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Working Paper
Doves for the Rich, Hawks for the Poor? Distributional Consequences of Systematic Monetary Policy
Gornemann, Nils; Kuester, Keith; Nakajima, Makoto (2021-06-29)
We build a New Keynesian business-cycle model with rich household heterogeneity. In the model, systematic monetary stabilization policy affects the distribution of income, income risks, and the demand for funds and supply of assets: the demand, because matching frictions render idiosyncratic labor-market risk endogenous; the supply, because markups, adjustment costs, and the tax system mean that the average profitability of firms is endogenous. Disagreement about systematic monetary stabilization policy is pronounced. The wealth-rich or retired tend to favor inflation targeting. The ...
Opportunity and Inclusive Growth Institute Working Papers , Paper 50

Working Paper
Bad Jobs and Low Inflation
Melosi, Leonardo; Faccini, Renato (2021-02-09)
The low rate of inflation observed in the U.S. over the entire past decade is hard to reconcile with traditional measures of labor market slack. We show that an alternative notion of slack that encompasses workers' propensity to search on the job explains this missing inflation. We derive this novel concept of slack from a model in which a drop in the on-the-job search rate lowers the intensity of interfirm wage competition to retain or hire workers. The on-the-job search rate can be measured directly from aggregate labor-market flows and is countercyclical. Its recent drop is corroborated by ...
Working Paper Series , Paper WP-2020-09

Working Paper
A tale of two commitments: equilibrium default and temptation
Nakajima, Makoto (2013-12-11)
I construct the life-cycle model with equilibrium default and preferences featuring temptation and self-control. The model provides quantitatively similar answers to positive questions such as the causes of the observed rise in debt and bankruptcies and macroeconomic implications of the 2005 bankruptcy reform, as the standard model without temptation. However, the temptation model provides contrasting welfare implications, because of overborrowing when the borrowing constraint is relaxed. Specifically, the 2005 bankruptcy reform has an overall negative welfare effect, according to the ...
Working Papers , Paper 14-1

Working Paper
The Nonlinear Effects of Fiscal Policy
Holter, Hans; Faria-e-Castro, Miguel; Ferreira, Miguel H.; Brinca, Pedro (2021-01-15)
We argue that the fiscal multiplier of government purchases is nonlinear in the spending shock, in contrast to what is assumed in most of the literature. In particular, the multiplier of a fiscal consolidation is decreasing in the size of the consolidation. We empirically document this fact using aggregate fiscal consolidation data across 15 OECD countries. We show that a neoclassical life-cycle, incomplete markets model calibrated to match key features of the U.S. economy can explain this empirical finding. The mechanism hinges on the relationship between fiscal shocks, their form of ...
Working Papers , Paper 2019-015

Working Paper
Generational War on Inflation: Optimal Inflation Rates for the Young and the Old
Fujiwara, Ippei; Hori, Shunsuke; Waki, Yuichiro (2019-11-19)
How does a grayer society affect the political decision-making regarding inflation rates? Is deflation preferred as a society ages? In order to answer these questions, we compute the optimal inflation rates for the young and the old respectively, and explore how they change with demographic factors, by using a New Keynesian model with overlapping generations. According to our simulation results, there indeed exists a tension between the young and the old on the optimal inflation rates, with the optimal inflation rates differing between generations. The rates can be significantly different ...
Globalization Institute Working Papers , Paper 372

Working Paper
The Nonlinear Effects of Fiscal Policy
Brinca, Pedro; Faria-e-Castro, Miguel; Ferreira, Miguel H.; Holter, Hans; Nóbrega, Valter (2023-06-23)
We argue that the fiscal multiplier of government purchases is nonlinear in the size of the spending shock. In particular, the multiplier is increasing in the spending shock, with more expansionary government spending shocks generating larger multipliers and more contractionary shocks generating smaller multipliers. We document that empirically this holds true across time, countries and types of shocks. We then propose a neoclassical mechanism that hinges on the relationship between fiscal shocks, their form of financing, and the response of labor supply across the wealth distribution. A ...
Working Papers , Paper 2019-015

Report
Pareto Improving Fiscal and Monetary Policies: Samuelson in the New Keynesian Model
Aguiar, Mark; Amador, Manuel; Arellano, Cristina (2023-06-16)
This paper explores the positive and normative consequences of government bond issuances in a New Keynesian model with heterogeneous agents, focusing on how the stock of government bonds affects the cross-sectional allocation of resources in the spirit of Samuelson (1958). We characterize the Pareto optimal levels of government bonds and the associated monetary policy adjustments that should accompany Pareto-improving bond issuances. The paper introduces a simple phase diagram to analyze the global equilibrium dynamics of inflation, interest rates, and labor earnings in response to changes in ...
Staff Report , Paper 646

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