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Working Paper
Macroeconomic Dynamics Near the ZLB : A Tale of Two Countries
We compute a sunspot equilibrium in an estimated small-scale New Keynesian model with a zero lower bound (ZLB) constraint on nominal interest rates and a full set of stochastic fundamental shocks. In this equilibrium a sunspot shock can move the economy from a regime in which inflation is close to the central bank's target to a regime in which the central bank misses its target, inflation rates are negative, and interest rates are close to zero with high probability. A nonlinear filter is used to examine whether the U.S. in the aftermath of the Great Recession and Japan in the late 1990s ...
Report
Wealth and Volatility
Periods of low household wealth in United States macroeconomic history have also been periods of high business cycle volatility. This paper develops a simple model that can exhibit self-fulfilling fluctuations in the expected path for unemployment. The novel feature is that the scope for sunspot-driven volatility depends on the level of household wealth. When wealth is high, consumer demand is largely insensitive to unemployment expectations and the economy is robust to confidence crises. When wealth is low, a stronger precautionary motive makes demand more sensitive to unemployment ...
Working Paper
Sovereign Default: The Role of Expectations
We study a variation of the standard model of sovereign default, as in Aguiar and Gopinath (2006) or Arellano (2008), and show that this variation is consistent with multiple interest rate equilibria. Some of those equilibria correspond to the ones identified by Calvo (1988), where default is likely because rates are high, and rates are high because default is likely. The model is used to simulate equilibrium movements in sovereign bond spreads that resemble sovereign debt crises. It is also used to discuss lending policies similar to the ones announced by the European Central Bank in 2012.
Working Paper
Interest Rate Dynamics, Variable-Rate Loan Contracts, and the Business Cycle
The interest rate at which US firms borrow funds has two features: (i) it moves in a countercyclical fashion and (ii) it is an inverted leading indicator of real economic activity: low interest rates forecast booms in GDP, consumption, investment, and employment. We show that a Kiyotaki-Moore model accounts for both properties when business-cycle movements are driven, in a significant way, by animal spirit shocks to credit-financed investment demand. The credit-based nature of such self-fulfilling equilibria is shown to be essential: the dynamic correlation between current loanable funds rate ...
Working Paper
History and the sizes of cities
We contrast evidence of urban path dependence with efforts to analyze calibrated models of city sizes. Recent evidence of persistent city sizes following the obsolescence of historical advantages suggests that path dependence cannot be understood as the medium-run effect of legacy capital but instead as the long-run effect of equilibrium selection. In contrast, a different, recent literature uses stylized models in which fundamentals uniquely determine city size. We show that a commonly used model is inconsistent with evidence of long-run persistence in city sizes and propose several ...
Working Paper
Closing Large Open Economy Models
A large class of international business cycle models admits multiple locally isolated deterministic steady states, if the elasticity of substitution between traded goods is sufficiently low. I explore the conditions under which such multiplicity occurs and characterize the dynamic properties in the neighborhood of each steady state. Models with standard incomplete markets, portfolio costs, a debt-elastic interest rate, or an overlapping generations framework allow for multiple steady states, if the model features multiple steady states under financial autarchy. If the excess demand for the ...
Working Paper
Externalities, Endogenous Productivity, and Poverty Traps
We present a version of the neoclassical model with an endogenous industry structure. We construct a distribution of firms? productivity that implies multiple steady-state equilibria even with an arbitrarily small degree of increasing returns to scale. While the most productive firms operate across all the steady states, in a poverty trap less productive firms operate as well. This results in lower average firm productivity and total factor productivity. The distributions of employment by firm size across steady states are consistent with the empirical observation that poor countries have a ...
Report
Self-Fulfilling Debt Dilution: Maturity and Multiplicity in Debt Models
We establish that creditor beliefs regarding future borrowing can be self-fulfilling, leading to multiple equilibria with markedly different debt accumulation patterns. We characterize such indeterminacy in the Eaton-Gersovitz sovereign debt model augmented with long maturity bonds. Two necessary conditions for the multiplicity are: (i) the government is more impatient than foreign creditors, and (ii) there are deadweight losses from default; both are realistic and standard assumptions in the quantitative literature. The multiplicity is dynamic and stems from the self-fulfilling beliefs of ...
Working Paper
Natural Amenities, Neighborhood Dynamics, and Persistence in the Spatial Distribution of Income
We present theory and evidence highlighting the role of natural amenities in neighborhood dynamics, suburbanization, and variation across cities in the persistence of the spatial distribution of income. Our model generates three predictions that we confirm using a novel database of consistent-boundary neighborhoods in U.S. metropolitan areas, 1880{2010, and spatial data for natural features such as coastlines and hills. First, persistent natural amenities anchor neighborhoods to high incomes over time. Second, naturally heterogeneous cities exhibit persistent spatial distributions of income. ...
Working Paper
Natural amenities, neighborhood dynamics, and persistence in the spatial distribution of income
We present theory and evidence highlighting the role of natural amenities in neighborhood dynamics, suburbanization, and variation across cities in the persistence of the spatial distribution of income. Our model generates three predictions that we confirm using a novel database of consistent-boundary neighborhoods in U.S. metropolitan areas, 1880{2010, and spatial data for natural features such as coastlines and hills. First, persistent natural amenities anchor neighborhoods to high incomes over time. Second, downtown neighborhoods in coastal cities were less susceptible to the ...