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Sustainable plans
Kehoe, Patrick J.; Chari, V. V. (1989)
We propose a definition of time consistent policy for infinite horizon economies with competitive private agents. Allocations and policies are defined as functions of the history of past policies. A sustainable equilibrium is a sequence of history-contingent policies and allocations that satisfy certain sequential rationality conditions for the government and for private agents. We provide a complete characterization of the sustainable equilibrium outcomes for a variant of Fischer?s (1980) model of capital taxation. We also relate our work to recent developments in the theory of repeated ...
Staff Report , Paper 122

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Optimal fiscal and monetary policy: some recent results
Kehoe, Patrick J.; Chari, V. V.; Christiano, Lawrence J. (1991)
This paper studies the quantitative properties of fiscal and monetary policy in business cycle models. In terms of fiscal policy, optimal labor tax rates are virtually constant and optimal capital income tax rates are close to zero on average. In terms of monetary policy, the Friedman rule is optimal?nominal interest rates are zero?and optimal monetary policy is activist in the sense that it responds to shocks to the economy.
Staff Report , Paper 147

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A contribution to the pure theory of money
Kiyotaki, Nobuhiro; Wright, Randall (1989)
We analyze a general equilibrium model with search frictions and differentiated commodities. Because of the many differentiated commodities, barter is difficult because it requires a double coincidence of wants, and this provides a medium of exchange role for fiat money. We prove the existence of equilibrium with valued fiat money and show it is robust to certain changes in the environment, including imposing transactions costs, storage costs, and taxes on the use of money. Rate of return dominance, liquidity, and the potential welfare improving role of fiat money are discussed.
Staff Report , Paper 123

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Capital taxation during the U.S. Great Depression - Technical appendix
McGrattan, Ellen R. (2011)
Staff Report , Paper 452

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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

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Firm dynamics and financial development
Bai, Yan; Zhang, Jing; Arellano, Cristina (2009)
This paper studies the impact of cross-country variation in financial market development on firms? financing choices and growth rates using comprehensive firm-level datasets. We document that in less financially developed economies, small firms grow faster and have lower debt to asset ratios than large firms. We then develop a quantitative model where financial frictions drive firm growth and debt financing through the availability of credit and default risk. We parameterize the model to the firms? financial structure in the data and show that financial restrictions can account for the ...
Staff Report , Paper 392

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Coarse Pricing Policies
Stevens, Luminita (2015-11-23)
The puzzling behavior of inflation in the Great Recession and its aftermath has increased the need to better understand the constraints that firms face when setting prices. Using new data and theory, I demonstrate that each firm's choice of how much information to acquire to set prices determines aggregate price dynamics through the patterns of pricing at the micro level, and through the large heterogeneity in pricing policies across firms. Viewed through this lens, the behavior of prices in recent years becomes less puzzling, as firms endogenously adjust their information acquisition ...
Staff Report , Paper 520

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Modeling the evolution of age and cohort effects in social research
Yang, Yang; Schulhofer-Wohl, Sam (2011)
This paper proposes a new way of modeling age, period, and cohort effects that improves substantively and methodologically on the conventional linear model. The linear model suffers from a well-known identification problem: If we assume an outcome of interest depends on the sum of an age effect, a period effect, and a cohort effect, then it is impossible to distinguish these three separate effects because, for any individual, birth year = current year ? age. Less well appreciated is that the model also suffers from a conceptual problem: It assumes that the influence of age is the same in all ...
Staff Report , Paper 461

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A simple general equilibrium model of depression
Bryant, John (1978)
Staff Report , Paper 36

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On the optimal choice of a monetary policy instrument
Kehoe, Patrick J.; Chari, V. V.; Atkeson, Andrew (2007)
The optimal choice of a monetary policy instrument depends on how tight and transparent the available instruments are and on whether policymakers can commit to future policies. Tightness is always desirable; transparency is only if policymakers cannot commit. Interest rates, which can be made endogenously tight, have a natural advantage over money growth and exchange rates, which cannot. As prices, interest and exchange rates are more transparent than money growth. All else equal, the best instrument is interest rates and the next-best, exchange rates. These findings are consistent with the ...
Staff Report , Paper 394

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