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Jel Classification:C60 

Working Paper
Reliably Computing Nonlinear Dynamic Stochastic Model Solutions: An Algorithm with Error Formulas

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
Convergence to Rational Expectations in Learning Models: A Note of Caution

This paper illustrates a challenge in analyzing the learning algorithms resulting in second-order difference equations. We show in a simple monetary model that the learning dynamics do not converge to the rational expectations monetary steady state. We then show that to guarantee convergence, the gain parameter used in the learning rule has to be restricted based on economic fundamentals in the monetary model.
Working Papers , Paper 2020-027

Working Paper
Optimal Taxation with Endogenous Default under Incomplete Markets

How are the optimal tax and debt policies affected if the government has the option to default on its debt? We address this question from a normative perspective in an economy with noncontingent government debt, domestic default and labor taxes. On one hand, default prevents the government from incurring future tax distortions that would come along with the service of the debt. On the other hand, default risk gives rise to endogenous credit limits that hinder the government's ability to smooth taxes. We characterize the fiscal policy and show how the option to default alters the near-unit ...
International Finance Discussion Papers , Paper 1297

Report
The Great Leverage 2.0? A Tale of Different Indicators of Corporate Leverage

Many policymakers have expressed concerns about the rise in nonfinancial corporate leverage and the risks this poses to financial stability, since (1) high leverage raises the odds of firms becoming a source of adverse shocks, and (2) high leverage amplifies the role of firms in propagating other adverse shocks. This policy brief examines alternative indicators of leverage, focusing especially on the somewhat disparate signals they send regarding the current state of indebtedness of nonfinancial corporate businesses. Even though the aggregate nonfinancial corporate debt-to-income ratio is at ...
Current Policy Perspectives

Working Paper
Convergence to Rational Expectations in Learning Models: A Note of Caution

This paper illustrates a challenge in analyzing the learning algorithms resulting in second-order difference equations. We show in a simple monetary model that the learning dynamics do not converge to the rational expectations monetary steady state. We then show that to guarantee convergence, the gain parameter used in the learning rule has to be restricted based on economic fundamentals in the monetary model.
Working Papers , Paper 2020-027

Working Paper
A moment-matching method for approximating vector autoregressive processes by finite-state Markov chains

This paper proposes a moment-matching method for approximating vector autoregressions by finite-state Markov chains. The Markov chain is constructed by targeting the conditional moments of the underlying continuous process. The proposed method is more robust to the number of discrete values and tends to outperform the existing methods for approximating multivariate processes over a wide range of the parameter space, especially for highly persistent vector autoregressions with roots near the unit circle.
FRB Atlanta Working Paper , Paper 2013-05

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