- Sovereign Defaults in Real Time
- Municipal and Regional Defaults (with Grey Gordon)
- Liquidity and Asset Prices (with Ryo Jinnai)
- Impulse Response Matching (with Atsushi Inoue and Lutz Kilian)
- Sentiments, Great Inflation, and Indeterminancy (with Molin Zhong)
- One-Sided Risk in Dynamic Stochastic General Equilibrium Models (with Jesus Fernandez-Villaverde and Juan Rubio-Ramirez)
- Bayesian Estimation of DSGE Models (with James Nason) in M. Thornton and N. Hashimzade eds. Handbook of Empirical Methods in Macroeconomics (forthcoming, 2012) Edward Elgar Publishing Ltd. New
Abstract: We study the impact that the liquidity crunch in 2008-2009 had on the U.S. economy's growth trend. To this end, we propose a model featuring endogenous growth á la Romer and a liquidity friction á la Kiyotaki-Moore. A key finding in our study is that liquidity declined around the demise of Lehman Brothers, which lead to the severe contraction in the economy. This liquidity shock was a tail event. Improving conditions in financial markets were crucial in the subsequent recovery. Had conditions remained at their worst level in 2008, output would have been 20 percent below its actual level in 2011.
- Dynamics of Investment, Debt, and Default (with Grey Gordon, Sept 2013) New
Abstract: How does physical capital accumulation affect the decision to default in developing small open economies? We
find that, conditional on a level of foreign indebtedness, more capital improves the sovereigns ability to meet its obligations, reducing the likelihood of default and the risk premium. This effect, however, is diminishing in the stock of capital because capital also tames the severity of the contraction following default, making autarky more appealing. Access to long-term debt and costly capital adjustment are crucial for matching business cycles. Our quantitative model delivers default episodes that mimic those observed in the data.
- Interest Rates and Prices in an Inventory Model of Money with Credit (with Mike Dotsey, December 2012)
Abstract: Using a segmented market model that includes state-dependent asset market decisions along with access to credit, we analyze the impact that transactions with credit has on interest rates and prices. We find that the availability of credit substantially changes the dynamics in the model, allowing agents to significantly smooth consumption and reduce the movements in velocity. As a result, prices become quite flexible and liquidity effects are dampened. Thus, adding another medium of exchange whose use is calibrated to U.S. data has important implications for economic behavior in a segmented markets model.
Abstract: We propose a novel method to estimate dynamic equilibrium models with stochastic volatility. First, we characterize the properties of the solution to this class of models. Second, we take advantage of the results about the structure of the solution to build a sequential Monte Carlo algorithm to evaluate the likelihood function of the model. The approach, which exploits the profusion of shocks in stochastic volatility models, is versatile and computationally tractable even in large-scale models, such as those often employed by policy-making institutions. As an application, we use our algorithm and Bayesian methods to estimate a business cycle model of the U.S. economy with both stochastic volatility and parameter drifting in monetary policy. Our application shows the importance of stochastic volatility in accounting for the dynamics of the data.
Abstract: Motivated by the recent experience of the U.S. and the Eurozone, we describe the quantitative properties of a New Keynesian model with a zero lower bound (ZLB) on nominal interest rates, explicitly accounting for the nonlinearities that the bound brings. Besides showing how such a model can be efficiently computed, we find that the behavior of the economy is substantially affected by the presence
of the ZLB. In particular, we document 1) the unconditional and conditional probabilities of hitting the ZLB; 2) the unconditional and conditional probability distributions of the duration of a spell at the ZLB; 3) the responses of output to government expenditure shocks at the ZLB, 4) the distribution of shocks that send the economy to the ZLB; and 5) the distribution of shocks that keep the economy at the ZLB.
Abstract: We study the effects of changes in uncertainty about future fiscal policy on aggregate economic activity. In light of large fiscal deficits and high public debt levels in the U.S., a fiscal consolidation seems inevitable. However, there is notable uncertainty about the policy mix and timing of such a budgetary adjustment. To evaluate the consequences of the increased uncertainty, we .first estimate tax and spending processes for the U.S. that allow for time-varying volatility. We then feed these processes into an otherwise standard New Keynesian business cycle model calibrated to the U.S. economy. We find that fiscal volatility shocks can have a sizable adverse effect on economic activity.
Abstract: This paper examines how supply-side policies may play a role in fighting a low aggregate demand that traps an economy at the zero lower bound (ZLB) of nominal interest rates. Future increases in productivity or reductions in mark-ups triggered by supply-side policies generate a wealth effect that pulls current consumption and output up. Since the economy is at the ZLB, increases in the interest rates do not undo this wealth effect, as we will have in the case outside the ZLB. We illustrate this mechanism with a simple two-period New Keynesian model. We discuss possible objections to this set of policies and the relation of supply-side policies with more conventional monetary and fiscal policies..
Abstract: This note provides an introductory exposition of the concepts of risk and uncertainty.