Results 1  10
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22
Challenges for Monetary Policy
 New and Old”, Bank of England Quarterly Bulletin
, 1999
"... helpful conversation and Philip Jefferson for providing data on currency holdings. In addition, we would like to thank participants in the Banco de Portugal Conference on Monetary Economics, the June 2000 meetings of the Society for Economic Dynamics, and seminar participants at Rutgers. Errors are ..."
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Cited by 117 (0 self)
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helpful conversation and Philip Jefferson for providing data on currency holdings. In addition, we would like to thank participants in the Banco de Portugal Conference on Monetary Economics, the June 2000 meetings of the Society for Economic Dynamics, and seminar participants at Rutgers. Errors are our own. The views expressed here are the authors ’ and not necessarily those of the Federal Reserve Banks of Philadelphia or Richmond or the Federal Reserve System. 1
LinearQuadratic Approximation of Optimal Policy Problems
, 2006
"... We consider a general class of nonlinear optimal policy problems involving forwardlooking constraints (such as the Euler equations that are typically present as structural equations in DSGE models), and show that it is possible, under regularity conditions that are straightforward to check, to deri ..."
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Cited by 70 (12 self)
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We consider a general class of nonlinear optimal policy problems involving forwardlooking constraints (such as the Euler equations that are typically present as structural equations in DSGE models), and show that it is possible, under regularity conditions that are straightforward to check, to derive a problem with linear constraints and a quadratic objective that approximates the exact problem. The LQ approximate problem is computationally simple to solve, even in the case of moderately large state spaces and flexibly parameterized disturbance processes, and its solution represents a local linear approximation to the optimal policy for the exact model in the case that stochastic disturbances are small enough. We derive the secondorder conditions that must be satisfied in order for the LQ problem to have a solution, and show that these are stronger, in general, than those required for LQ problems without forwardlooking constraints. We also show how the same linear approximations to the model structural equations and quadratic approximation to the exact welfare measure can be used to correctly rank alternative simple policy rules, again in the case of small enough shocks.
Efficient Allocations with Moral Hazard and Hidden Borrowing and Lending
, 2003
"... In this paper we develop a recursive approach to study efficient allocations in a dynamic moral hazard setting, where agents can borrow and lend and their decisions about effort, consumption and savings are private information. The recursive formulation of the problem is based on a generalized first ..."
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Cited by 44 (5 self)
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In this paper we develop a recursive approach to study efficient allocations in a dynamic moral hazard setting, where agents can borrow and lend and their decisions about effort, consumption and savings are private information. The recursive formulation of the problem is based on a generalized first order approach, whose validity is verified using a parsimonious numerical procedure based on the recursive formulation itself. In contrast with previous findings, we show that the second best allocation is welfare improving with respect to the case where the agents can self insure themselves only through borrowing and lending. Thanks to the recursive formulation, we are able to quantify the efficiency gains in a number of numerical examples. We find that welfare gains are substantial and do not vary monotonically with the credit market return. We also identify the main observational characteristics of the constrained efficient allocation.
Meets Bewley: Optimal Government Financing with Incomplete Markets
"... This paper studies optimal fiscal policy in an economy with heterogeneous households and incomplete markets. Relative to a representativeagent version of the model, the Ramsey planner takes into account the idiosyncratic income risk faced by heterogeneous households in a way that alters the model’s ..."
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Cited by 27 (0 self)
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This paper studies optimal fiscal policy in an economy with heterogeneous households and incomplete markets. Relative to a representativeagent version of the model, the Ramsey planner takes into account the idiosyncratic income risk faced by heterogeneous households in a way that alters the model’s prediction about the level of government debt. The simpler model with a representative agent has the government accumulate assets to minimize tax distortion in the long run. In contrast, with heterogeneous agents who face undiversifiable idiosyncratic risk that is sufficiently large relative to aggregate risk, the Ramsey planner chooses to issue debt and facilitate the precautionary saving of the private sector, even at the cost of extra tax distortion. I interpret these outcomes in terms of the strengths of two competing insurance motives that concern the Ramsey planner: aggregate tax smoothing and individual consumption smoothing.
Accuracy of simulations for stochastic dynamic models
 Econometrica
, 2005
"... This paper is concerned with accuracy properties of simulations of approximate solutions for stochastic dynamic models. Our analysis rests upon a continuity property of invariant distributions and a generalized law of large numbers. We then show that the statistics generated by any sufficiently good ..."
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Cited by 19 (4 self)
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This paper is concerned with accuracy properties of simulations of approximate solutions for stochastic dynamic models. Our analysis rests upon a continuity property of invariant distributions and a generalized law of large numbers. We then show that the statistics generated by any sufficiently good numerical approximation are arbitrarily close to the set of expected values of the model’s invariant distributions. Also, under a contractivity condition on the dynamics we establish error bounds. These results are of further interest for the comparative study of stationary solutions and the estimation of structural dynamic models.
2009): “Differentiability of the value function without interiority assumptions
 Journal of Economic Theory
"... This paper studies firstorder differentiability properties of the value function in concave dynamic programs. Motivated by economic considerations, we dispense with commonly imposed interiority assumptions. We suppose that the correspondence of feasible choices varies with the vector of state varia ..."
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Cited by 11 (4 self)
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This paper studies firstorder differentiability properties of the value function in concave dynamic programs. Motivated by economic considerations, we dispense with commonly imposed interiority assumptions. We suppose that the correspondence of feasible choices varies with the vector of state variables, and we allow the optimal solution to belong to the boundary of this correspondence. Under minimal assumptions we show that the value function is continuously differentiable. We then discuss this result in the context of several economic models.
History as a Widespread Externality in Some Arrow–Debreu Market Games
 University of Munich, Center for
, 1993
"... Two Arrow–Debreu market games are formulated whose straightforward Nash equilibria are Walrasian. Both have an auctioneer setting prices to maximize net sales value. In the second an additional redistributive agency maximizes welfare through optimal lumpsum transfers. In intertemporal economies, ho ..."
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Cited by 7 (5 self)
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Two Arrow–Debreu market games are formulated whose straightforward Nash equilibria are Walrasian. Both have an auctioneer setting prices to maximize net sales value. In the second an additional redistributive agency maximizes welfare through optimal lumpsum transfers. In intertemporal economies, however, subgame imperfections can arise because agents understand how current decisions such as those determining investment influence either future prices (with finitely many agents), or future redistribution (even in continuum economies). The latter observation undermines the second efficiency theorem of welfare economics. Indeed, when the state of the economy affects future policy, it functions like a “widespread externality.” 1.
Optimal Fiscal Policy in a Business Cycle Model without Commitment
, 2002
"... This paper studies optimal taxation in the stochastic growh model when the goverment cannot commit. We use recursive game theory to characterize the set of Sustainable Equilibria and to build strategies that support equilibrium payoffs. We calibrate our model to match U.S. data and compute both the ..."
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Cited by 7 (0 self)
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This paper studies optimal taxation in the stochastic growh model when the goverment cannot commit. We use recursive game theory to characterize the set of Sustainable Equilibria and to build strategies that support equilibrium payoffs. We calibrate our model to match U.S. data and compute both the set of sustainable equilibria payoffs, strategies that implement them and triggers. We also look at the Best Equilibrium under no commitment and compare it with the Markov Perfect Equilibrium and with the Ramsey Equilibrium.
A Duality Approach to ContinuousTime Contracting Problems with Limited Commitment
, 2013
"... We propose a duality approach to solving contracting models with either onesided or twosided limited commitment in continuous time. We establish weak and strong duality theorems and provide a dynamic programming characterization of the dual problem. The dual problem gives a linear HamiltonJacobi ..."
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Cited by 3 (0 self)
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We propose a duality approach to solving contracting models with either onesided or twosided limited commitment in continuous time. We establish weak and strong duality theorems and provide a dynamic programming characterization of the dual problem. The dual problem gives a linear HamiltonJacobiBellman equation with a known state space subject to freeboundary conditions, making analysis much more tractable than the primal problem. We provide three explicitly solved examples of a consumption insurance problem. We characterize the optimal consumption allocation in terms of the marginal utility ratio. We find that neither autarky nor full risk sharing can be an optimal contract with either onesided or twosided limited commitment, unlike in discretetime models. We also derive an explicit solution for the unique longrun stationary distribution of consumption relative to income.