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Working Paper
Bank Liquidity and Capital Regulation in General Equilibrium
Driscoll, John C.; Covas, Francisco (2014-09-12)
We develop a nonlinear dynamic general equilibrium model with a banking sector and use it to study the macroeconomic impact of introducing a minimum liquidity standard for banks on top of existing capital adequacy requirements. The model generates a distribution of bank sizes arising from differences in banks' ability to generate revenue from loans and from occasionally binding capital and liquidity constraints. Under our baseline calibration, imposing a liquidity requirement would lead to a steady-state decrease of about 3 percent in the amount of loans made, an increase in banks' holdings ...
Finance and Economics Discussion Series , Paper 2014-85

Report
Evolution of Modern Business Cycle Models: Accounting for the Great Recession
Kehoe, Patrick J.; Pastorino, Elena; Midrigan, Virgiliu (2018-06-14)
Modern business cycle theory focuses on the study of dynamic stochastic general equilibrium models that generate aggregate fluctuations similar to those experienced by actual economies. We discuss how this theory has evolved from its roots in the early real business cycle models of the late 1970s through the turmoil of the Great Recession four decades later. We document the strikingly different pattern of comovements of macro aggregates during the Great Recession compared to other postwar recessions, especially the 1982 recession. We then show how two versions of the latest generation of real ...
Staff Report , Paper 566

Working Paper
Financing Ventures
Greenwood, Jeremy; Sanchez, Juan M.; Han, Pengfei (2021-11)
The relationship between venture capital and growth is examined using an endogenous growth model incorporating dynamic contracts between entrepreneurs and venture capitalists. At each stage of financing, venture capitalists evaluate the viability of startups. If viable, venture capitalists provide funding for the next stage. The success of a project depends on the amount of funding. The model is confronted with stylized facts about venture capital: statistics by funding round concerning success rates, failure rates, investment rates, equity shares, and IPO values. The increased efficiency ...
Working Papers , Paper 2017-035

Working Paper
Learning about Regime Change
Matthes, Christian; Foerster, Andrew (2020-04-15)
Total factor productivity (TFP) and investment specific technology (IST) growth both exhibit regime-switching behavior, but the regime at any given time is difficult to infer. We build a rational expectations real business cycle model where the underlying TFP and IST regimes are unobserved. We then develop a general perturbation solution algorithm for a wide class of models with unobserved regime-switching. Using our method, we show that learning about regime-switching alters the responses to regime shifts and intra-regime shocks, increases asymmetries in the responses, generates forecast ...
Working Paper Series , Paper 2020-15

Working Paper
Optimal Dynamic Tax-Transfer Policies in Heterogeneous-Agents Economies
Chien, YiLi; Wen, Yi (2023-05-01)
In the design of an optimal tax-transfer system, there are two complementary conventional wisdoms: the labor-efficiency argument and the debt-efficiency argument. The former emphasizes the trade-off between redistribution and distortions in the labor market, while the latter emphasizes the trade-off between gains from monopoly rents and distortions in the asset market. We use an analytically tractable infinite-horizon model with both ex-ante and ex-post heterogeneity to show that neither argument is complete in the design of the tax-transfer system. Instead, in Aiyagari-type models the ...
Working Papers , Paper 2023-009

Working Paper
Technology adoption and mortality
Hejkal, John P.; Vandenbroucke, Guillaume; Ravikumar, B. (2020-10)
We develop a quantitative theory of mortality trends and population dynamics. In our theory, individuals incur time and/or goods costs over their life cycle, to adopt a better health technology that increases their age-specific survival probability. Technology adoption is a source of a dynamic externality: As more individuals adopt the better technology, the marginal benefit of future adoption increases. The allocation of time and/or goods also depends on total factor productivity (TFP): As TFP grows, more resources are allocated to technology adoption. Both channels---the dynamic externality ...
Working Papers , Paper 2020-039

Working Paper
Don’t Tax Capital — Optimal Ramsey Taxation in Heterogeneous Agent Economies with Quasi-Linear Preferences
Chien, YiLi; Wen, Yi (2019-02-22)
We build a tractable heterogeneous-agent incomplete-markets model with quasi-linear preferences to address a set of long-standing issues in the optimal Ramsey taxation literature. The tractability of our model enables us to analytically prove the existence of a Ramsey steady state and establish several novel results (i) Depending on the government's capacity to issue debt, there can exist different types of Ramsey steady states but they have the same implications for optimal long-run tax policies. (ii) The optimal capital tax is exclusively zero in a Ramsey steady state regardless of the ...
Working Papers , Paper 2019-7

Working Paper
The Ramsey Steady-State Conundrum in Heterogeneous-Agent Economies
Chien, YiLi; Wen, Yi (2023-02-06)
In infinite horizon, heterogeneous-agent and incomplete-market models, the existence of an interior Ramsey steady state is often assumed instead of proven. This paper makes two fundamental contributions: (i) We prove that the interior Ramsey steady state assumed by Aiyagari (1995) does not exist in the standard Aiyagari model. Specifically, a steady state featuring the modified golden rule and a positive capital tax is feasible but not optimal. (ii) We design a modified, analytically tractable version of the standard Aiyagari model to unveil the necessary and/or sufficient conditions for the ...
Working Papers , Paper 2022-009

Working Paper
The Determination of Public Debt under both Aggregate and Idiosyncratic Uncertainty
Chien, YiLi; Wen, Yi (2020-08-13)
We use an analytically tractable model to show that the Ramsey planner's decisions to finance stochastic public expenditures under uninsurable idiosyncratic risk implies a departure from tax smoothing. In the absence of state-contingent bonds the government's attempt to balance the competing incentives between tax smoothing and individual consumption smoothing---even at the cost of extra tax distortion---implies a bounded stochastic unit root component in optimal taxes. Nonetheless, a sufficiently high average level of public debt to support individuals’ self-insurance position is welfare ...
Working Papers , Paper 2019-038

Working Paper
Can Intangible Capital Explain Cyclical Movements in the Labor Wedge?
Gourio, Francois; Rudanko, Leena (2014-01-15)
Intangible capital is an important factor of production in modern economies that is generally neglected in business cycle analyses. We demonstrate that intangible capital can have a substantial impact on business cycle dynamics, especially if the intangible is complementary with production capacity. We focus on customer capital: the capital embodied in the relationships a firm has with its customers. Introducing customer capital into a standard real business cycle model generates a volatile and countercyclical labor wedge, due to a mismeasured marginal product of labor. We also provide new ...
Working Paper Series , Paper WP-2014-2

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