Search Results
Working Paper
Bubbly Recessions
We develop a tractable rational bubbles model with financial frictions, downward nominal wage rigidity, and the zero lower bound. The interaction of financial frictions and nominal rigidities leads to a "bubbly pecuniary externality," where competitive speculation in risky bubbly assets can result in excessive investment booms that precede inefficient busts. The collapse of a large bubble can push the economy into a "secular stagnation" equilibrium, where the zero lower bound and the nominal wage rigidity constraint bind, leading to a persistent and inefficient recession. We evaluate a ...
Working Paper
Understanding Persistent Stagnation
We theoretically explore long-run stagnation at the zero lower bound in a representative agent framework. We analytically compare expectations-driven stagnation to a secular stagnation episode and find contrasting policy implications for changes in government spending, supply shocks and neo-Fisherian policies. On the other hand, a minimum wage policy is expansionary and robust to the source of stagnation. Using Bayesian methods, we estimate a DSGE model that can accommodate two competing hypotheses of long-run stagnation in Japan. We document that equilibrium selection under indeterminacy ...
Discussion Paper
At the N.Y. Fed: The Transatlantic Economy: Convergence or Divergence?
On April 18, 2016, the New York Fed hosted a conference on current and future policy directions for the linked economies of Europe and the United States. “The Transatlantic Economy: Convergence or Divergence?”—organized jointly with the Centre for Economic Policy Research and the European Commission—brought together U.S. and Europe-based policymakers, regulators, and academics to discuss a series of important issues: Are the economies of the euro area and the United States on a convergent or divergent path? Are financial regulatory reforms making the banking and financial structures ...
Working Paper
Why Aging Induces Deflation and Secular Stagnation
We provide a quantitative theory of deflation and secular stagnation. In our lifecycle framework, an aging population puts persistent downward pressure on the price level, real interest rates, and output. A novel feature of our theory is that it also recognizes the reactions of government policy. The central bank responds to falling prices by reducing its policy nominal interest rate, and the fiscal authority responds by allowing the public debt–gross domestic product ratio to rise.
Working Paper
Bubbles and Stagnation
This paper studies the consequences of asset bubbles for economies that are vulnerable to persistent stagnation. Stagnation is the result of a shortage of assets that creates an oversupply of savings and puts downward pressure on the level of interest rates. Once the zero lower bound on the nominal interest rate binds, the real rate cannot fully adjust downward, forcing output to fall instead. In such context, bubbles are useful as they expand the supply of assets, absorb excess savings and raise the natural interest rate - the real rate that is compatible with full employment - crowding in ...
Working Paper
A Model of Secular Stagnation: Theory and Quantitative Evaluation
This paper formalizes and quantifies the secular stagnation hypothesis, defined as a persistently low or negative natural rate of interest leading to a chronically binding zero lower bound (ZLB). Output-inflation dynamics and policy prescriptions are fundamentally different from those in the standard New Keynesian framework. Using a 56-period quantitative life cycle model, a standard calibration to US data delivers a natural rate ranging from -1.5% to -2%, implying an elevated risk of ZLB episodes for the foreseeable future. We decompose the contribution of demographic and technological ...
Working Paper
A Nowcasting Model for the Growth Rate of Real GDP of Ecuador : Implementing a Time-Varying Intercept
This paper proposes a model to nowcast the annual growth rate of real GDP for Ecuador. The specification combines monthly information of 28 macroeconomic variables with quarterly information of real GDP in a mixed-frequency approach. Additionally, our setup includes a time-varying mean coefficient on the annual growth rate of real GDP to allow the model to incorporate prolonged periods of low growth, such as those experienced during secular stagnation episodes. The model produces reasonably good nowcasts of real GDP growth in pseudo out-of-sample exercises and is marginally more precise than ...
Working Paper
Capital Misallocation and Secular Stagnation
The widespread emergence of intangible technologies in recent decades may have significantly hurt output growth--even when these technologies replaced considerably less productive tangible technologies--because of structurally low interest rates caused by demographic forces. This insight is obtained in a model in which intangible capital cannot attract external finance, firms are credit constrained, and there is substantial dispersion in productivity. In a tangibles-intense economy with highly leveraged firms, low rates enable more borrowing and faster debt repayment, reduce misallocation, ...
Working Paper
Understanding Persistent ZLB: Theory and Assessment
We develop a theoretical framework that rationalizes two hypotheses of long-lasting low interest rate episodes: deflationary-expectations-traps and secular stagnation in a unified setting. These hypotheses differ in the sign of the theoretical correlation between inflation and output growth that they imply. Using the data from Japan over 1998:Q1-2019:Q4, we find that the data favor the expectations-trap hypothesis. The superior model fit of the expectations trap relies on its ability to generate the observed negative correlation between inflation and output growth.
Speech
Opening remarks at the Transatlantic Economy: Convergence or Divergence Conference
Remarks at the Transatlantic Economy: Convergence or Divergence Conference, Federal Reserve Bank of New York, New York City.