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Working Paper
Mortgages and Monetary Policy
Šustek, Roman; Kydland, Finn E.; Garriga, Carlos
(2015-10-25)
Mortgages are long-term loans with nominal payments. Consequently, under incomplete asset markets, monetary policy can affect housing investment and the economy through the cost of new mortgage borrowing and real payments on outstanding debt. These channels, distinct from traditional real rate channels, are embedded in a general equilibrium model. The transmission mechanism is found to be stronger under adjustable- than fixed-rate mortgages. Further, monetary policy shocks affecting the level of the nominal yield curve have larger real effects than transitory shocks, affecting its slope. ...
Working Papers
, Paper 2015-33
Working Paper
The Indirect Fiscal Benefits of Low-Skilled Immigration
Sachs, Dominik; Colas, Mark
(2020-10-02)
Low-skilled immigrants indirectly affect public finances through their effect on native wages & labor supply. We operationalize this general-equilibrium effect in the workhorse labor market model with heterogeneous workers and intensive and extensive labor supply margins. We derive a closed-form expression for this effect in terms of estimable statistics. We extend the analysis to various alternative specifications of the labor market and production that have been emphasized in the immigration literature. Empirical quantifications for the U.S. reveal that the indirect fiscal benefit of one ...
Opportunity and Inclusive Growth Institute Working Papers
, Paper 38
Working Paper
Occupation Mobility, Human Capital and the Aggregate Consequences of Task-Biased Innovations
Monge-Naranjo, Alexander; Dvorkin, Maximiliano
(2019-04-23)
We construct a dynamic general equilibrium model with occupation mobility, human capital accumulation and endogenous assignment of workers to tasks to quantitatively assess the aggregate impact of automation and other task-biased technological innovations. We extend recent quantitative general equilibrium Roy models to a setting with dynamic occupational choices and human capital accumulation. We provide a set of conditions for the problem of workers to be written in recursive form and provide a sharp characterization for the optimal mobility of individual workers and for the aggregate supply ...
Working Papers
, Paper 2019-13
Working Paper
Doves for the Rich, Hawks for the Poor? Distributional Consequences of Monetary Policy
Nakajima, Makoto; Kuester, Keith; Goernemann, Nils
(2016-05)
We build a New Keynesian business-cycle model with rich household heterogeneity. A central feature is that matching frictions render labor-market risk countercyclical and endogenous to monetary policy. Our main result is that a majority of households prefer substantial stabilization of unemployment even if this means deviations from price stability. A monetary policy focused on unemployment stabilization helps Main Street" by providing consumption insurance. It hurts Wall Street" by reducing precautionary saving and, thus, asset prices. On the aggregate level, household heterogeneity ...
International Finance Discussion Papers
, Paper 1167
Working Paper
Incorporating Diagnostic Expectations into the New Keynesian Framework
L’Huillier, Jean-Paul; Singh, Sanjay R.; Yoo, Donghoon
(2023-03-01)
Diagnostic expectations constitute a realistic behavioral model of inference. This paper shows that this approach to expectation formation can be productively integrated into the New Keynesian framework. Diagnostic expectations generate endogenous extrapolation in general equilibrium. We show that diagnostic expectations generate extra amplification in the presence of nominal frictions; a fall in aggregate supply generates a Keynesian recession; fiscal policy is more effective at stimulating the economy. We perform Bayesian estimation of a rich medium-scale model that incorporates consensus ...
Working Paper Series
, Paper 2023-19
Working Paper
A Generalized Approach to Indeterminacy in Linear Rational Expectations Models
Bianchi, Francesco; Nicolo, Giovanni
(2019-05)
We propose a novel approach to deal with the problem of indeterminacy in Linear Rational Expectations models. The method consists of augmenting the original state space with a set of auxiliary exogenous equations to provide the adequate number of explosive roots in presence of indeterminacy. The solution in this expanded state space, if it exists, is always determinate, and is identical to the indeterminate solution of the original model. The proposed approach accommodates determinacy and any degree of indeterminacy, and it can be implemented even when the boundaries of the determinacy region ...
Finance and Economics Discussion Series
, Paper 2019-033
Working Paper
Robust permanent income in general equilibrium
Luo, Yulei; Young, Eric R.; Nie, Jun
(2015-10-29)
This paper provides a tractable continuous-time constant-absolute-risk averse (CARA)-Gaussian framework to quantitatively explore how the preference for robustness (RB) affects the interest rate, the dynamics of consumption and income, and the welfare costs of model uncertainty in general equilibrium. We show that RB significantly reduces the equilibrium interest rate, and reduces the relative volatility of consumption growth to income growth when the income process is stationary. Furthermore, we find that the welfare costs of model uncertainty are nontrivial for plausibly estimated income ...
Research Working Paper
, Paper RWP 15-14
Working Paper
How Big is the Wealth Effect? Decomposing the Response of Consumption to House Prices
Kalemli-Ozcan, Sebnem; Elul, Ronel; Aruoba, S. Boragan
(2019-01-22)
We investigate the effect of declining house prices on household consumption behavior during 2006-2009. We use an individual-level dataset that has detailed information on borrower characteristics, mortgages and credit risk. Proxying consumption by individual-level auto loan originations, we decompose the effect of declining house prices on consumption into three main channels: wealth effect, household financial constraints, and bank health. We find a negligible wealth effect. Tightening householdlevel financial constraints can explain 40-45 percent of the response of consumption to declining ...
Working Papers
, Paper 19-6
Working Paper
Discount Shock, Price-Rent Dynamics, and the Business Cycle
Miao, Jianjun; Wang, Pengfei; Zha, Tao
(2020-05-21)
The price-rent ratio in commercial real estate is highly volatile, and its variation comoves with the business cycle. To account for these two facts, we develop a dynamic general equilibrium model that explicitly introduces a rental market and incorporates the liquidity constraint on an individual firm's production as a key ingredient. Our estimation identifies the discount shock as the most important factor in driving price-rent dynamics and linking the dynamics in the real estate market to those in the real economy. We illustrate the importance of the liquidity premium and endogenous total ...
FRB Atlanta Working Paper
, Paper 2020-7
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