Working Papers

Macroeconomics and Econometrics

1. Updated  0524/09 Debt, Deficits and Finite Horizons: The Stochastic Case. Joint with Carine Nourry and Alain Venditti.   This paper constructs a stochastic version of Blanchard's perpetual youth model. It should be useful to researchers who are interested in studying the effects of fiscal policy in stochastic macroeconomic models without the representative agent assumption.

2. New 10/22/09  Fiscal Policy Can Reduce Unemployment: But there is  a Better Alternative. This paper studies the effectiveness of fiscal policy to restore full employment in a model with multiple steady state unemployment equilibria.  I argue that fiscal policy can help us out of the current crisis but there is a better alternative. This is direct support for the stock market through central bank purchases of equity. Prepared for the November 2009 Carnegie-Rochester Conference on “Fiscal Policy in an Era of Unprecedented Budget Deficits.”

3. New 05/03/09 Confidence Crashes and Animal Spirits. This paper presents a model with a continuum of steady state unemployment equilibria. It defines an equilibrium concept and explains why the welfare theorems of general equilibrium theory do not apply.

4. New 06/05/08 The Great Depression. This is a working paper version of material from my completed and forthcoming book, Expectations Employment and Prices. It uses a search model of the labor market to provide a micro-founded interpretation of Keynes' explanation of the Great Depression.

5. Revised 09/21/06 Old Keynesian Economics. This is the working paper version of a paper prepared for a conference in honor of Axel Leijonhufvud, held at UCLA on August 30th and 31st 2006. The paper is published as in Macroeconomics in the Small and the Large, Roger E. A Farmer ed., Edward Elgar, London, 2008

6. Minimal State Variable Solutions to Markov-Switching Rational Expectations Models.   Joint with Dan F. Waggoner and Tao Zha. We develop a new method for computing minimal state variable solutions (MSV) to Markov switching rational expectations models. We provide an algorithm to compute an MSV solution and we show how to test a given solution for uniqueness and boundedness. We construct an example, calibrated to US data, and we show that the MSV solution in our example is unique. This solution can potentially explain the observed reduction in the variance of inflation and the interest rate after 1980, in three different ways. The policy rule might have changed, the variance of the fundamental shocks might have fallen or the private sector equations might have been different across regimes. We compare these three explanations for the change in variance and we show that any one of them can potentially account for the facts. Our paper provides the necessary tools for a future empirical study of this issue.

7. A method to generate structural impulse-responses for measuring the effects of shocks in structural macro models, Joint with Andreas Beyer, ECB working paper #586, February 2006. We develop a technique for analyzing the response dynamics of economic variables to structural shocks in linear rational expectations models. Our work differs from standard SVARs since we allow expectations of future variables to enter structural equations. We show how to estimate the variance-covariance matrix of fundamental and non-fundamental shocks and we construct point estimates and confidence bounds for impulse response functions. Our technique can handle both determinate and indeterminate equilibria. We provide an application to U.S. monetary policy under pre and post Volcker monetary policy rules.

8. Updated 09/05/06 Shooting the Auctioneer. Joint with Andrew Hollenhorst. This is a new project based on recent ideas by Rob Shimer and Bob Hall.  Most dynamic stochastic general equilibrium models (DSGE) of the macroeconomy assume that labor is traded in a spot market. Two exceptions (Andolfatto AER 1986, Merz JME 1995) combine the two-sided search model of Mortensen and Pissarides, (Re Studs 1995) with a one-sector real business cycle model. These hybrid models are successful, in some dimensions, but they cannot account for observed volatility in unemployment and vacancies. Following a suggestion by Hall, Re. Stats 2004, building on work by Shimer 2004, this paper shows that a relatively standard DSGE model with sticky wages can account for these facts. Using a second-order approximation to the policy function we simulate moments of an artificial economy with and without sticky wages. We compute the welfare costs of the sticky wage equilibrium and find them to be small.

9. On the Indeterminacy of New-Keynesian Economics. Joint with Andreas Beyer.  ECB working paper #323. This  is an extension of On the Indeterminacy of Determinacy and Indeterminacy ( American Economic Review, 97(1) 2007, pp. 524-529.  It  generalizes the argument to a class of three equation linear models. A version of the working paper is published in Macroeconomics Dynamics 12, S1, 2008 pp 60-74 under the title "What we Don't Know about the Monetary Transmission Mechanism and why we Don't Know it”.Identifying the Monetary Transmission Mechanism using Structural Breaks. Joint with Andreas Beyer. An earlier version of this paper appeared as ECB working paper #275.  This is a new version as of July 2005. The basic idea is to use structural breaks as a kind of natural experiment to help to identify a subset of equations of a complete structural model. We apply the idea to U.S. monetary policy by showing a) that a break occurred around 1979 and b) by using the assumption that this break was solely in the policy rule to identify the private sector of a rational expectations model. The most recent version has formal tests for a structural break using the work of Bai Lumsdaine and Stock (Re. Studs. 1998) and impulse responses from our loosely identified model.

10. Business Cycles with Heterogeneous Agents. May 2002. This is part of a project that studies the implications of long-lived stochastic overlapping generations models. The main contribution of the paper is a method for solving these models in closed form. I haven't revised the paper for a while although its still on my agenda. Gauss code for the simulations is available here.
     

11. Fiscal Policy, Equity Premia and  Heterogeneous Agents,    May 2002. This paper follows on from (10).  It explores the equity premium puzzle in a long-lived agent model and it argues that market incompleteness can be captured by rapid change  in the traders who participate in the equity markets.  The paper is also on my "get to soon" list..