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Working Paper
Search Complementarities, Aggregate Fluctuations, and Fiscal Policy
Yu, Yang; Fernández-Villaverde, Jesús; Zanetti, Francesco; Mandelman, Federico S. (2019-05-01)
We develop a quantitative business cycle model with search complementarities in the inter-firm matching process that entails a multiplicity of equilibria. An active equilibrium with strong joint venture formation, large output, and low unemployment coexists with a passive equilibrium with low joint venture formation, low output, and high unemployment. {{p}} Changes in fundamentals move the system between the two equilibria, generating large and persistent business cycle fluctuations. The volatility of shocks is important for the selection and duration of each equilibrium. Sufficiently adverse ...
FRB Atlanta Working Paper , Paper 2019-9

Working Paper
Systemic Credit Risk Premium: Insights from Credit Derivatives Markets
Byun, Kiwoong; Kim, Baeho; Oh, Dong Hwan (2025-08-04)
This study examines the market-implied premiums for bearing systemic credit risk by analyzing credit derivatives on the CDX North American Investment Grade portfolio from September 2005 to March 2021. We construct systemic credit risk premium (SCRP) as the difference between the observed prices of multi-name super-senior tranches and their synthetic counterparts valued from historical asset correlations implied by single-name CDS spreads. Our findings show that the fitted SCRP surged during the 2007-2009 financial crisis, remained stable for a period, declined gradually after 2016, and spiked ...
Finance and Economics Discussion Series , Paper 2023-055r1

Working Paper
Some Implications of Uncertainty and Misperception for Monetary Policy
López-Salido, J. David; Hebden, James; Erceg, Christopher J.; Kiley, Michael T.; Tetlow, Robert J. (2018-08-23)
When choosing a strategy for monetary policy, policymakers must grapple with mismeasurement of labor market slack, and of the responsiveness of price inflation to that slack. Using stochastic simulations of a small-scale version of the Federal Reserve Board?s principal New Keynesian macroeconomic model, we evaluate representative rule-based policy strategies, paying particular attention to how those strategies interact with initial conditions in the U.S. as they are seen today and with the current outlook. To do this, we construct a current relevant baseline forecast, one that is loosely ...
Finance and Economics Discussion Series , Paper 2018-059

Working Paper
The "Matthew Effect" and Market Concentration: Search Complementarities and Monopsony Power
Yu, Yang; Mandelman, Federico S.; Zanetti, Francesco; Fernández-Villaverde, Jesús (2021-01-15)
This paper develops a dynamic general equilibrium model with heterogeneous firms that face search complementarities in the formation of vendor contracts. Search complementarities amplify small differences in productivity among firms. Market concentration fosters monopsony power in the labor market, magnifying profits and further enhancing the output share of high-productivity firms. The combination of search complementarities and monopsony power induce a strong "Matthew effect" that endogenously generates superstar firms out of uniform idiosyncratic productivity distributions. Reductions in ...
FRB Atlanta Working Paper , Paper 2021-4

Working Paper
Reliably Computing Nonlinear Dynamic Stochastic Model Solutions: An Algorithm with Error Formulas
Anderson, Gary S. (2018-10-11)
This paper provides a new technique for representing discrete time nonlinear dynamic stochastic time invariant maps. Using this new series representation, the paper augments the usual solution strategy with an additional set of constraints thereby enhancing algorithm reliability. The paper also provides general formulas for evaluating the accuracy of proposed solutions. The technique can readily accommodate models with occasionally binding constraints and regime switching. The algorithm uses Smolyak polynomial function approximation in a way which makes it possible to exploit a high degree of ...
Finance and Economics Discussion Series , Paper 2018-070

Working Paper
Rational Inattention via Ignorance Equivalence
Müller-Itten, Michèle; Stangebye, Zachary; Armenter, Roc (2020-06-22)
We present a novel approach to finite Rational Inattention (RI) models based on the ignorance equivalent, a fictitious action with state-dependent payoffs that effectively summarizes the optimal learning and conditional choices. The ignorance equivalent allows us to recast the RI problem as a standard expected utility maximization over an augmented choice set called the learning-proof menu, yielding new insights regarding the behavioral implications of RI, in particular as new actions are added to the menu. Our geometric approach is also well suited to numerical methods, outperforming ...
Working Papers , Paper 20-24

Working Paper
Geometric Methods for Finite Rational Inattention
Strangebye, Zachary; Müller-Itten, Michèle; Armenter, Roc (2021-09-14)
We present a geometric approach to the finite Rational Inattention (RI) model, recasting it as a convex optimization problem with reduced dimensionality that is well-suited to numerical methods. We provide an algorithm that outperforms existing RI computation techniques in terms of both speed and accuracy. We also introduce methods to quantify the impact of numerical inaccuracy on the behavioral predictions and to produce robust predictions regarding the most frequently implemented actions.
Working Papers , Paper 21-30

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
How Small is Small? Non-linearities in Heterogeneous Agent Models
Bianchi, Javier; Kaplan, Greg (2026-06-22)
In plausibly calibrated heterogeneous-agent models, marginal propensities to consume (MPCs) are highly non-linear in wealth, falling sharply away from borrowing constraints. As a result, the aggregate consumption response to a fiscal transfer is strongly concave in its size: larger transfers shift households out of high-MPC regions, dampening the consumption response. Across partial- and general-equilibrium settings, linear methods substantially overstate the effects of fiscal stimulus at empirically relevant sizes. Local methods of any order are unlikely to be reliable in settings where a ...
Working Papers , Paper 815

Working Paper
A Distance-based Algorithm for Defining Antitrust Markets
Taragin, Charles; Taylhardat, Marco (2025-07-08)
We propose a simple algorithm for defining merger-specific geographic antitrust markets based on merging firm proximity. Applying it to over a thousand hypothetical bank mergers, we compare concentration measures in our markets to those defined by the Federal Reserve, which are not merger-specific, finding broad agreement but also offering potential improvements upon current definitions.
Finance and Economics Discussion Series , Paper 2025-051

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