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Working Paper
Idiosyncratic shocks and the role of nonconvexities in plant and aggregate investment dynamics.
We solve equilibrium models of lumpy investment wherein establishments face persistent shocks to common and plant-specific productivity. Nonconvex adjustment costs lead plants to pursue generalized (S,s) decision rules with respect to capital; as a result, their individual investments are lumpy. In partial equilibrium, this yields substantial skewness and kurtosis in aggregate investment, though with differences in plant-level productivity, these nonlinearities are far less pronounced. Moreover, nonconvex costs, like quadratic adjustment costs, greatly increase the persistence of aggregate ...
Working Paper
Optimal monetary policy
Optimal monetary policy maximizes the welfare of a representative agent, given frictions in the economic environment. Constructing a model with two broad sets of frictions ? costly price adjustment by imperfectly competitive firms and costly exchange of wealth for goods ? we find optimal monetary policy is governed by two familar principles. ; First, the average level of the nominal interest rate should be sufficiently low, as suggested by Milton Friedman, that there should be deflation on average. Yet, the Keynesian frictions imply that the optimal nominal interest rate is positive. ; ...
Working Paper
Idiosyncratic shocks and the role of nonconvexities in plant and aggregate investment dynamics
The authors study a model of lumpy investment wherein establishments face persistent shocks to common and plant-specific productivity, and nonconvex adjustment costs lead them to pursue generalized (S,s) investment rules. They allow persistent heterogeneity in both capital and total factor productivity alongside low-level investments exempt from adjustment costs to develop the first model consistent with the cross-sectional distribution of establishment investment rates. Examining the implications of lumpy investment for aggregate dynamics in this setting, the authors find that they remain ...
Working Paper
Enduring Relationships in an Economy with Capital and Private Information
We study efficient risk sharing in a model where agents operate linear production technologies with private information about idiosyncratic productivity. Capital is the sole factor of production, and accumulable. We establish a time-invariant, one-to-one mapping between the capital allocated to an agent and his lifetime utility entitlement. The mapping implies properties that are distinct from those in models with private information about endowments. In contrast to the latter, the value of the risk-sharing arrangement in our model always remains above the autarky value. There is no need for ...
Journal Article
Understanding the life-cycle of a manufacturing plant.
In the final article this quarter, Aubhik Khan wonders: What determines whether a manufacturing plant survives? Is it access to credit markets? Or does learning about plants' profitability over time determine survival? Should government policy play a role in helping plants survive? In "Understanding the Life-Cycle of a Manufacturing Plant," Khan discusses the collateral and learning views as two possible explanations for a typical plant's life-cycle. He concludes that although it remains unclear as to which explanation is more relevant, the two views have very different implications for ...
Working Paper
Enduring Relationships in an Economy with Capital and Private Information
We study efficient risk sharing in a model where agents operate linear production technologies with private information about idiosyncratic productivity. Capital is the sole factor of production, and accumulable. We establish a time-invariant, one-to-one mapping between the capital allocated to an agent and his lifetime utility entitlement. The mapping implies properties that are distinct from those in private-information endowment models. In contrast to the endowment model, the value of the risk-sharing arrangement in our model always remains above autarky value, so there is no need for ...
Working Paper
Financial development and economic growth
The author develops a theory of financial development based on the costs associated with the provision of external finance. These costs are assumed to arise within an environment where informational asymmetries between borrowers and lenders are costly to resolve. When borrowing is limited, producers with access to financial intermediary loans obtain higher returns to investment than other producers. This creates incentives for others to undertake the technology adoption necessary to access investment loans. Over time, as increasing numbers of producers gain access to external finance, ...
Journal Article
Accounting for cross-country differences in income per capita
Living standards, as measured by average income per person, vary widely across countries. Differences in income result in large disparities in spending on goods and services by people living in different economies. What makes some countries rich and others poor? Furthermore, what determines income per person in a country, and why are these factors unevenly allocated across the world? In "Accounting for Cross-Country Differences in Income Per Capita," Aubhik Khan outlines a framework for growth accounting to account for cross-country differences in income. The current consensus is that ...
Journal Article
The role of segmented markets in monetary policy
The popular press would lead us to believe that during the stock market boom of the 1990s just about everyone was buying and selling bonds every day. In fact, evidence shows that most households make only infrequent changes to their investment portfolios. "In The Role of Market Segmented Markets in Monetary Policy," Aubhik Khan discusses this market segmentation and its implication for the way monetary policy affects interest rates and inflation.
Working Paper
The pitfalls of discretionary monetary policy.
In a canonical staggered pricing model, monetary discretion leads to multiple private sector equilibria. The basis for multiplicity is a form of policy complementarity. Specifically, prices set in the current period embed expectations about future policy, and actual future policy responds to these same prices. For a range of values of the fundamental state variable ? a ratio of predetermined prices ? there is complementarity between actual and expected policy, and multiple equilibria occur. Moreover, this multiplicity is not associated with reputational considerations: it occurs in a ...