomas R.; Kazinnik, Sophia; Modig, Zach; Palmer, Nathan M. (2025-11-25)
Large language models (LLMs) are now used for economic reasoning, but their implicit "preferences” are poorly understood. We study LLM preferences as revealed by their choices in simple allocation games and a job-search setting. Most models favor equal splits in dictator-style allocation games, consistent with inequality aversion. Structural estimates recover Fehr–Schmidt parameters that indicate inequality aversion is stronger than in similar experiments with human participants. However, we find these preferences are malleable: reframing (e.g., masking social context) and learned ...
Research Working Paper , Paper RWP 25-19

Working Paper
Implementing the Modified Golden Rule? Optimal Ramsey Capital Taxation with Incomplete Markets Revisited
Yang, C.C.; Chen, Yunmin; Chien, YiLi (2020-10-01)
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). In deriving the MGR result, Aiyagari (1995) implicitly assumed that the multiplier on the resource constraint of the Ramsey problem converges to a finite positive value in the limit. We first show that this implicit assumption has a strong implication for the shadow price of Ramsey taxation in the limit: it must go to ...
Working Papers , Paper 2017-003

Working Paper
Impulse-Based Computation of Policy Counterfactuals
Hebden, James; Winkler, Fabian (2021-07-15)
We propose an efficient procedure to solve for policy counterfactuals in linear models with occasionally binding constraints. The procedure does not require knowledge of the structural or reduced-form equations of the model, its state variables, or its shock processes. Forecasts of the variables entering the policy problem, and impulse response functions of these variables to anticipated policy shocks under an arbitrary policy, constitute sufficient information to construct valid counterfactuals. We show how to compute solutions for instrument rules and optimal discretionary and commitment ...
Finance and Economics Discussion Series , Paper 2021-042

Working Paper
Estimating Macroeconomic News and Surprise Shocks
Richter, Alexander W.; Kilian, Lutz; Plante, Michael D. (2023-11-03)
The importance of understanding the economic effects of TFP news and surprise shocks is widely recognized in the literature. This paper examines the ability of the state-of-the-art VAR approach in Kurmann and Sims (2021) to identify responses to TFP news shocks and possibly surprise shocks in theory and practice. When applied to data generated from conventional New Keynesian DSGE models with shock processes that match key TFP moments, this estimator tends to be strongly biased, both in the presence of TFP measurement error and in its absence. This bias worsens in realistically small samples, ...
Working Papers , Paper 2304

Journal Article
Optimal Capital Taxation and Precautionary Savings
Chen, Yunmin; Chien, YiLi; Yang, C.C. (2021-07-01)
There are multiple reasons to motivate the role of capital taxation in the heterogenous-agent incomplete-markets (HAIM) model. One is the production inefficiency caused by precautionary savings. The other is the wealth redistribution role played by capital taxation. To distinguish between these two reasons, this article uses an analytical tractable HAIM model with a degenerated distribution of wealth while preserving the role of precautionary savings. The degenerated wealth distribution shuts down the distributional role played by capital taxation. Our results show that, with no role to play ...
Review , Volume 103 , Issue 3 , Pages 333-350

Report
Optimal target criteria for stabilization policy
Woodford, Michael; Giannoni, Marc (2012)
This paper considers a general class of nonlinear rational-expectations models in which policymakers seek to maximize an objective function that may be household expected utility. We show how to derive a target criterion that is 1) consistent with the model?s structural equations, 2) strong enough to imply a unique equilibrium, and 3) optimal, in the sense that a commitment to adjust the policy instrument at all dates so as to satisfy the target criterion maximizes the objective function. The proposed optimal target criterion is a linear equation that must be satisfied by the projected paths ...
Staff Reports , Paper 535

Working Paper
Implementing the Modified Golden Rule? Optimal Ramsey Capital Taxation with Incomplete Markets Revisited
Owyang, Michael T.; Chen, Yunmin; Chien, YiLi (2017-02-13)
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. We first show that the Aiyagari?s result holds if the shadow price of raising government revenues through distorting taxes converges to zero in the limit at the Ramsey optimum. This ?if? is clearly a strong condition. As long as the condition fails to hold, we show (i) there ...
Working Papers , Paper 2017-3

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