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Bank:Federal Reserve Bank of Minneapolis  Series:Staff Report 

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Learning-by-employing: the value of commitment under uncertainty

We analyze commitment to employment in an environment in which an infinitely lived firm faces a sequence of finitely lived workers who differ in their ability to produce output. The ability of a worker is initially unknown to both the worker and the firm, and a worker's effort affects the information on ability that is conveyed by performance. We characterize equilibria and show that they display commitment to employment only when effort has a persistent but delayed impact on output. In this case, by providing insurance against early termination, commitment encourages workers to exert effort, ...
Staff Report , Paper 475

Report
If exchange rates are random walks, then almost everything we say about monetary policy is wrong

The key question asked by standard monetary models used for policy analysis, How do changes in short-term interest rates affect the economy? All of the standard models imply that such changes in interest rates affect the economy by altering the conditional means of the macroeconomic aggregates and have no effect on the conditional variances of these aggregates. We argue that the data on exchange rates imply nearly the opposite: the observation that exchange rates are approximately random walks implies that fluctuations in interest rates are associated with nearly one-for-one changes in ...
Staff Report , Paper 388

Report
Tax smoothing with redistribution

We study optimal labor and capital taxation in a dynamic economy subject to government expenditure and aggregate productivity shocks. We relax two assumptions from Ramsey models: that a representative agent exists and that taxation is proportional with no lump-sum tax. In contrast, we capture a redistributive motive for distortive taxation by allowing privately observed differences in relative skills across workers. We consider two scenarios for tax instruments: (i) taxation is linear with arbitrary intercept and slope; and (ii) taxation is non-linear and unrestricted as in Mirrleesian ...
Staff Report , Paper 365

Report
Money, interest rates, and exchange rates with endogenously segmented markets

This paper analyzes the effects of money injections on interest rates and exchange rates in a model in which agents must pay a Baumol-Tobin style fixed cost to exchange bonds and money. Asset markets are endogenously segmented because this fixed cost leads agents to trade bonds and money only infrequently. When the government injects money through an open market operation, only those agents that are currently trading absorb these injections. Through their impact on these agents? consumption, these money injections affect real interest rates and real exchange rates. We show that the model ...
Staff Report , Paper 278

Report
The CAPM is alive and well

In empirical studies of the CAPM, it is commonly assumed that, (a) the return to the value-weighted portfolio of all stocks is a reasonable proxy for the return on the market portfolio of all assets in the economy, and (b) betas of assets remain constant over time. Under these assumptions, Fama and French (1992) find that the relation between average return and beta is flat. We argue that these two auxiliary assumptions are not reasonable. We demonstrate that when these assumptions are relaxed, the empirical support for the CAPM is very strong. When human capital is also included in measuring ...
Staff Report , Paper 165

Report
Alternative computational approaches to inference in the multinomial probit model

This research compares several approaches to inference in the multinomial probit model, based on Monte-Carlo results for a seven choice model. The experiment compares the simulated maximum likelihood estimator using the GHK recursive probability simulator, the method of simulated moments estimator using the GHK recursive simulator and kernel-smoothed frequency simulators, and posterior means using a Gibbs sampling-data augmentation algorithm. Each estimator is applied in nine different models, which have from 1 to 40 free parameters. The performance of all estimators is found to be ...
Staff Report , Paper 170

Report
Money and bonds: an equivalence theorem

This paper considers four models in which immortal agents face idiosyncratic shocks and trade only a single risk-free asset over time. The four models specify this single asset to be private bonds, public bonds, public money, or private money respectively. I prove that, given an equilibrium in one of these economies, it is possible to pick the exogenous elements in the other three economies so that there is an outcome-equivalent equilibrium in each of them. (The term ?exogenous variables? refers to the limits on private issue of money or bonds, or the supplies of publicly issued bonds or ...
Staff Report , Paper 393

Report
Fiat Value in the Theory of Value

We explore monetary policy in a world without currency. In our world, money is a form of government debt that bears interest, which can be negative as well as positive. Services of money are a factor of production. We show that the national accounts must be revised in this world. Using our baseline economy, we determine the balanced growth paths for a set of money interest rate target policy regimes. Besides this interest rate, the only policy variable that differs across regimes is either the labor income tax rate or the inflation rate. We find that Friedman monetary satiation without ...
Staff Report , Paper 530

Report
Inflation, output and welfare

This paper studies the effects of anticipated inflation on aggregate output and welfare within a search-theoretic framework. We allow money-holders to choose the intensities with which they search for trading partners, so inflation affects the frequency of trade as well as the quantity of output produced in each trade. We consider the standard pricing mechanism for search models, i.e., ex post bargaining, as well as a notion of competitive pricing. If prices are bargained over, the equilibrium is generically inefficient and an increase in inflation reduces buyers? search intensities, output ...
Staff Report , Paper 342

Report
Default Risk, Sectoral Reallocation and Persistent Recessions

Sovereign debt crises are associated with large and persistent declines in economic activity, disproportionately so for nontradable sectors. This paper documents this pattern using Spanish data and builds a two-sector dynamic quantitative model of sovereign default with capital accumulation. Recessions are very persistent in the model and more pronounced for nontraded sectors because of default risk. An adverse domestic shock increases the likelihood of default, limits capital in?ows, and thus restricts the ability of the economy to exploit investment opportunities. The economy responds by ...
Staff Report , Paper 555

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