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Working Paper
How to Starve the Beast: Fiscal Policy Rules
Martin, Fernando M. (2022-09-14)
Countries have widely imposed fiscal rules designed to constrain government spending and ensure fiscal responsibility. This paper studies the effectiveness and welfare implications of revenue, deficit and debt rules when governments are discretionary and prone to overspending. The optimal prescription is a revenue ceiling coupled with a balance budget requirement. For the U.S., the optimal revenue ceiling is about 15% of output, 3 percentage points below the postwar average. Most of the benefits can still be reaped with a milder constraint or escape clauses during adverse times. Imposing a ...
Working Papers , Paper 2019-026

Working Paper
A Quantitative Theory of Time-Consistent Unemployment Insurance
Pei, Yun; Xie, Zoe (2016-11-01)
During recessions, the U.S. government substantially increases the duration of unemployment insurance (UI) benefits through multiple extensions. This paper seeks to understand the incentives driving these increases. Because of the trade-off between insurance and job search incentives, the classic time-inconsistency problem arises. During recessions, the U.S. government substantially increases the duration of unemployment insurance (UI) benefits through multiple extensions. This paper seeks to understand the incentives driving these extensions. Because of the trade-off between insurance and ...
FRB Atlanta Working Paper , Paper 2016-11

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
Macroeconomic Policy Games
Bodenstein, Martin; Guerrieri, Luca; LaBriola, Joe (2014-09-23)
Strategic interactions between policymakers arise whenever each policymaker has distinct objectives. Deviating from full cooperation can result in large welfare losses. To facilitate the study of strategic interactions, we develop a toolbox that characterizes the welfare-maximizing cooperative Ramsey policies under full commitment and open-loop Nash games. Two examples for the use of our toolbox offer some novel results. The first example revisits the case of monetary policy coordination in a two-country model to confirm that our approach replicates well-known results in the literature and ...
Finance and Economics Discussion Series , Paper 2014-87

Working Paper
Commodity Prices and Labour Market Dynamics in Small Open Economies
Thoenissen, C.; Kamber, Gunes; Bodenstein, Martin (2017-04-04)
We investigate the connection between commodity price shocks and unemployment in advanced resource-rich small open economies from an empirical and theoretical perspective. Shocks to commodity prices are shown to influence labour market conditions primarily through the real exchange rate. The empirical impact of commodity price shocks is obtained from estimating a panel vector autoregression; a positive price shock is found to expand the components of GDP, to cause the real exchange rate to appreciate, and to improve labour market conditions. For every one percent increase in commodity prices, ...
Finance and Economics Discussion Series , Paper 2017-039

Working Paper
An Analysis of the Literature on International Unconventional Monetary Policy
Bhattarai, Saroj; Neely, Christopher J. (2016-11-28)
This paper critically evaluates the literature on international unconventional monetary policies. We begin by reviewing the theories of how such heterogeneous policies could work. Empirically, event studies provide compelling evidence that international asset purchase announcements have strongly influenced international bond yields, exchange rates, and equity prices in the desired manner and curtailed market perceptions of extreme events. Calibrated modeling and vector autoregressive (VAR) exercises imply that these policies significantly improved macroeconomic outcomes, raising output and ...
Working Papers , Paper 2016-21

Working Paper
Fiscal Dominance
Martin, Fernando M. (2023-02-27)
Central banks' resolve and independence is chronically tested by fiscal authorities wishing to impose their desired policies, often leading to socially undesirable economic outcomes. I study how the fiscal and monetary authorities' disagreement over outcomes and their choice of active instruments shape the implementation of policy, dispensing with commitment or first-mover advantage. I characterize the equilibrium for various combinations of active (and correspondingly, passive) instruments, identify which sources of disagreement play a role in each case, and show whether and under what ...
Working Papers , Paper 2020-040

Journal Article
Secular Stagnation and Monetary Policy
Summers, Lawrence H. (2016)
This article is based on the author?s Homer Jones Memorial Lecture delivered at the Federal Reserve Bank of St. Louis, April 6, 2016.
Review , Volume 98 , Issue 2

Report
An investigation of the gains from commitment in monetary policy
Tambalotti, Andrea; Schaumburg, Ernst (2003-08-01)
This paper proposes a simple framework for analyzing a continuum of monetary policy rules characterized by differing degrees of credibility, in which commitment and discretion become special cases of what we call quasi commitment. The monetary policy authority is assumed to formulate optimal commitment plans, to be tempted to renege on them, and to succumb to this temptation with a constant exogenous probability known to the private sector. By interpreting this probability as a continuous measure of the (lack of) credibility of the monetary policy authority, we investigate the welfare effect ...
Staff Reports , Paper 171

Report
Accounting for Business Cycles
Chari, V. V.; McGrattan, Ellen R.; Kehoe, Patrick J.; Brinca, Pedro (2016-06-28)
We elaborate on the business cycle accounting method proposed by Chari, Kehoe, and McGrattan (2007), clear up some misconceptions about the method, and then apply it to compare the Great Recession across OECD countries as well as to the recessions of the 1980s in these countries. We have four main findings. First, with the notable exception of the United States, Spain, and Ireland, the Great Recession was driven primarily by the efficiency wedge. Second, in the Great Recession, the labor wedge plays a dominant role only in the United States, and the investment wedge plays a dominant role in ...
Staff Report , Paper 531

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