| Dynamic Identification in VARs, with P. Beaudry, P. Fève, A. Guay, F. Portier.
Most macroeconomic models, view economic outcomes as being generated by a combination of endogenous and exogenous dynamic forces. In particular, the exogenous forces are generally modeled as a set of independent dynamics processes. In this paper we begin by showing that this dual dynamic structure is sufficient to identify the entire set of structural impulse responses inherent to any such model. No extra restrictions are needed. We then use this result to suggest how it can be used to evaluate common SVAR restrictions (impact restrictions, long run restrictions and proxy-VAR).
|
Abstract | PDF |
| Monetary Policy and Endogenous Financial Crises, with F. Boissay, J. Galí and C. Manea.
We study whether a central bank should deviate from its objective of price stability to promote financial stability. We tackle this question within a textbook New Keynesian model augmented with capital accumulation and microfounded endogenous financial crises. We compare several interest rate rules, under which the central bank responds more or less forcefully to inflation and aggregate output. Our main findings are threefold. First, monetary policy affects the probability of a crisis both in the short run (through aggregate demand) and in the medium run (through savings and capital accumulation). Second, a central bank can both reduce the probability of a crisis and increase welfare by departing from strict inflation targeting and responding systematically to fluctuations in output. Third, financial crises may occur after a long period of unexpectedly loose monetary policy as the central bank abruptly reverses course.
|
Abstract | PDF |
| The Hammer and the Dance: Equilibrium and Optimal Policy during a Pandemic Crisis, with TSE Macro Group.
We develop a comprehensive framework for analyzing optimal economic policy during a pandemic crisis in a dynamic economic model that trades off pandemic-induced mortality costs against the adverse economic impact of policy interventions. We use the comparison between the planner problem and the dynamic decentralized equilibrium to highlight the margins of policy intervention and describe optimal policy actions. As our main conclusion, we provide a strong and novel economic justification for the current approach to dealing with the pandemic, which is different from the existing health policy rationales. This justification is based on a simple economic concept, the shadow price of infection risks, which succinctly captures the static and dynamic trade-offs and externalities between economic prosperity and mortality risk as the pandemic unfolds.
|
Abstract | PDF |
| Public Debt as Private Liquidity: Optimal Policy with M. Angeletos and H. Dellas
We study the Ramsey policy problem in an economy in which public debt contributes to the supply of assets that private agents can use as buffer stock and collateral, or as a vehicle of liquidity. Issuing more debt eases the underlying financial friction. This raises welfare by improving the allocation of resources; but it also tightens the government budget by raising the interest rate on public debt. In contrast to the literature on the Friedman rule, the government’s supply of liquidity becomes intertwined with its debt policy. In contrast to the standard Ramsey paradigm, a departure from tax smoothing becomes desirable. Novel insights emerge about the optimal long-run quantity of public debt; the optimal policy response to shocks; and the sense in which a financial crisis presents the government with an opportunity for cheap borrowing.
Soon available.
|
Abstract | PDF |
| Home Bias in Goods and Assets, with H. Dellas, B. Diba and A. Stockman.
We show that international trade in goods offers a compelling resolution of the portfolio home bias puzzle. A simple model with traded and non-traded goods implies that investors can achieve full international risk diversification if their foreign equity position (as a % of GDP) matches their country's degree of openness (the imports to GDP share). Empirical evidence on the international equity holdings of financially mature economies strongly supports this implication.
|
Abstract | PDF |
| The Reluctant Defaulter: A Tale of High Government Debt with M. Habib and J.C. Rochet
We seek to account for the very high levels of public debt recently reached in many OECD countries. We do so by assuming that governments do their utmost to stave off default, which occurs only when a government fails to muster the funds needed for debt service. This distinguishes our work from existing work on sovereign debt, which has assumed that governments weigh the costs of debt service against those of default. The debt ratios we compute are quite close to prevailing levels: our baseline case has debt-to-GDP ratio slightly above 80%.
|
Abstract | |PDF |
| Macroeconomics of Bank Capital and Liquidity Regulations, with F. Boissay
We study the transmission mechanisms of liquidity and capital regulations as well as their effects on the economy and welfare. We propose a macro–economic model, in which a regulator faces the following trade–off. On the one hand, banking regulations reduce the aggregate supply of credit. On the other hand, they promote the allocation of credit to its best uses. Accordingly, in a regulated economy there is less, but more productive lending. Liquidity and capital requirements mutually reinforce each other, except when liquid assets are scarce. Both regulations are needed. The optimal requirements are relatively high. Our analysis provides general support for Basel III’s “multiple metrics” framework. |
Abstract | |PDF |