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Jel Classification:E13 

Working Paper
Time-Inconsistent Optimal Quantity of Debt

A key property of the Aiyagari-type heterogeneous-agent models is that the equilibrium interest rate of public debt lies below the time discount rate. This fundamental property, however, implies that the Ramsey planner’s fiscal policy may be time-inconsistent because the forward-looking planner would have a dominant incentive to issue plenty of debt such that all households are fully self-insured against idiosyncratic risk. But such a full self-insurance allocation may be paradoxical because, to achieve it, the optimal labor tax rate may approach 100% and aggregate consumption may approach ...
Working Papers , Paper 2020-037

Working Paper
Interpreting Shocks to the Relative Price of Investment with a Two-Sector Model

Consumption and investment comove over the business cycle in response to shocks that permanently move the price of investment. The interpretation of these shocks has relied on standard one-sector models or on models with two or more sectors that can be aggregated. However, the same interpretation continues to go through in models that cannot be aggregated into a standard one-sector model. Furthermore, such a two-sector model with distinct factor input shares across production sectors and commingling of sectoral outputs in the assembly of final consumption and investment goods, in line with ...
Finance and Economics Discussion Series , Paper 2016-7

Working Paper
The Stable Transformation Path

Standard dynamic models of structural transformation, without knife-edge and counterfactual parameter values, preclude balanced growth path (BGP) analysis. This paper develops a dynamic equilibrium concept for a more general class of models | an alternative to a BGP, which we coin a Stable Transformation Path (STraP). The STraP characterizes the medium-term dynamics of the economy in a turnpike sense; it is the path toward which the economy (quickly) converges from an arbitrary initial capital stock. Calibrated simulations demonstrate that the relaxed parameter values that the STraP allows ...
Working Paper Series , Paper WP-2020-23

Working Paper
Optimal Fiscal Policies under Market Failures

The aggregate capital stock in a nation can be overaccumulated for many different reasons. This paper studies which policy or policy mix is more effective in achieving the socially optimal (golden rule) level of aggregate capital stock in an infinite-horizon heterogeneous-agents incomplete-markets economy where capital is over-accumulated for two distinct reasons: (i) precautionary savings and (ii) production externalities. By solving the Ramsey problem analytically along the entire transitional path, we show that public debt and capital taxation play very distinct roles in dealing with the ...
Working Papers , Paper 2020-002

Working Paper
The Real Effects of Monetary Shocks: Evidence from Micro Pricing Moments

This paper evaluates the informativeness of eight micro pricing moments for monetary non-neutrality. Frequency of price changes is the only robustly informative moment. The ratio of kurtosis over frequency is significant only because of frequency, and insignificant when non-pricing moments are included. Non-pricing moments are additionally informative about monetary non-neutrality, indicating potential omitted variable bias and the inability of pricing moments to serve as sufficient statistics. In contrast to existing theoretical work, this ratio has an ambiguous relationship with monetary ...
Working Papers , Paper 21-17

Working Paper
Technology adoption, mortality and population dynamics

We develop a quantitative theory of mortality trends and population dynamics. Our theory emphasizes individual choices on costly adoption of healthy technologies and diffusion of knowledge about infections as a key channel for reducing mortality. Our theory is consistent with three observations on mortality: (i) The cross-country correlation between levels of mortality and income is negative; (ii) mortality in poor countries has converged to that of rich countries despite no convergence in income; and (iii) economic growth is not a prerequisite for mortality to decline. We calibrate our model ...
Working Papers , Paper 2020-039

Working Paper
Revisiting Capital-Skill Complementarity, Inequality, and Labor Share

This paper revisits capital-skill complementarity and inequality, as in Krusell, Ohanian, Rios-Rull and Violante (KORV, 2000). Using their methodology, we study how well the KORV model accounts for more recent data, including the large changes in the labor's share of income that were not present in KORV. We study both labor share of gross income (as in KORV), and income net of depreciation. We also use nonfarm business sector output as an alternative measure of production to real GDP. We find strong evidence for continued capital-skill complementarity in the most recent data, and we also find ...
International Finance Discussion Papers , Paper 1319

Journal Article
China's Growth Outlook: Is High-Income Status in Reach?

Can China build on its development success to achieve high-income status in the decades ahead? To shed light on this question, we examine the past and prospective future sources of growth in China through the lens of the neoclassical growth model. Our key finding is that China would need to sustain total factor productivity growth at the top end of the range achieved by its high-income Pacific Rim neighbors in order to match their success in raising living standards. While fast-growing working-age populations boosted per capita income growth elsewhere in the Pacific Rim, a rapidly aging ...
Economic Policy Review , Volume 26 , Issue 4 , Pages 69-97

Working Paper
Disasters Everywhere: The Costs of Business Cycles Reconsidered

Business cycles are costlier and stabilization policies more beneficial than widely thought. This paper shows that all business cycles are asymmetric and resemble mini “disasters”. By this we mean that growth is pervasively fat-tailed and non-Gaussian. Using long-run historical data, we show empirically that this is true for all advanced economies since 1870. Focusing on the peacetime sample, we develop a tractable local projection framework to estimate consumption growth paths for normal and financial-crisis recessions. Using random coefficient local projections we get an easy and ...
Working Paper Series , Paper 2020-11

Report
Evolution of Modern Business Cycle Models: Accounting for the Great Recession

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

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