Search Results
Working Paper
Search Complementarities, Aggregate Fluctuations, and Fiscal Policy
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 ...
Working Paper
The "Matthew Effect" and Market Concentration: Search Complementarities and Monopsony Power
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 ...
Working Paper
Targeting Long Rates in a Model with Segmented Markets
This paper develops a model of segmented financial markets in which the net worth of financial institutions limits the degree of arbitrage across the term structure. The model is embedded into the canonical Dynamic New Keynesian (DNK) framework. We estimate the model using data on the term premium. Our principal results include the following. First, the estimated segmentation coefficient implies a nontrivial effect of central bank asset purchases on yields and real activity. Second, there are welfare gains to having the central bank respond to the term premium, eg., including the term premium ...
Working Paper
Optimal Contracts, Aggregate Risk, and the Financial Accelerator
This paper derives the optimal lending contract in the financial accelerator model of Bernanke, Gertler and Gilchrist (1999), hereafter BGG. The optimal contract includes indexation to the aggregate return on capital, household consumption, and the return to internal funds. This triple indexation results in a dampening of fluctuations in leverage and the risk premium. Hence, compared with the contract originally imposed by BGG, the privately optimal contract implies essentially no financial accelerator.
Working Paper
Macro Credit Policy and the Financial Accelerator
This paper studies macro credit policies within the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The focus is on borrower-based restrictions on lending such as loan-to-value (LTV) ratios. We find that the efficacy of cyclical taxes on LTV ratios depends upon the nature of the underlying loan contract. If the loan contract contains equity-like features such as indexation to aggregate conditions, then there is little role for cyclical taxation. But if the loan contract is not indexed to aggregate conditions, then there are substantial gains to procyclical ...
Working Paper
The market resources method for solving dynamic optimization problems
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.
Working Paper
Trends and cycles in small open economies: making the case for a general equilibrium approach
Economic research into the causes of business cycles in small open economies is almost always undertaken using a partial equilibrium model. This approach is characterized by two key assumptions. The first is that the world interest rate is unaffected by economic developments in the small open economy, an exogeneity assumption. The second assumption is that this exogenous interest rate combined with domestic productivity is sufficient to describe equilibrium choices. We demonstrate the failure of the second assumption by contrasting general and partial equilibrium approaches to the study of a ...
Working Paper
Tractable latent state filtering for non-linear DSGE models using a second-order approximation
This paper develops a novel approach for estimating latent state variables of Dynamic Stochastic General Equilibrium (DSGE) models that are solved using a second-order accurate approximation. I apply the Kalman filter to a state-space representation of the second-order solution based on the ?pruning? scheme of Kim, Kim, Schaumburg and Sims (2008). By contrast to particle filters, no stochastic simulations are needed for the filter here--the present method is thus much faster. In Monte Carlo experiments, the filter here generates more accurate estimates of latent state variables than the ...
Working Paper
A Generalized Time Iteration Method for Solving Dynamic Optimization Problems with Occasionally Binding Constraints
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.
Working Paper
A History of U.S. Tariffs: Quantifying Strategic Trade-Offs in Tariff Policy Design
U.S. tariff policy has historically balanced competing goals—revenue, protection and reciprocity. Policy priorities have shifted over time in response to changing economic and political conditions. Using a calibrated general equilibrium model, we illustrate these trade-offs through the lens of tariff Laffer curves. A 70 percent tariff maximizes U.S. revenue only in the absence of retaliation; this optimum falls to 30 percent with reciprocal tariffs. A unilateral 25 percent tariff delivers the largest domestic consumption gains through favorable terms-of-trade effects, though these gains ...