"Money Creation, Reserve Requirements, and Seigniorage" with Joseph H. Haslag. In this paper, we examine the impact that changes in the rate of money creation and reserve requirements have on real seigniorage revenue. We consider two additional features that differ from previous analyses. First, the model economies grow endogenously, and that growth depends on the accumulation of intermediated capital. Second, agents have two means of financing; one is bank deposits against which reserves must be held, and the other is a nonbank intermediary. Thus, growth-rate effects and financing-substitution effects are both present, and one can assess the quantitiative importance of each factor. Published, Review of Economic Dynamics 1(3), pp. 677-98.
"Unemployment Insurance and Capital Accumulation." In this paper, I examine a model economy with production, search, and unemployment insurance. The introduction of capital into the economy of Wang and Williamson (J. Monetary Econom. 49(7)(2001)1337) generates the result that optimal replacement ratios are always zero. The result arises from the decline in aggregate activity caused by unemployment insurance: both capital and labor inputs to production fall when benefits rise. Unlike most of the literature, I compute explicitly the cost of the transition path; agents are made better off by switching to a steady state with no unemployment insurance, but the welfare gain is approximately cut in half. Only the very poor and unemployed suffer welfare losses along the transition path. I then briefly investigate the implications of negative replacement ratios. Published, Journal of Monetary Economics 51(8), pp. 1683-710.
Programs to Solve Benchmark Allocation:
Supplemental and Input Files:
xkpts150.in, roots.f, matrix4.f
Computational Appendix:
"Generalized Quasi-Geometric Discounting." This paper derives the ‘generalized Euler equation’ for an agent with multi-period deviations from geometric discounting. The functional equation that describes optimal consumption-savings decisions involves manipulation of future selves and indirect manipulation of more distant selves through intervening selves. Published, Economics Letters 96(3), pp. 343-50.
"The Wealth Distribution and the Demand for Status" with Yulei Luo. Standard economic theories of asset markets assume that assets are valued entirely for the consumption streams they can finance. This paper examines the introduction of the demand for status (as a function of wealth) into a model of uninsurable idiosyncratic risk – the ’spirit of capitalism’ assumption. We find that soc preferences lead to less inequality in wealth; placing wealth into the utility function leads to a shrinking wealth distribution. The drop in wealth concentration is smaller if the utility function implies status is a luxury good, but no parametrization leads to higher wealth Gini coefficients than the benchmark case. We then consider the consequences of revenue-neutral tax reforms with and without soc preferences, finding that they make little difference for this policy experiment. Forthcoming, Macroeconomic Dynamics.
"Solving the Stochastic Growth Model with Finite Forecasting Functions." This article describes the approach to computing the version of the stochastic growth model with idiosyncratic and aggregate risk that relies on collapsing the aggregate state space down to a small number of moments used to forecast future prices. One innovation relative to most of the literature is the use of a nonstochastic simulation routine. Prepared for special issue of the Journal of Economic Dynamics and Control.
Program Files: Programs
"Unsecured Credit Markets Are Not Insurance Markets" with Kartik Athreya and Xuan S. Tam. We study the extent to which unsecured credit markets have altered the transmission of increased income risk to consumption variability over the past several decades. We find that unsecured credit markets pass through increased income risk to consumption, irrespective of bankruptcy policy and the information possessed by lenders. If risk sharing has indeed improved over this period, the reasons do not therefore lie in the unsecured credit market. Forthcoming Journal of Monetary Economics.
"The Stationary Distribution of Wealth under Progressive Taxation" with Daniel R. Carroll. This paper considers the long-run distribution of capital holdings in a model with complete asset markets and progressive taxation. Households are assumed to be heterogeneous in their labor market productivity. We show that this model is capable of producing a nondegenerate determinate wealth distribution. However, it also predicts that capital and labor income will be negatively correlated. These results are robust to the introduction of elastic labor supply and borrowing constraints. Forthcoming, Review of Economic Dynamics.
"A Quantitative Theory of Information and Unsecured Credit" with Kartik Athreya and Xuan S. Tam. Over the past three decades five striking features of aggregates in the unsecured credit market have been documented: (1) rising availability of credit along both the intensive and extensive margins, (2) rising debt accumulation, (3) rising bankruptcy rates and discharge in bankruptcy, (4) rising dispersion in interest rates across households, and (5) the emergence of a discount for borrowers with good credit ratings. We show that all five outcomes are quantitatively consistent with improvements in the ability of lenders to observe borrower characteristics. Part of our contribution is the development of an algorithm for computing equilibria with asymmetric information and individualized pricing. From a welfare perspective, our main finding is that more information is better ex ante, even though better information can rule out pooling outcomes that some groups might find beneficial ex post. Federal Reserve Bank of Richmond Working Paper No 08-6. Under review.
"Information Heterogeneity in the Macroeconomy" with Ponpoje Porapakkarm. This paper considers the role that information heterogeneity can play in generating wealth inequality. We solve a model where households face both aggregate and idiosyncratic shocks to returns and wages under two assumptions about information – fully-informed (FI) economies have agents who observe all states while partially-informed (PI) economies have agents that must rely on the Kalman filter to extract estimates of the states based on observed prices. We find that the PI economy has higher aggregate activity (output, consumption, investment) and larger fluctuations in output and investment. Quantitatively, we find that the most important factor is the gap between the PI agents’ beliefs about the state of the world today and the true state; the other two factors, the heterogeneity of forecasts tomorrow and the higher risk faced by PI agents, generate only small changes in behavior. Under revision.
Programs for FI Economy and PI Economy
"A Note on Sunspots with Heterogeneous Agents" with Daniel R. Carroll. This paper studies sunspot fluctuations in a model with heterogeneous households. We find that wealth inequality reduces the degree of increasing returns needed to produce indeterminacy, while wage inequality increases it. When the model is calibrated to match the joint distribution of hours, income, and wealth the required degree of increasing returns to scale is still much too high to be supported empirically (although smaller than similar homogeneous agent economies). We also find that the model robustly predicts only one sunspot, despite having 1242 predetermined state variables. Under review.
"Approximate Aggregation." This paper examines the robustness of the approximate aggregation result in Krusell and Smith (1998). I find the following results: 1) adding additional moments neither changes the law of motion for aggregate capital nor affects the ergodic moments; 2) the higher-order moments are independent of the mean; and 3) the algorithm is robust to changes in the demographic structure, preferences, and curvature in the savings return. (The computational aspects of this paper are addressed in the paper above).
"Rational Inattention and Aggregate Fluctuations" with Yulei Luo. We explore the effect of introducing the Rational Inattention Hypothesis into a standard stochastic growth model with random walk technology. We find that RI is too weak as a propagation mechanism to fix the standard set of anomalies, in particular the failure of permanent shocks to produce autocorrelated growth rates in output and the very small variance of the predictable component of output growth. Under review.
"Asset Pricing under Information-Processing Constraints" with Yulei Luo. This note shows that limited information processing has the potential to increase the equity premium because it introduces persistence and excess volatility into consumption growth. Under review.
"Risk-sensitive Consumption and Savings under Rational Inattention" with Yulei Luo. This paper studies the consumption-savings behavior of households who have risk-sensitive preferences and suffer from limited information-processing capacity (rational inattention or RI). We find that the model displays a wide range of observational equivalence properties, implying that consumption and savings data cannot distinguish between models with risk-sensitivity, robustness, rational inattention, or rational expectations, in any combination. We then show that the welfare costs from RI are much larger for risk-sensitive households than any other observationally-equivalent settings. Thus, a potential method for testing risk-sensitivity vs. robustness is to ask agents how much they would pay to receive better information about the state of the world. Under review.
"Crowding Out or Crowding In? UI and Private Insurance." This paper reconsiders the results in Young (2004) under the assumption that debt limits are endogenously determined in order to prevent default, as in Kehoe and Levine (1993). I find that eliminating UI is a net welfare loss for the economy because it eliminates all borrowing, although for smaller changes in the replacement rate the effect of changing debt limits is minor. General equilibrium effects dominate. Preliminary and still incomplete.
"Optimal Stabilization Policy in a Model with Endogenous Sudden Stops" with Gianluca Benigno, Huigang Chen, Christopher Otrok, and Alessandro Rebucci. We develop a framework to study optimal stabilization policy in an economy with an occasionally binding credit constraint. The objective of the paper is to provide a framework to understand both the optimal response to a ‘sudden stop,’ as well as the behavior of optimal policy outside of the crisis period. In the model, the policy instrument of the government is a distortionary tax wedge on consumption of non-tradable goods. We find that, for a plausible calibration of the model, the optimal policy is highly nonlinear. If the constraint is not binding, the optimal tax rate is zero, as in an economy without a credit constraint. If the constraint is binding, the optimal tax rate is negative, meaning that the government subsidizes nontradable consumption. Preliminary and still incomplete.