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The cost of business cycles for unskilled workers
Mukoyama, Toshihiko; Sahin, Aysegul (2005-07-01)
This paper reconsiders the cost of business cycles under incomplete markets. Primarily, we focus on the heterogeneity in the cost of business cycles among agents with different skill levels. Unskilled workers are subject to a much larger risk of unemployment during recessions than are skilled workers. Moreover, unskilled workers earn less income, which limits their ability to self-insure. We examine how this heterogeneity in unemployment risk and income translates into heterogeneity in the cost of business cycles. We set up a dynamic general equilibrium model with incomplete markets, in which ...
Staff Reports , Paper 214

Working Paper
Closing Large Open Economy Models
Bodenstein, Martin (2006)
A large class of international business cycle models admits multiple locally isolated deterministic steady states, if the elasticity of substitution between traded goods is sufficiently low. I explore the conditions under which such multiplicity occurs and characterize the dynamic properties in the neighborhood of each steady state. Models with standard incomplete markets, portfolio costs, a debt-elastic interest rate, or an overlapping generations framework allow for multiple steady states, if the model features multiple steady states under financial autarchy. If the excess demand for the ...
International Finance Discussion Papers , Paper 867

Working Paper
Low Risk Sharing with Many Assets
Singh, Sanjay R.; Marin, Emile A. (2023-11-30)
Classical contributions in international macroeconomics rely on goods-market mechanisms to reconcile the cyclicality of real exchange rates when financial markets are incomplete. However, cross-border trade in one domestic and one foreign-currency-denominated risk-free asset prohibits these mechanisms from breaking the pattern consistent with complete markets. In this paper, we characterize how goods markets drive exchange rate cyclicality, taking into account trade in risk-free and/or risky assets. We show that goods-market mechanisms come back into play, even when there is cross-border ...
Working Paper Series , Paper 2023-37

Working Paper
Optimal Public Debt with Life Cycle Motives
Sager, Erick; Peterman, William B. (2018-04-20)
Public debt can be optimal in standard incomplete market models with infinitely lived agents, since the associated capital crowd-out induces a higher interest rate. The higher interest rate encourages individuals to save and, hence, better self-insure against idiosyncratic labor earnings risk. Even though individual savings behavior is a crucial determinant of the optimality of public debt, this class of economies abstracts from empirically observed life cycle savings patterns. Thus, this paper studies how incorporating a life cycle affects optimal public debt. We find that while the ...
Finance and Economics Discussion Series , Paper 2018-028

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Spillovers and Spillbacks
Acharya, Sushant; Pesenti, Paolo (2024-03-01)
We study international monetary policy spillovers and spillbacks in a tractable two-country Heterogeneous Agent New Keynesian model. Relative to Representative Agent (RANK) models, our framework introduces a precautionary-savings channel, as households in both countries face uninsurable income risk, and a real-income channel, as households have heterogeneous marginal propensities to consume (MPC). While both channels amplify the size of spillovers/spillbacks, only precautionary savings can change their sign relative to RANK. Spillovers are likely to be larger in economies with higher ...
Staff Reports , Paper 1089

Working Paper
Assessing bankruptcy reform in a model with temptation and equilibrium default
Nakajima, Makoto (2015-03-09)
A life-cycle model with equilibrium default in which consumers with and without temptation coexist is constructed to evaluate the 2005 bankruptcy law reform and other counterfactual reforms. The calibrated model indicates that the 2005 bankruptcy reform achieves its goal of reducing the number of bankruptcy filings, as seen in the data, but at the cost of loss in social welfare. The creditor-friendly reform provides borrowers with a stronger commitment to repay and thus yields lower default premia and better consumption smoothing. However, those who borrow and default due to temptation or ...
Working Papers , Paper 15-12

Report
Optimal Monetary Policy According to HANK
Dogra, Keshav; Challe, Edouard; Acharya, Sushant (2020-02-01)
We study optimal monetary policy in a heterogeneous agent new Keynesian economy. A utilitarian planner seeks to reduce consumption inequality, in addition to stabilizing output gaps and inflation. The planner does so both by reducing income risk faced by households, and by reducing the pass-through from income to consumption risk, trading off the benefits of lower inequality against productive inefficiency and higher inflation. When income risk is countercyclical, policy curtails the fall in output in recessions to mitigate the increase in inequality. We uncover a new form of time ...
Staff Reports , Paper 916

Working Paper
Idiosyncratic Investment Risk and Business Cycles
Goldberg, Jonathan (2014-01-10)
I show that, due to imperfect risk sharing, aggregate shocks to uncertainty about idiosyncratic return on investment generate economic contractions with elevated risk premia and a decrease in the risk-free rate. I present a tractable real business cycle model in which firms experience idiosyncratic shocks, to which managers are at least partially exposed; the distribution of these shocks is time-varying and stochastic. I show that the path for aggregate quantities, the price of physical capital, and the equity premium are the same as in a model without idiosyncratic risk, but with ...
Finance and Economics Discussion Series , Paper 2014-05

Working Paper
Designing Unemployment Insurance for Developing Countries
Espino, Emilio; Sanchez, Juan M.; Cirelli, Fernando (2020-09-10)
The high incidence of informality in the labor markets of middle-income economies challenges the provision of unemployment protection. We show that, despite informational frictions, introducing an unemployment insurance savings account (UISA) system may provide substantial benefits. This system improves welfare by providing insurance to the unemployed and creating incentives to work in the formal sector. The optimal scheme generates a reduction in unemployment (from 4 to 3 percent), an increase in formality (from 68 to 72 percent), and a rise in total output (by 4 percent). Overall, ...
Working Papers , Paper 2018-006

Working Paper
Credit, bankruptcy, and aggregate fluctuations
Nakajima, Makoto; Rios-Rull, Jose-Victor (2014-10-20)
We ask two questions related to how access to credit affects the nature of business cycles. First, does the standard theory of unsecured credit account for the high volatility and procyclicality of credit and the high volatility and countercyclicality of bankruptcy filings found in U.S. data? Yes, it does, but only if we explicitly model recessions as displaying countercyclical earnings risk (i.e., rather than having all households fare slightly worse than normal during recessions, we ensure that more households than normal fare very poorly). Second, does access to credit smooth aggregate ...
Working Papers , Paper 14-31

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