DSGE Models with Financial Frictions

Size: px
Start display at page:

Download "DSGE Models with Financial Frictions"

Transcription

1 DSGE Models with Financial Frictions Simon Gilchrist 1 1 Boston University and NBER September 2014

2 Overview OLG Model New Keynesian Model with Capital New Keynesian Model with Financial Accelerator

3 Introduction Bernanke and Gertler describe a general equilibrium model in which financial frictions cause fluctuations in output. The model is highly stylized and relies on an overlapping generations structure to obtain closed-form general equilibrium dynamics. Importantly, the contracting structure is developed from first principles rather than ad hoc assumptions regarding the relationship between borrower balance sheets and economic activity. It conveys the essence of the argument that financial market distortions create a powerful source of propagation via a financial accelerator mechanism.

4 OLG Model Overlapping generations framework with two types of agents households and entrepreneurs. Entrepreneurs borrow from financial intermediaries and face frictions in capital markets owing to a costly-state-verification problem as described above. Households lend to financial intermediaries and hence serve as the ultimate source of funds. In this sense, the financial intermediaries are a veil and can be ignored in the analysis.

5 Households work when young, consume, and save for consumption when old. Households can either lend to entrepreneurs or can save via a storage technology that yields gross return R. Assume that some fraction of households invest in the storage technology so that the household return on savings is R. Alternatively, one can view this as a simple open economy model.

6 Savings of young A young household chooses savings B t to solve: max ln C y t + β ln Co t+1 subject to C y t = W t B t, C o t+1 = RB t. Household optimality implies that household savings is linear in the current wage: B t = bw t where b denotes the savings rate.

7 Entrepreneurs Entrepreneurs work when young, earn a wage W t and save to purchase k t+1 units of capital. Capital goods are produced one-for-one from consumption goods so that the price of capital in terms of foregone consumption is unity (Q = 1). Entrepreneurs also pay a fixed cost C e which may be interpreted as a fixed amount of consumption when young.

8 Net Worth Entrepreneurs are risk neutral and, net of C e, only consume when old. Entrepreneurial net worth is therefore n t = W t C e. This net worth is used to finance capital expenditures k t+1.

9 Production Given capital k t+1, an individual entrepreneur has access to a constant returns to scale Cobb-Douglas production technology: y t+1 = l 1 α t+1 (θ t+1ωk t+1 ) α where θ t+1 denotes aggregate productivity and ω denotes an idiosyncratic shock to an individual firm s project return. Given k t+1 units of capital purchased at time t, entrepreneurs hire labor in t + 1 and earn the expost profits π t+1 which, given the form of production, is a linear function of capital π t+1 = ωr k t+1k t+1 Because ω can only be observed with cost µωr k t+1 k t+1, entrepreneurs face a CSV contracting problem as outlined above.

10 Aggregate Economy Let aggregate output be defined as Y t = y t dφ(ω) and define aggregate capital, K t+1, in an analogous manner. (This ignores bankruptcy costs as resource drain). Total labor is in fixed supply and normalized to unity so that W t = (1 α)y t Assume that shocks to the aggregate technology θ t are iid and, without loss of generality, normalize the mean of θ t such that the expected aggregate return satisfies E t R k t+1 = αk α 1 t+1 Thus, although individual entrepreneurs face constant returns to scale, the aggregate return on capital is a decreasing function of the aggregate stock of capital.

11 Benchmark Economy without Financial Frictions In the absence of frictions in financial markets, the expected return on capital is equated to the risk free rate. Consequently, the aggregate capital stock is determined by the user cost of capital: and is therefore constant. ( α 1/(1 α) K = R) Thus iid shocks to technology have no persistent effects on the economy.

12 Model with Financial Frictions Entrepreneurial net worth is equal to wages earned when young net of consumption: N t = (1 α)y t C e Aggregate capital next period is the sum of entrepreneurial net worth and household savings: where B t = b(1 α)y t. K t+1 = N t + B t Entrepreneurial leverage is therefore K t+1 N t = 1 + b(1 α)y t (1 α)y t C e and hence a decreasing function of current output.

13 Leverage With constant returns to scale, entrepreneurs leverage up to the point where the expected excess return on capital is equal to the premium on external funds. As a result, capital expenditures are determined by available net worth: E t R k t+1 R = s ( Kt+1 where s() is derived from the contracting problem defined above. If K < N t, entrepreneurs need not borrow to finance desired capital. In this case s = 1, there is no premium on external funds, and the capital stock is equal to the first best. N t )

14 Capital supply vs capital demand Assuming N t < K we have ( αkt+1 α 1 = Rs 1 + b(1 α)y ) t (1 α)y t C e where s() > 1. In this case, the premium on external funds is positive and aggregate capital is below first best.

15 Comments: The left-hand side of this equation can be interpreted as a capital demand equation. It is a downward sloping function of current capital. The right hand side can be interpreted as a capital supply equation, i.e. the price at which the market can finance a given level of capital depends on leverage at higher leverage, default risk is higher and hence the premium on external funds is higher. In this example household and entrepreneurial savings can be summarized by current output. As a result, the capital supply curve does not depend on the current capital choice K t+1.

16 Dynamics: With C e > 0, an increase in the current level of technology θ t leads to an increase in entrepreneurial net worth N t that is proportionately larger than the increase in household savings. As output rises, leverage falls. Given s () > 0, the premium on external finance falls. This is represented as an outward shift in the capital supply curve. Next period s capital will therefore increase. Furthermore, high capital tomorrow implies higher output tomorrow. As a result, following a positive shock to technology in period t, leverage and the premium on external funds will be persistently below steady-state, and capital will be persistently above steady-state.

17 Intuition In Bernanke-Gertler, iid shocks to technology are propagated through time via the financial accelerator mechanism. The essential ingredient necessary to obtain persistent procyclical movements in output is that entrepreneurial net worth increases more than household savings in response to an increase in current output. In the simple framework outlined above, this occurs because of the fixed entrepreneurial consumption requirement C e. More generally, any mechanism that makes net worth more procyclical than savings result in an amplification and propagation mechanism. Asset price movements are the most likely source of procyclicality in net worth.

18 Additional implications Any mechanism that transfers wealth from savers to borrowers will have expansionary effects on the economy. Bernanke and Gertler use this insight to argue that debt-deflation which transfers net worth from entrepreneurs to households can have persistent contractionary effects on economic activity.

19 Households choose i=0 Households: maximize ( E t β i 1 1 γ C1 γ t+i + a m 1 γ m subject to { C t+i, N t+i, B t+i P t+i, M t+i P t+i, K t+i } i=0 to ( Mt+i P t+i ) ) 1 γm 1 a n N 1+γn t+s 1 + γ n C t = W t N t + Π t + T R t + Z t K t + Q t (K t+1 (1 δ) K t ) P t + B t + M t 1 M ( ) t 1 Bt+1 P t P t P t 1 + i t P t where W t /P t denotes the real wage and Π t denotes profits received from firms owned by households, Q t denotes the price of capital and Z t denotes the rental rate on capital.

20 Household Optimality Conditions: The inter-temporal first-order conditions are: ( ) C γ Pt t = β(1 + i t )E t C γ t+1 P t+1 ) ( Mt + a m P t ( [Zt+1 + (1 δ) Q t+1 ] t = βe t C γ t = βe t ( Pt P t+1 C γ t+1 C γ The labor-leisure FOC is: Q t W t C γ t = a n N γn t P t ) γm C γ t+1 )

21 Labor-leisure: Household Optimality Conditions: W t C γ t = a n N γn t P t Consumption euler equation: { } C γ t = E t βr t+1 C γ t+1 where Money demand: R t+1 = Z t+1 + (1 δ) Q t+1 Q t ( M t = (a m ) 1 γm 1 1 ) 1 P t 1 + i t with R t+1 = (1 + i t ) Pt P t+1 γm C γ γm t

22 Final goods producers: Firms in the final goods sector producer a homogenous good, Y t, using intermediate goods, Y t (z) according to the CES production function ( 1 Y t = 0 ) ε Y t (z) ε 1 ε 1 ε dz where Y t (z) denotes intermediate good z and ε > 1 is the price elasticity of demand. The representative firm chooses inputs Y t (z) to solve ( 1 ) ε max Y t (z) ε 1 ε 1 E t ε dz P t subject to 0 E t = 1 0 P t (z)y t (z)dz

23 Lagrangean Problem: Substituting constraints and taking derivatives, the first order condition is ( ε 1 ) ε Y t (z) ε 1 ε 1 1 ε 1 ε dz Y t (z) 1 P ε t (z) = ε 1 ε P t 0 Rearranging we get the demand for the intermediate good ( ) Pt (z) ε Y t (z) = Y t Using this demand curve in conjunction with the definition of E t, it is straightforward to show that P t Y t = E t for ( 1 ) 1/(1 ε) P t = P t (z) 1 ε dz 0 where P t represents the minimum cost of achieving one unit of the final goods bundle. We interpret P t as the aggregate price index. P t

24 Intermediate goods producers: There is a continuum of monopolistically competitive firms owned by consumers, indexed by z [0, 1]. Each intermediate good firm operates a CRS production function and faces the demand curve for good z derived above. Nominal Rigidities: Calvo price setting. With probability 1 θ firms reset their price in any given period. Average price duration = 1 1 θ.

25 Cost Minimization Firm z chooses inputs N t (z) and K t (z) to minimize: subject to Cost minimization implies Marginal Cost: where C t = min W t P t N t (z) + Z t K t (z) Y t (z) = A t N t (z) α K t (z) 1 α W t = MC t α Y t (z) P t N t (z) MC t = Z t = MC t (1 α) Y t(z) K t (z) C t = MC t Y t (z) 1 α 1 α (1 α) α ( Wt P t ) 1 α Z α t A t

26 Flexible Prices Firm z chooses P t (z) to maximize subject to Π t (z) = P t(z) Y t (z) MC t Y t (z) P t ( ) Pt (z) ε Y t (z) = Y t The firm solves [ (Pt ) (z) 1 ε ( ) ] Pt (z) ε MC t max P t(z) P t P t P t Y t

27 Price vs Marginal Cost First order conditions imply that the firm sets its relative price as P t (z) P t = (1 + µ) MC t where (1 + µ) = ε ε 1 denotes a constant markup over real marginal cost.

28 Nominal Price Rigidities: Firm solves: ( [ ]) P max E t Λ t+s θ s t Y Pt t+s MC t+s Yt+s P s=0 t+s subject to ( ) P Yt+s ε = t Y t+s P t Write this as: ( [ ( ) P max E t Λ t+s θ s 1 ε t MC t+s P t(z) P t+s s=0 ( P t P t+s ) ε ] Y t+s )

29 Optimal reset price The first-order-conditions imply E t ( where s=0 ( P Λ t+s θ s [Pt (1 + µ) P t+s MC t+s ] t Y 1 + µ = ε ε 1 t+s P t+s ) ) = 0 Optimal reset price is a weighted average of expected future marginal costs: ( ( E t Pt s=0 Λ t+sθ s P )) P t+s MC t Yt+s t+s P t+s = (1 + µ) ( ( E t s=0 Λ P )) t Yt+s t+s P t+s

30 Log-linearization of P t Log-linearize this equation: ˆp t = (1 βθ) E t β s θ s [ˆp t+s + mc t+s ] which may be expressed as s=0 or equivalently: ˆp t = (1 βθ) mc t + βθe t ˆp t+1 ˆp t ˆp t = (1 βθ) ˆmc t + ˆπ t + βθe t (ˆp t+1 ˆp t+1 )

31 Price index: so P t = ( θp 1 ε t 1 P t P t 1 = Phillips Curve ) 1 ε 1/(1 ε) + (1 θ) Pt ( ( P θ + (1 θ) t P t 1 ) 1 ε ) 1/(1 ε) Log linearize this equation around a constant price level we have ˆπ t = (1 θ) (ˆp t ˆp t 1 ) Combine with optimal reset price to obtain: ˆπ t = κ ˆmc t + βe tˆπ t+1 where κ = (1 θ) (1 βθ) θ

32 Total input demand satisfies Aggregation: Aggregate output is N t = K t = N t (z)dz K t (z)dz ( 1 Y t = A t (N t (z) α K t (z) 1 α) ) ε/(ε 1) (ε 1)/ε dz 0 = A t N α t K 1 α t ( 1 ( ) Nt (z) (ε 1)/ε ε/(ε 1) dz) 0 The term in brackets reflects the (second-order) loss in output owing to price dispersion. N t

33 Capital Production Capital accumulation is subject to adjustment costs: ( ) It K t+1 = (1 δ)k t + φ K t K t where φ(δ) = δ and φ (δ) = 1. Capital producers choose I t to max ( ) It Q t φ I t K t K t FOC implies Q t = 1 ( ) φ It K t

34 Monetary Policy Monetary policy satisfies a Taylor rule: 1 + i t = ( Pt P t 1 ) φπ ( ) φy Yt Y p t

35 Overview Bernanke, Gertler and Gilchrist develop a quantitative dynamic stochastic general equilibrium framework that embeds financial frictions in an otherwise workhorse dynamic New Keynesian economy. Their framework allows one to quantitatively assess the strength of the financial accelerator mechanism described by Bernanke-Gertler and Kiyotaki and Moore. It also provides a basis for a quantitative evaluation of alternative monetary policy rules.

36 Households: Households make consumption and labor supply decisions to maximize the present value of utility subject to standard constraints. Let R t denote the risk-free rate. Household optimality conditions imply a consumption Euler equation U (C t ) = E t R t+1 βu (C t+1 ) and combined with firm s hiring decisions the labor equation U (C t ) 1 µ t αy t /N t = v (N t ) where v (N) denotes the marginal disutility of labor.

37 Aggregate Capital Return Entrepreneurs in this economy purchase capital at period t, produce in period t + 1 and then resell their capital at market price Q t+1. The required return on capital is E t R k t+1 = E t [ (1/µt+1 ) Y t+1 /K t+1 + (1 δ)q t+1 Q t where denotes the marginal profitability of capital. The term µ t is the markup over marginal cost owing to monopolistic-competition features of the New Keynesian framework. In the absence of financial frictions, the return on household savings is equal to the return on capital: R t+1 = R k t+1 ]

38 Tobin s Q With adjustment costs to capital, Tobin s Q is an increasing function of the rate of investment: where φ () 0 1 Q t = ( ) φ It K t

39 Resource constraints Production:: Y t = A t N α t K 1 α t = C t + I t Capital Accumulation: ( ) It K t+1 = (1 δ)k t + φ K t K t

40 Log-linearization Consumption-euler equation: Return on capital: ĉ t = σe tˆr t+1 + E t ĉ t+1 Markup: ˆr k t = (1 ν)(ˆµ t + ŷ t ˆk t ) + ν ˆq t ˆq t 1 ˆµ t = ŷ t γĉ t (1 + γ n )ˆn t Tobin s Q: î t ˆk t = ηˆq t

41 Log-linearization Production and resource constraints: ŷ t = â t + αˆn t + (1 α)ˆk t ŷ t = c y ĉt + i y ît ˆk t+1 = (1 δ)ˆk t + δî t

42 Frictionless Model (RBC) With no nominal rigidities we impose: ˆµ t = 0 With no financial frictions we impose: ˆr t+1 = ˆr k t+1

43 Nominal Rigidities and Monetary Policy The New Keynesian features of the model imply a relationship between inflation and markups via the Phillips curve: π t = κˆµ t + βe t π t+1 Monetary policy specifies a Taylor type monetary policy rule where the nominal interest rate depends on inflation and output: ˆr n t = φ πˆπ t + φ y ŷ t The Fisher equation determines the relationship between real and nominal rates: ˆr t+1 = ˆr n t E tˆπ t+1

44 The Financial Sector: Entrepreneurs are long-lived but risk neutral. Face an exogenous failure rate and hence discount the future more than households. Financial frictions based on the costly-state-verification model of BGG.

45 Capital Return of Entrepreneur Continuum of risk-neutral entrepreneurs with exogenous birth and death rate γ. Entrepreneur with capital K it has access to a technology that transforms labor and capital services into wholesale output goods. Entrepreneur uses net worth N it to buy capital K i,t+1 at price Q t to be used in production at t + 1. She then resells the capital at price ω i,t+1 Q t+1. The realized (gross) return on capital: [ ] ω 1 it+1 Ri,t+1 k µ t+1 (1 α) Y i,t+1 K i,t+1 + Q t+1 (1 δ) = Q t

46 Default and leverage With constant returns to scale in production and monitoring technologies, the contracting problem implies E t R k t+1 R t = ρ( ω t ) Given a default barrier ω, capital expenditures are determined by available net worth: [ ( )] Γ(ωt ) µg(ω t )] QK i,t+1 = 1 + λ N i,t 1 Γ(ω t ) Summing across entrepreneurs: [ ( )] Γ(ωt ) µg(ω t )] QK t+1 = 1 + λ N t 1 Γ(ω t ) where N t = i N it and K t = i K it

47 Leverage Let N t+1 denote aggregate net worth. Because all entrepreneurs face the same aggregate return on capital, they face the same premium on external funds, hence summing across entrepreneurs implies that this equation holds in the aggregate. BGG obtain a relationship between the aggregate return on capital and the aggregate degree of entrepreneurial leverage: E t R K t+1 R t ( ) Qt K t+1 = s where the function s() is derived from the costly state verification contracting structure. N t

48 Entrepreneurial savings: Entrepreneurs discount the future more than households and are risk neutral implies that they defer consumption until they exit.

49 Aggregate net worth Aggregating across entrepreneurs then implies the aggregate net worth accumulation equation: N t = (1 γ)rt k Q t 1 K t ( ) (1 γ) (R t 1 (Q t 1 K t N t 1 ) + µg( ω t )Rt k Q t 1 K t ) + γw e t where γ is the death rate of entrepreneurs and γw e t represents a small exogenous transfer to new startups. The first term in this expression is the aggregate return on capital. The second term is the payment to bond holders (households) inclusive of compensation for default costs.

50 Aggregate net worth In equilibrium, the expected return on capital compensates for the risk free rate plus the loss in monitoring. Rewriting we obtain ( ) N t = (1 γ)r t 1 N t 1 +(1 γ) Rt k E t 1 Rt k Q t 1 K t +γwt e Thus ( surprise movements in the return on capital R k t E t 1 Rt k ) influence current net worth Nt. This is analogous to the Kiyotaki-Moore result. To fully describe model dynamics one must solve the full system using standard numerical solution methods. Nonetheless, one can get some idea of model dynamics from this last equation.

51 Log-linearization of financial sector External finance premium and net worth equation: s t = χ (n t q t k t + ε fd t n t = K ( ) K N rk t N 1 (s t 1 + r t 1 π t ) + θn t 1 + ε nw t Allow for credit-supply shocks: ε fd ε nw t t : disturbances to credit intermediation process : disturbances to asset values that serve as collateral

52 Intuition: Consider a positive shock to the economy that leads to an increase in the current value of assets in place Q t. For a given level of capital expenditures, a 1% increase in asset prices raises financing requirements Q t K t+1 by 1%. Net worth will also increase owing to the rise in asset prices. Around the steady-state we have that approximately d ln N t d ln Q t = K N > 1

53 Intuition: The percent change in net worth is roughly proportional to the steady-state degree of leverage. As a result, holding other things fixed, surprise movements in asset prices cause net worth to rise proportionately more than the increase in capital expenditures hence leverage falls and the external finance premium decreases. This causes a further increase in asset prices and further reductions in the premium on external funds and hence an expansion of investment spending.

54 The role of nominal price rigidities A positive shock that increases asset prices also leads to an increase in marginal cost which is only partially transmitted to the economy owing to nominal price rigidities. As a result, markups fall, and output expands. The reduction in markups and expansion of output puts further upward pressure on asset prices and thus strengthens the financial accelerator. The conduct of monetary policy also plays a key role: A relatively weak response of monetary policy to expected inflation reduces the effect of increased investment demand on real interest rates and causes a much larger increase in asset prices.

55 Quantitative results According to the calibration used in BGG, the financial accelerator leads to a 30% amplification of the output in response to increases in technology relative to a benchmark model without financial frictions. It also provides substantial amplification to shocks to monetary policy and other demand-side disturbances. A reallocation of wealth from households to entrepreneurs has a strong amplification mechanism: A reallocation that is equivalent to 1% of entrepreneurial net worth implies a 2% rise in actual net worth owing to the fact that asset prices rise as net worth expands. Such reallocation mechanisms allow one to consider the role of debt deflation as a source of business cycle dynamics. It also raises the possibility that the financial sector can serve as a source of economic volatility.

Monetary Economics. Financial Markets and the Business Cycle: The Bernanke and Gertler Model. Nicola Viegi. September 2010

Monetary Economics. Financial Markets and the Business Cycle: The Bernanke and Gertler Model. Nicola Viegi. September 2010 Monetary Economics Financial Markets and the Business Cycle: The Bernanke and Gertler Model Nicola Viegi September 2010 Monetary Economics () Lecture 7 September 2010 1 / 35 Introduction Conventional Model

More information

A Model with Costly-State Verification

A Model with Costly-State Verification A Model with Costly-State Verification Jesús Fernández-Villaverde University of Pennsylvania December 19, 2012 Jesús Fernández-Villaverde (PENN) Costly-State December 19, 2012 1 / 47 A Model with Costly-State

More information

The new Kenesian model

The new Kenesian model The new Kenesian model Michaª Brzoza-Brzezina Warsaw School of Economics 1 / 4 Flexible vs. sticky prices Central assumption in the (neo)classical economics: Prices (of goods and factor services) are fully

More information

Alternative theories of the business cycle

Alternative theories of the business cycle Alternative theories of the business cycle Lecture 14, ECON 4310 Tord Krogh October 19, 2012 Tord Krogh () ECON 4310 October 19, 2012 1 / 44 So far So far: Only looked at one business cycle model (the

More information

The New Keynesian Model

The New Keynesian Model The New Keynesian Model Noah Williams University of Wisconsin-Madison Noah Williams (UW Madison) New Keynesian model 1 / 37 Research strategy policy as systematic and predictable...the central bank s stabilization

More information

Credit Disruptions and the Spillover Effects between the Household and Business Sectors

Credit Disruptions and the Spillover Effects between the Household and Business Sectors Credit Disruptions and the Spillover Effects between the Household and Business Sectors Rachatar Nilavongse Preliminary Draft Department of Economics, Uppsala University February 20, 2014 Abstract This

More information

Lecture 8: Two period corporate debt model

Lecture 8: Two period corporate debt model Lecture 8: Two period corporate debt model Simon Gilchrist Boston Univerity and NBER EC 745 Fall, 213 A two-period model with investment At time 1, the firm buys capital k, using equity issuance s and

More information

Monetary Economics Final Exam

Monetary Economics Final Exam 316-466 Monetary Economics Final Exam 1. Flexible-price monetary economics (90 marks). Consider a stochastic flexibleprice money in the utility function model. Time is discrete and denoted t =0, 1,...

More information

Graduate Macro Theory II: The Basics of Financial Constraints

Graduate Macro Theory II: The Basics of Financial Constraints Graduate Macro Theory II: The Basics of Financial Constraints Eric Sims University of Notre Dame Spring Introduction The recent Great Recession has highlighted the potential importance of financial market

More information

The Basic New Keynesian Model

The Basic New Keynesian Model Jordi Gali Monetary Policy, inflation, and the business cycle Lian Allub 15/12/2009 In The Classical Monetary economy we have perfect competition and fully flexible prices in all markets. Here there is

More information

Credit Frictions and Optimal Monetary Policy. Vasco Curdia (FRB New York) Michael Woodford (Columbia University)

Credit Frictions and Optimal Monetary Policy. Vasco Curdia (FRB New York) Michael Woodford (Columbia University) MACRO-LINKAGES, OIL PRICES AND DEFLATION WORKSHOP JANUARY 6 9, 2009 Credit Frictions and Optimal Monetary Policy Vasco Curdia (FRB New York) Michael Woodford (Columbia University) Credit Frictions and

More information

Macroeconomics. Basic New Keynesian Model. Nicola Viegi. April 29, 2014

Macroeconomics. Basic New Keynesian Model. Nicola Viegi. April 29, 2014 Macroeconomics Basic New Keynesian Model Nicola Viegi April 29, 2014 The Problem I Short run E ects of Monetary Policy Shocks I I I persistent e ects on real variables slow adjustment of aggregate price

More information

A Model of Financial Intermediation

A Model of Financial Intermediation A Model of Financial Intermediation Jesús Fernández-Villaverde University of Pennsylvania December 25, 2012 Jesús Fernández-Villaverde (PENN) A Model of Financial Intermediation December 25, 2012 1 / 43

More information

ECON 815. A Basic New Keynesian Model II

ECON 815. A Basic New Keynesian Model II ECON 815 A Basic New Keynesian Model II Winter 2015 Queen s University ECON 815 1 Unemployment vs. Inflation 12 10 Unemployment 8 6 4 2 0 1 1.5 2 2.5 3 3.5 4 4.5 5 Core Inflation 14 12 10 Unemployment

More information

Inflation Dynamics During the Financial Crisis

Inflation Dynamics During the Financial Crisis Inflation Dynamics During the Financial Crisis S. Gilchrist 1 R. Schoenle 2 J. W. Sim 3 E. Zakrajšek 3 1 Boston University and NBER 2 Brandeis University 3 Federal Reserve Board Theory and Methods in Macroeconomics

More information

A Model with Costly Enforcement

A Model with Costly Enforcement A Model with Costly Enforcement Jesús Fernández-Villaverde University of Pennsylvania December 25, 2012 Jesús Fernández-Villaverde (PENN) Costly-Enforcement December 25, 2012 1 / 43 A Model with Costly

More information

Lecture 4. Extensions to the Open Economy. and. Emerging Market Crises

Lecture 4. Extensions to the Open Economy. and. Emerging Market Crises Lecture 4 Extensions to the Open Economy and Emerging Market Crises Mark Gertler NYU June 2009 0 Objectives Develop micro-founded open-economy quantitative macro model with real/financial interactions

More information

Financial Frictions Under Asymmetric Information and Costly State Verification

Financial Frictions Under Asymmetric Information and Costly State Verification Financial Frictions Under Asymmetric Information and Costly State Verification General Idea Standard dsge model assumes borrowers and lenders are the same people..no conflict of interest. Financial friction

More information

Macroeconomics 2. Lecture 6 - New Keynesian Business Cycles March. Sciences Po

Macroeconomics 2. Lecture 6 - New Keynesian Business Cycles March. Sciences Po Macroeconomics 2 Lecture 6 - New Keynesian Business Cycles 2. Zsófia L. Bárány Sciences Po 2014 March Main idea: introduce nominal rigidities Why? in classical monetary models the price level ensures money

More information

Microfoundations of DSGE Models: III Lecture

Microfoundations of DSGE Models: III Lecture Microfoundations of DSGE Models: III Lecture Barbara Annicchiarico BBLM del Dipartimento del Tesoro 2 Giugno 2. Annicchiarico (Università di Tor Vergata) (Institute) Microfoundations of DSGE Models 2 Giugno

More information

Energy and Capital in a New-Keynesian Framework

Energy and Capital in a New-Keynesian Framework Energy and Capital in a New-Keynesian Framework Verónica Acurio Vásconez, Gaël Giraud, Florent Mc Isaac, Ngoc Sang Pham CES, PSE, University Paris I March 27, 2014 Outline Goals Model Household Firms The

More information

Notes on Financial Frictions Under Asymmetric Information and Costly State Verification. Lawrence Christiano

Notes on Financial Frictions Under Asymmetric Information and Costly State Verification. Lawrence Christiano Notes on Financial Frictions Under Asymmetric Information and Costly State Verification by Lawrence Christiano Incorporating Financial Frictions into a Business Cycle Model General idea: Standard model

More information

(Incomplete) summary of the course

(Incomplete) summary of the course (Incomplete) summary of the course Lecture 19, ECON 4310 Tord Krogh November 20, 2012 Tord Krogh () ECON 4310 November 20, 2012 1 / 68 Main topics This semester we have been through: Ramsey OLG RBC methodology

More information

ECON 4325 Monetary Policy and Business Fluctuations

ECON 4325 Monetary Policy and Business Fluctuations ECON 4325 Monetary Policy and Business Fluctuations Tommy Sveen Norges Bank January 28, 2009 TS (NB) ECON 4325 January 28, 2009 / 35 Introduction A simple model of a classical monetary economy. Perfect

More information

DSGE model with collateral constraint: estimation on Czech data

DSGE model with collateral constraint: estimation on Czech data Proceedings of 3th International Conference Mathematical Methods in Economics DSGE model with collateral constraint: estimation on Czech data Introduction Miroslav Hloušek Abstract. Czech data shows positive

More information

Macroeconomics of Financial Markets

Macroeconomics of Financial Markets ECON 712, Fall 2017 Financial Markets and Business Cycles Guillermo Ordoñez University of Pennsylvania and NBER September 17, 2017 Introduction Credit frictions amplification & persistence of shocks Two

More information

Macroeconomic Models. with Financial Frictions

Macroeconomic Models. with Financial Frictions Macroeconomic Models with Financial Frictions Jesús Fernández-Villaverde University of Pennsylvania May 31, 2010 Jesús Fernández-Villaverde (PENN) Macro-Finance May 31, 2010 1 / 69 Motivation I Traditional

More information

Uninsured Unemployment Risk and Optimal Monetary Policy

Uninsured Unemployment Risk and Optimal Monetary Policy Uninsured Unemployment Risk and Optimal Monetary Policy Edouard Challe CREST & Ecole Polytechnique ASSA 2018 Strong precautionary motive Low consumption Bad aggregate shock High unemployment Low output

More information

Bernanke and Gertler [1989]

Bernanke and Gertler [1989] Bernanke and Gertler [1989] Econ 235, Spring 2013 1 Background: Townsend [1979] An entrepreneur requires x to produce output y f with Ey > x but does not have money, so he needs a lender Once y is realized,

More information

A Macroeconomic Model with Financial Panics

A Macroeconomic Model with Financial Panics A Macroeconomic Model with Financial Panics Mark Gertler, Nobuhiro Kiyotaki, Andrea Prestipino NYU, Princeton, Federal Reserve Board 1 March 218 1 The views expressed in this paper are those of the authors

More information

Collateral and Amplification

Collateral and Amplification Collateral and Amplification Macroeconomics IV Ricardo J. Caballero MIT Spring 2011 R.J. Caballero (MIT) Collateral and Amplification Spring 2011 1 / 23 References 1 2 Bernanke B. and M.Gertler, Agency

More information

Uncertainty Shocks In A Model Of Effective Demand

Uncertainty Shocks In A Model Of Effective Demand Uncertainty Shocks In A Model Of Effective Demand Susanto Basu Boston College NBER Brent Bundick Boston College Preliminary Can Higher Uncertainty Reduce Overall Economic Activity? Many think it is an

More information

2. Preceded (followed) by expansions (contractions) in domestic. 3. Capital, labor account for small fraction of output drop,

2. Preceded (followed) by expansions (contractions) in domestic. 3. Capital, labor account for small fraction of output drop, Mendoza (AER) Sudden Stop facts 1. Large, abrupt reversals in capital flows 2. Preceded (followed) by expansions (contractions) in domestic production, absorption, asset prices, credit & leverage 3. Capital,

More information

The Financial Accelerator and the Optimal Lending Contract

The Financial Accelerator and the Optimal Lending Contract The Financial Accelerator and the Optimal Lending Contract Mikhail Dmitriev and Jonathan Hoddenbagh First Draft: August 23 This Version: August 24 In the financial accelerator literature pioneered by Bernanke,

More information

Capital Flows, Financial Intermediation and Macroprudential Policies

Capital Flows, Financial Intermediation and Macroprudential Policies Capital Flows, Financial Intermediation and Macroprudential Policies Matteo F. Ghilardi International Monetary Fund 14 th November 2014 14 th November Capital Flows, 2014 Financial 1 / 24 Inte Introduction

More information

Technology shocks and Monetary Policy: Assessing the Fed s performance

Technology shocks and Monetary Policy: Assessing the Fed s performance Technology shocks and Monetary Policy: Assessing the Fed s performance (J.Gali et al., JME 2003) Miguel Angel Alcobendas, Laura Desplans, Dong Hee Joe March 5, 2010 M.A.Alcobendas, L. Desplans, D.H.Joe

More information

Household income risk, nominal frictions, and incomplete markets 1

Household income risk, nominal frictions, and incomplete markets 1 Household income risk, nominal frictions, and incomplete markets 1 2013 North American Summer Meeting Ralph Lütticke 13.06.2013 1 Joint-work with Christian Bayer, Lien Pham, and Volker Tjaden 1 / 30 Research

More information

Quantitative Significance of Collateral Constraints as an Amplification Mechanism

Quantitative Significance of Collateral Constraints as an Amplification Mechanism RIETI Discussion Paper Series 09-E-05 Quantitative Significance of Collateral Constraints as an Amplification Mechanism INABA Masaru The Canon Institute for Global Studies KOBAYASHI Keiichiro RIETI The

More information

Inflation Dynamics During the Financial Crisis

Inflation Dynamics During the Financial Crisis Inflation Dynamics During the Financial Crisis S. Gilchrist 1 1 Boston University and NBER MFM Summer Camp June 12, 2016 DISCLAIMER: The views expressed are solely the responsibility of the authors and

More information

Risk Aversion and the Financial Accelerator *

Risk Aversion and the Financial Accelerator * Risk Aversion and the Financial Accelerator * Giacomo Candian 1 Boston College Mikhail Dmitriev 2 Florida State University This Draft: October 214 Abstract We extend the Bernanke, Gertler and Gilchrist

More information

1 Dynamic programming

1 Dynamic programming 1 Dynamic programming A country has just discovered a natural resource which yields an income per period R measured in terms of traded goods. The cost of exploitation is negligible. The government wants

More information

Credit Frictions and Optimal Monetary Policy

Credit Frictions and Optimal Monetary Policy Credit Frictions and Optimal Monetary Policy Vasco Cúrdia FRB New York Michael Woodford Columbia University Conference on Monetary Policy and Financial Frictions Cúrdia and Woodford () Credit Frictions

More information

Utility Maximizing Entrepreneurs and the Financial Accelerator

Utility Maximizing Entrepreneurs and the Financial Accelerator Utility Maximizing Entrepreneurs and the Financial Accelerator Mikhail Dmitriev and Jonathan Hoddenbagh August, 213 Job Market Paper In the financial accelerator literature developed by Bernanke, Gertler

More information

Household Debt, Financial Intermediation, and Monetary Policy

Household Debt, Financial Intermediation, and Monetary Policy Household Debt, Financial Intermediation, and Monetary Policy Shutao Cao 1 Yahong Zhang 2 1 Bank of Canada 2 Western University October 21, 2014 Motivation The US experience suggests that the collapse

More information

State-Dependent Pricing and the Paradox of Flexibility

State-Dependent Pricing and the Paradox of Flexibility State-Dependent Pricing and the Paradox of Flexibility Luca Dedola and Anton Nakov ECB and CEPR May 24 Dedola and Nakov (ECB and CEPR) SDP and the Paradox of Flexibility 5/4 / 28 Policy rates in major

More information

Macro II. John Hassler. Spring John Hassler () New Keynesian Model:1 04/17 1 / 10

Macro II. John Hassler. Spring John Hassler () New Keynesian Model:1 04/17 1 / 10 Macro II John Hassler Spring 27 John Hassler () New Keynesian Model: 4/7 / New Keynesian Model The RBC model worked (perhaps surprisingly) well. But there are problems in generating enough variation in

More information

Credit Frictions and Optimal Monetary Policy

Credit Frictions and Optimal Monetary Policy Vasco Cúrdia FRB of New York 1 Michael Woodford Columbia University National Bank of Belgium, October 28 1 The views expressed in this paper are those of the author and do not necessarily re ect the position

More information

State-Dependent Fiscal Multipliers: Calvo vs. Rotemberg *

State-Dependent Fiscal Multipliers: Calvo vs. Rotemberg * State-Dependent Fiscal Multipliers: Calvo vs. Rotemberg * Eric Sims University of Notre Dame & NBER Jonathan Wolff Miami University May 31, 2017 Abstract This paper studies the properties of the fiscal

More information

Delayed Capital Reallocation

Delayed Capital Reallocation Delayed Capital Reallocation Wei Cui University College London Introduction Motivation Less restructuring in recessions (1) Capital reallocation is sizeable (2) Capital stock reallocation across firms

More information

Asset purchase policy at the effective lower bound for interest rates

Asset purchase policy at the effective lower bound for interest rates at the effective lower bound for interest rates Bank of England 12 March 2010 Plan Introduction The model The policy problem Results Summary & conclusions Plan Introduction Motivation Aims and scope The

More information

The Role of Investment Wedges in the Carlstrom-Fuerst Economy and Business Cycle Accounting

The Role of Investment Wedges in the Carlstrom-Fuerst Economy and Business Cycle Accounting RIETI Discussion Paper Series 9-E-3 The Role of Investment Wedges in the Carlstrom-Fuerst Economy and Business Cycle Accounting INABA Masaru The Canon Institute for Global Studies NUTAHARA Kengo Senshu

More information

Collateral Constraints and Multiplicity

Collateral Constraints and Multiplicity Collateral Constraints and Multiplicity Pengfei Wang New York University April 17, 2013 Pengfei Wang (New York University) Collateral Constraints and Multiplicity April 17, 2013 1 / 44 Introduction Firms

More information

On the Merits of Conventional vs Unconventional Fiscal Policy

On the Merits of Conventional vs Unconventional Fiscal Policy On the Merits of Conventional vs Unconventional Fiscal Policy Matthieu Lemoine and Jesper Lindé Banque de France and Sveriges Riksbank The views expressed in this paper do not necessarily reflect those

More information

Unemployment Fluctuations and Nominal GDP Targeting

Unemployment Fluctuations and Nominal GDP Targeting Unemployment Fluctuations and Nominal GDP Targeting Roberto M. Billi Sveriges Riksbank 3 January 219 Abstract I evaluate the welfare performance of a target for the level of nominal GDP in the context

More information

A Simple DSGE Model of Banking Industry Dynamics

A Simple DSGE Model of Banking Industry Dynamics A Simple DSGE Model of Banking Industry Dynamics Akio Ino University of Wisconsin - Madison December 12, 217 Abstract In this paper I introduce imperfect competition and entry and exit in the banking sector

More information

Risk Aversion and the Financial Accelerator

Risk Aversion and the Financial Accelerator Risk Aversion and the Financial Accelerator Giacomo Candian Boston College Mikhail Dmitriev Florida State University First Draft: June 214 This Version: December 215 Abstract This paper studies how entrepreneurs

More information

Macroeconomics 2. Lecture 5 - Money February. Sciences Po

Macroeconomics 2. Lecture 5 - Money February. Sciences Po Macroeconomics 2 Lecture 5 - Money Zsófia L. Bárány Sciences Po 2014 February A brief history of money in macro 1. 1. Hume: money has a wealth effect more money increase in aggregate demand Y 2. Friedman

More information

Macroprudential Policies in a Low Interest-Rate Environment

Macroprudential Policies in a Low Interest-Rate Environment Macroprudential Policies in a Low Interest-Rate Environment Margarita Rubio 1 Fang Yao 2 1 University of Nottingham 2 Reserve Bank of New Zealand. The views expressed in this paper do not necessarily reflect

More information

Final Exam II (Solutions) ECON 4310, Fall 2014

Final Exam II (Solutions) ECON 4310, Fall 2014 Final Exam II (Solutions) ECON 4310, Fall 2014 1. Do not write with pencil, please use a ball-pen instead. 2. Please answer in English. Solutions without traceable outlines, as well as those with unreadable

More information

The Role of Investment Wedges in the Carlstrom-Fuerst Economy and Business Cycle Accounting

The Role of Investment Wedges in the Carlstrom-Fuerst Economy and Business Cycle Accounting MPRA Munich Personal RePEc Archive The Role of Investment Wedges in the Carlstrom-Fuerst Economy and Business Cycle Accounting Masaru Inaba and Kengo Nutahara Research Institute of Economy, Trade, and

More information

Reserve Requirements and Optimal Chinese Stabilization Policy 1

Reserve Requirements and Optimal Chinese Stabilization Policy 1 Reserve Requirements and Optimal Chinese Stabilization Policy 1 Chun Chang 1 Zheng Liu 2 Mark M. Spiegel 2 Jingyi Zhang 1 1 Shanghai Jiao Tong University, 2 FRB San Francisco ABFER Conference, Singapore

More information

Fiscal and Monetary Policy in a New Keynesian Model with Tobin s Q Investment Theory Features

Fiscal and Monetary Policy in a New Keynesian Model with Tobin s Q Investment Theory Features MPRA Munich Personal RePEc Archive Fiscal and Monetary Policy in a New Keynesian Model with Tobin s Q Investment Theory Features Stylianos Giannoulakis Athens University of Economics and Business 4 May

More information

Economic stability through narrow measures of inflation

Economic stability through narrow measures of inflation Economic stability through narrow measures of inflation Andrew Keinsley Weber State University Version 5.02 May 1, 2017 Abstract Under the assumption that different measures of inflation draw on the same

More information

Final Exam II ECON 4310, Fall 2014

Final Exam II ECON 4310, Fall 2014 Final Exam II ECON 4310, Fall 2014 1. Do not write with pencil, please use a ball-pen instead. 2. Please answer in English. Solutions without traceable outlines, as well as those with unreadable outlines

More information

Collateralized capital and news-driven cycles. Abstract

Collateralized capital and news-driven cycles. Abstract Collateralized capital and news-driven cycles Keiichiro Kobayashi Research Institute of Economy, Trade, and Industry Kengo Nutahara Graduate School of Economics, University of Tokyo, and the JSPS Research

More information

The Extensive Margin of Trade and Monetary Policy

The Extensive Margin of Trade and Monetary Policy The Extensive Margin of Trade and Monetary Policy Yuko Imura Bank of Canada Malik Shukayev University of Alberta June 2, 216 The views expressed in this presentation are our own, and do not represent those

More information

STATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics. Ph. D. Comprehensive Examination: Macroeconomics Fall, 2016

STATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics. Ph. D. Comprehensive Examination: Macroeconomics Fall, 2016 STATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics Ph. D. Comprehensive Examination: Macroeconomics Fall, 2016 Section 1. (Suggested Time: 45 Minutes) For 3 of the following 6 statements, state

More information

STATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics. Ph. D. Comprehensive Examination: Macroeconomics Spring, 2009

STATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics. Ph. D. Comprehensive Examination: Macroeconomics Spring, 2009 STATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics Ph. D. Comprehensive Examination: Macroeconomics Spring, 2009 Section 1. (Suggested Time: 45 Minutes) For 3 of the following 6 statements,

More information

Topic 4. Introducing investment (and saving) decisions

Topic 4. Introducing investment (and saving) decisions 14.452. Topic 4. Introducing investment (and saving) decisions Olivier Blanchard April 27 Nr. 1 1. Motivation In the benchmark model (and the RBC extension), there was a clear consump tion/saving decision.

More information

Financial Frictions in DSGE Models

Financial Frictions in DSGE Models Financial Frictions in DSGE Models Noah Williams University of Wisconsin-Madison Noah Williams (UW Madison) New Keynesian model 1 / 1 Overview Conventional Model with Perfect Capital Markets: 1. Arbitrage

More information

STATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics. Ph. D. Comprehensive Examination: Macroeconomics Spring, 2016

STATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics. Ph. D. Comprehensive Examination: Macroeconomics Spring, 2016 STATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics Ph. D. Comprehensive Examination: Macroeconomics Spring, 2016 Section 1. Suggested Time: 45 Minutes) For 3 of the following 6 statements,

More information

Probably Too Little, Certainly Too Late. An Assessment of the Juncker Investment Plan

Probably Too Little, Certainly Too Late. An Assessment of the Juncker Investment Plan Probably Too Little, Certainly Too Late. An Assessment of the Juncker Investment Plan Mathilde Le Moigne 1 Francesco Saraceno 2,3 Sébastien Villemot 2 1 École Normale Supérieure 2 OFCE Sciences Po 3 LUISS-SEP

More information

Product Cycles and Prices: Search Foundation

Product Cycles and Prices: Search Foundation Product Cycles and Prices: Search Foundation Mei Dong 1 Yuki Teranishi 2 1 University of Melbourne 2 Keio University and CAMA, ANU April 2018 1 / 59 In this paper, we Show a fact for product cycles and

More information

Money in an RBC framework

Money in an RBC framework Money in an RBC framework Noah Williams University of Wisconsin-Madison Noah Williams (UW Madison) Macroeconomic Theory 1 / 36 Money Two basic questions: 1 Modern economies use money. Why? 2 How/why do

More information

Agency Costs, Net Worth and Business Fluctuations. Bernanke and Gertler (1989, AER)

Agency Costs, Net Worth and Business Fluctuations. Bernanke and Gertler (1989, AER) Agency Costs, Net Worth and Business Fluctuations Bernanke and Gertler (1989, AER) 1 Introduction Many studies on the business cycles have suggested that financial factors, or more specifically the condition

More information

Monetary Policy in a New Keyneisan Model Walsh Chapter 8 (cont)

Monetary Policy in a New Keyneisan Model Walsh Chapter 8 (cont) Monetary Policy in a New Keyneisan Model Walsh Chapter 8 (cont) 1 New Keynesian Model Demand is an Euler equation x t = E t x t+1 ( ) 1 σ (i t E t π t+1 ) + u t Supply is New Keynesian Phillips Curve π

More information

Optimality of Inflation and Nominal Output Targeting

Optimality of Inflation and Nominal Output Targeting Optimality of Inflation and Nominal Output Targeting Julio Garín Department of Economics University of Georgia Robert Lester Department of Economics University of Notre Dame First Draft: January 7, 15

More information

Bank Capital, Agency Costs, and Monetary Policy. Césaire Meh Kevin Moran Department of Monetary and Financial Analysis Bank of Canada

Bank Capital, Agency Costs, and Monetary Policy. Césaire Meh Kevin Moran Department of Monetary and Financial Analysis Bank of Canada Bank Capital, Agency Costs, and Monetary Policy Césaire Meh Kevin Moran Department of Monetary and Financial Analysis Bank of Canada Motivation A large literature quantitatively studies the role of financial

More information

Collateralized capital and News-driven cycles

Collateralized capital and News-driven cycles RIETI Discussion Paper Series 07-E-062 Collateralized capital and News-driven cycles KOBAYASHI Keiichiro RIETI NUTAHARA Kengo the University of Tokyo / JSPS The Research Institute of Economy, Trade and

More information

Menu Costs and Phillips Curve by Mikhail Golosov and Robert Lucas. JPE (2007)

Menu Costs and Phillips Curve by Mikhail Golosov and Robert Lucas. JPE (2007) Menu Costs and Phillips Curve by Mikhail Golosov and Robert Lucas. JPE (2007) Virginia Olivella and Jose Ignacio Lopez October 2008 Motivation Menu costs and repricing decisions Micro foundation of sticky

More information

Concerted Efforts? Monetary Policy and Macro-Prudential Tools

Concerted Efforts? Monetary Policy and Macro-Prudential Tools Concerted Efforts? Monetary Policy and Macro-Prudential Tools Andrea Ferrero Richard Harrison Benjamin Nelson University of Oxford Bank of England Rokos Capital 20 th Central Bank Macroeconomic Modeling

More information

Evaluating Macroprudential Policy in a DSGE Framework with Financial Frictions

Evaluating Macroprudential Policy in a DSGE Framework with Financial Frictions Evaluating Macroprudential Policy in a DSGE Framework with Financial Frictions Sherry Xinrui Yu Boston University October 15, 213 Abstract This paper studies the effectiveness of macroprudential policy

More information

STATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics. Ph. D. Preliminary Examination: Macroeconomics Fall, 2009

STATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics. Ph. D. Preliminary Examination: Macroeconomics Fall, 2009 STATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics Ph. D. Preliminary Examination: Macroeconomics Fall, 2009 Instructions: Read the questions carefully and make sure to show your work. You

More information

Keynesian Views On The Fiscal Multiplier

Keynesian Views On The Fiscal Multiplier Faculty of Social Sciences Jeppe Druedahl (Ph.d. Student) Department of Economics 16th of December 2013 Slide 1/29 Outline 1 2 3 4 5 16th of December 2013 Slide 2/29 The For Today 1 Some 2 A Benchmark

More information

A Macroeconomic Model with Financial Panics

A Macroeconomic Model with Financial Panics A Macroeconomic Model with Financial Panics Mark Gertler, Nobuhiro Kiyotaki, Andrea Prestipino NYU, Princeton, Federal Reserve Board 1 September 218 1 The views expressed in this paper are those of the

More information

Essays on Money, Credit Constraints and Asset Prices

Essays on Money, Credit Constraints and Asset Prices Essays on Money, Credit Constraints and Asset Prices Lei Wang Research School of Economics College of Business and Economics The Australian National University A thesis submitted for the degree of Doctor

More information

Question 1 Consider an economy populated by a continuum of measure one of consumers whose preferences are defined by the utility function:

Question 1 Consider an economy populated by a continuum of measure one of consumers whose preferences are defined by the utility function: Question 1 Consider an economy populated by a continuum of measure one of consumers whose preferences are defined by the utility function: β t log(c t ), where C t is consumption and the parameter β satisfies

More information

Asset Prices and Business Cycles with. Financial Frictions

Asset Prices and Business Cycles with. Financial Frictions Asset Prices and Business Cycles with Financial Frictions Pedram Nezafat Ctirad Slavík November 21, 2009 Job Market Paper Abstract. Existing dynamic general equilibrium models have failed to explain the

More information

Graduate Macro Theory II: Fiscal Policy in the RBC Model

Graduate Macro Theory II: Fiscal Policy in the RBC Model Graduate Macro Theory II: Fiscal Policy in the RBC Model Eric Sims University of otre Dame Spring 7 Introduction This set of notes studies fiscal policy in the RBC model. Fiscal policy refers to government

More information

Graduate Macro Theory II: The Real Business Cycle Model

Graduate Macro Theory II: The Real Business Cycle Model Graduate Macro Theory II: The Real Business Cycle Model Eric Sims University of Notre Dame Spring 2017 1 Introduction This note describes the canonical real business cycle model. A couple of classic references

More information

Habit Formation in State-Dependent Pricing Models: Implications for the Dynamics of Output and Prices

Habit Formation in State-Dependent Pricing Models: Implications for the Dynamics of Output and Prices Habit Formation in State-Dependent Pricing Models: Implications for the Dynamics of Output and Prices Phuong V. Ngo,a a Department of Economics, Cleveland State University, 22 Euclid Avenue, Cleveland,

More information

Fiscal Policy Stabilization: Purchases or Transfers?

Fiscal Policy Stabilization: Purchases or Transfers? Fiscal Policy Stabilization: Purchases or Transfers? Neil R. Mehrotra This Draft: August 15, 214 Abstract Both government purchases and transfers figure prominently in the use of fiscal policy for counteracting

More information

Return to Capital in a Real Business Cycle Model

Return to Capital in a Real Business Cycle Model Return to Capital in a Real Business Cycle Model Paul Gomme, B. Ravikumar, and Peter Rupert Can the neoclassical growth model generate fluctuations in the return to capital similar to those observed in

More information

Taxing Firms Facing Financial Frictions

Taxing Firms Facing Financial Frictions Taxing Firms Facing Financial Frictions Daniel Wills 1 Gustavo Camilo 2 1 Universidad de los Andes 2 Cornerstone November 11, 2017 NTA 2017 Conference Corporate income is often taxed at different sources

More information

Aging and Monetary Policy

Aging and Monetary Policy Aging and Monetary Policy Zeynep Kantur November 16, 213 Abstract This paper studies the impact of aging on effectiveness of monetary policy. To do so, it introduces an OLG-DNK framework where the demand

More information

International Banks and the Cross-Border Transmission of Business Cycles 1

International Banks and the Cross-Border Transmission of Business Cycles 1 International Banks and the Cross-Border Transmission of Business Cycles 1 Ricardo Correa Horacio Sapriza Andrei Zlate Federal Reserve Board Global Systemic Risk Conference November 17, 2011 1 These slides

More information

0. Finish the Auberbach/Obsfeld model (last lecture s slides, 13 March, pp. 13 )

0. Finish the Auberbach/Obsfeld model (last lecture s slides, 13 March, pp. 13 ) Monetary Policy, 16/3 2017 Henrik Jensen Department of Economics University of Copenhagen 0. Finish the Auberbach/Obsfeld model (last lecture s slides, 13 March, pp. 13 ) 1. Money in the short run: Incomplete

More information

External Financing and the Role of Financial Frictions over the Business Cycle: Measurement and Theory. November 7, 2014

External Financing and the Role of Financial Frictions over the Business Cycle: Measurement and Theory. November 7, 2014 External Financing and the Role of Financial Frictions over the Business Cycle: Measurement and Theory Ali Shourideh Wharton Ariel Zetlin-Jones CMU - Tepper November 7, 2014 Introduction Question: How

More information

Relative Price Distortion and Optimal Monetary Policy in Open Economies

Relative Price Distortion and Optimal Monetary Policy in Open Economies Relative Price Distortion and Optimal Monetary Policy in Open Economies Jinill Kim, Andrew T. Levin, and Tack Yun Federal Reserve Board Abstract This paper addresses three issues on the conduct of monetary

More information

1.3 Nominal rigidities

1.3 Nominal rigidities 1.3 Nominal rigidities two period economy households of consumers-producers monopolistic competition, price-setting uncertainty about productivity preferences t=1 C it is the CES aggregate with σ > 1 Ã!

More information