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Report
Non-convexities in quantitative general equilibrium studies of business cycles
Prescott, Edward C. (2003)
This paper reviews the role of micro non-convexities in the study of business cycles. One important non-convexity arises because an individual can work only one workweek length in a given week. The implication of this non-convexity is that the aggregate intertemporal elasticity of labor supply is large and the principal margin of adjustment is in the number employed-not in the hours per person employed-as observed. The paper also reviews a business cycle model with an occasionally binding capacity constraint. This model better mimics business cycle fluctuations than the standard real business ...
Staff Report , Paper 312

Working Paper
Imperfect competition and sunspots
Wen, Yi; Wang, Pengfei (2006)
This paper shows that imperfect competition can be a rich source of sunspots equilibria and coordination failures. This is demonstrated in a dynamic general equilibrium model that has no major distortions except imperfect competition. In the absence of fundamental shocks, the model has a unique certainty (fundamental) equilibrium. But there is also a continuum of stochastic (sunspots) equilibria that are not mere randomizations over fundamental equilibria. Markup is always counter-cyclical in sunspots equilibria, which is consistent with empirical evidence. The paper provides a justification ...
Working Papers , Paper 2006-015

Working Paper
Optimal policy with probabilistic equilibrium selection
Ennis, Huberto M.; Keister, Todd (2001)
This paper introduces an approach to the study of optimal government policy in economies characterized by a coordination problem and multiple equilibria. Such models are often criticized as not being useful for policy analysis because they fail to assign a unique prediction to each possible policy choice. We employ a selection mechanism that assigns, ex ante, a probability to each equilibrium indicating how likely it is to obtain. With this, the optimal policy is well defined. We show how such a mechanism can be derived as the natural result of an adaptive learning process. This approach ...
Working Paper , Paper 01-03

Working Paper
Modest policy interventions
Zha, Tao; Leeper, Eric M. (2003)
The authors present a theoretical and empirical framework for computing and evaluating linear projections conditional on hypothetical paths of monetary policy. A modest policy intervention does not significantly shift agents' beliefs about policy regime and does not induce the changes in behavior that Lucas (1976) emphasizes. Applied to an econometric model of U.S. monetary policy, the authors find that a rich class of interventions routinely considered by the Federal Reserve is modest and their impacts can be reliably forecast by an identified linear model. Modest interventions can shift ...
FRB Atlanta Working Paper , Paper 2003-24

Working Paper
Fighting against currency depreciation, macroeconomic instability and sudden stops
Zanna, Luis-Felipe (2006)
In this paper we show that, in the aftermath of a currency crisis, a government that adjusts the nominal interest rate in response to domestic currency depreciation can induce aggregate instability in the economy by generating self-fulfilling endogenous cycles. We find that, if a government raises the interest rate proportionally more than an increase in currency depreciation, then it induces selffulfilling cycles that, driven by people?s expectations about depreciation, replicate several of the salient stylized facts of the ?Sudden Stop? phenomenon. These facts include a decline in domestic ...
International Finance Discussion Papers , Paper 848

Working Paper
Impacts of priors on convergence and escapes from Nash inflation
Williams, Noah; Sargent, Thomas J. (2003)
Recent papers have analyzed how adaptive agents may converge to and escape from self-confirming equilibria. All of these papers have imputed to agents a particular prior about drifting coefficients. In the context of a model of monetary policy, this paper analyzes dynamics that govern both convergence and escape under a more general class of priors for the government. The authors characterize how the shape of the prior influences the dynamics in important ways. There are priors for which the E-stability condition is not enough to assure local convergence to a self-confirming equilibrium. ...
FRB Atlanta Working Paper , Paper 2003-14

Working Paper
Inventory accelerator in general equilibrium
Wen, Yi; Wang, Pengfei (2009)
We develop a general-equilibrium model of inventories with explicit micro-foundations by embedding the production-cost-smoothing motive (e.g., Eichenbaum, AER 1989) into an otherwise standard DSGE model. We show that firms facing idiosyncratic cost shocks have incentives to bunch production and smooth sales by carrying inventories. The optimal inventory target of a firm is derived explicitly. The model is broadly consistent with many of the observed stylized facts of aggregate inventory fluctuations, such as the procyclical inventory investment and the countercyclical inventory-sales ratio. ...
Working Papers , Paper 2009-010

Journal Article
Consumption, savings, and the meaning of the wealth effect in general equilibrium
Sarte, Pierre-Daniel G.; Lantz, Carl D. (2001-07)
Economic Quarterly , Issue Sum , Pages 53-71

Report
Finite memory and imperfect monitoring
Kocherlakota, Narayana R.; Cole, Harold L. (2001)
Staff Report , Paper 287

Working Paper
Equilibrium and government commitment
Bassetto, Marco (2002)
How should a government use the power to commit to ensure a desirable equilibrium outcome? In this paper, I show a misleading aspect of what has become a standard approach to this question, and I propose an alternative. I show that the complete description of an optimal (indeed, of any) policy scheme requires outlining the consequences of paths that are often neglected. The specification of policy along those paths is crucial in determining which schemes implement a unique equilibrium and which ones leave room for multiple equilibria that depend on the expectations of the private sector.
Working Papers , Paper 624

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