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12
Macroeconomic Dynamics Near The ZLB: A Tale Of Two Equilibria,” manuscript
, 2012
"... This paper studies the dynamics of a New Keynesian DSGE model near the zero lower bound (ZLB) on nominal interest rates. In addition to the standard targetedinflation equilibrium, we consider a deflation equilibrium as well as a Markov sunspot equilibrium that switches between a targetedinflation a ..."
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Cited by 32 (5 self)
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This paper studies the dynamics of a New Keynesian DSGE model near the zero lower bound (ZLB) on nominal interest rates. In addition to the standard targetedinflation equilibrium, we consider a deflation equilibrium as well as a Markov sunspot equilibrium that switches between a targetedinflation and a deflation regime. We use the particle filter to estimate the state of the U.S. economy during and after the 200809 recession under the assumptions that the U.S. economy has been in either the targetedinflation or the sunspot equilibrium. We consider a combination of fiscal policy (calibrated to the American Recovery and Reinvestment Act) and monetary policy (that tries to keep interest rates near zero) and compute government spending multipliers. Exante multipliers (cumulative over one year) under the targetedinflation regime are around 0.9. A monetary policy that keeps interest rates at zero can raise the multiplier to 1.7. The expost (conditioning on the realized shocks in 20092011) multiplier is estimated to be 1.3. Conditional on the sunspot equilibrium the multipliers are generally smaller and the scope for conventional expansionary monetary policy is
Envelope condition method with an application to default risk models, Manuscript
, 2014
"... We develop an envelope condition method (ECM) for dynamic programming problems – a tractable alternative to expensive conventional value function iteration (VFI). ECM has two novel features: First, to reduce the cost of iteration on Bellman equation, ECM constructs policy functions using envelope ..."
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Cited by 1 (1 self)
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We develop an envelope condition method (ECM) for dynamic programming problems – a tractable alternative to expensive conventional value function iteration (VFI). ECM has two novel features: First, to reduce the cost of iteration on Bellman equation, ECM constructs policy functions using envelope conditions which are simpler to analyze numerically than …rstorder conditions. Second, to increase the accuracy of solutions, ECM solves for derivatives of value function jointly with value function itself. We complement ECM with other computational techniques that are suitable for highdimensional problems, such as simulationbased grids, monomial integration rules and derivativefree solvers. The resulting valueiterative ECM method can accurately solve models with at least up to 20 state variables and can successfully compete in accuracy and speed with stateoftheart Euler equation methods. We …nally use ECM to solve a challenging default risk model with a kink in value and policy functions.
Forward Guidance Under Uncertainty∗
, 2013
"... Increased uncertainty about the future can reduce a central bank’s ability to stabilize the economy. The inability to offset contractionary shocks at the zero lower bound endogenously generates downside risk for the economy. This increase in risk induces precautionary saving by households, which ca ..."
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Cited by 1 (0 self)
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Increased uncertainty about the future can reduce a central bank’s ability to stabilize the economy. The inability to offset contractionary shocks at the zero lower bound endogenously generates downside risk for the economy. This increase in risk induces precautionary saving by households, which causes larger contractions in output and inflation and prolongs the zero lower bound episode. When the economy faces significant uncertainty, optimal monetary policy implies further lowering real rates by committing to a higher pricelevel target. Under optimal policy, the monetary authority accepts higher inflation risk in the future to minimize downside risk when the economy hits the zero lower bound. In the face of large shocks, raising the central bank’s inflation target can attenuate much of the downside risk posed by the zero lower bound. JEL Classification: E32, E52
ABSTRACT Title of dissertation: ESSAYS IN MONETARY ECONOMICS AND BUSINESS CYCLES
"... This dissertation investigates nonlinear macroeconomic dynamics within the New Keynesian model during periods with zero shortterm nominal interest rates. I implement modern quantitative tools to solve and analyze Dynamic Stochastic General Equilibrium (DSGE) models where the feedback rule that def ..."
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This dissertation investigates nonlinear macroeconomic dynamics within the New Keynesian model during periods with zero shortterm nominal interest rates. I implement modern quantitative tools to solve and analyze Dynamic Stochastic General Equilibrium (DSGE) models where the feedback rule that defines monetary policy is subject to the Zero Lower Bound (ZLB) constraint. The revived attention about the importance of the ZLB constraint followed the extreme events that took place in the United States after the financial crisis of 2008. The first chapter studies aggregate dynamics near the ZLB of nominal interest rates in a mediumscale New Keynesian model with capital. I use Sequential Monte Carlo methods to uncover the shocks that pushed the U.S. economy to the ZLB during the Great Recession and investigate the interaction between shocks and frictions in generating the contraction of output, consumption and investment during 2008:Q32013:Q4. I find that a combination of shocks to the marginal efficiency of investment and to households ’ discount factor generated the prolonged liquidity trap observed in this period. A comparison between these two sources suggests that
*Title Page Envelope Condition Method versus Endogenous Grid Method for Solving Dynamic Programming Problems
, 2012
"... We introduce an envelope condition method (ECM) for solving dynamic programming problems. The ECM method is simple to implement, dominates conventional value function iteration and is comparable in accuracy and cost to Carroll’s (2005) endogenous grid method. ..."
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We introduce an envelope condition method (ECM) for solving dynamic programming problems. The ECM method is simple to implement, dominates conventional value function iteration and is comparable in accuracy and cost to Carroll’s (2005) endogenous grid method.
Lower Bounds on Approximation Errors: Testing the Hypothesis That a Numerical Solution Is Accurate
, 2014
"... We propose a novel methodology for evaluating the accuracy of numerical solutions to dynamic economic models. Speci
cally, we construct a lower bound on the size of approximation errors. A small lower bound on errors is a necessary condition for accuracy: If a lower error bound is unacceptably larg ..."
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We propose a novel methodology for evaluating the accuracy of numerical solutions to dynamic economic models. Speci
cally, we construct a lower bound on the size of approximation errors. A small lower bound on errors is a necessary condition for accuracy: If a lower error bound is unacceptably large, then the actual approximation errors are even larger, and hence, we reject the hypothesis that a numerical solution is accurate. Our accuracy analysis is logically equivalent to hypothesis testing in statistics. As an illustration of our methodology, we assess approximation errors in the
rstand secondorder perturbation solutions for two stylized models: a neoclassical growth model and a new Keynesian model. The errors are small for the former model but unacceptably large for the latter model under some empirically relevant parameterizations. JEL classification: C61, C63, C68, E31, E52 Key Words: approximation errors; best case scenario, error bounds, Euler equation residuals; accuracy; numerical solution; algorithm; new Keynesian model
JEL classification:
, 2013
"... h i g h l i g h t s • We introduce the envelope condition method (ECM) for solving dynamic programming problems. • ECM simplifies rootfinding and is faster than conventional value function iteration. • ECM is similar in accuracy and speed to Carroll’s (2005) endogenous grid method (EGM). • We introd ..."
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h i g h l i g h t s • We introduce the envelope condition method (ECM) for solving dynamic programming problems. • ECM simplifies rootfinding and is faster than conventional value function iteration. • ECM is similar in accuracy and speed to Carroll’s (2005) endogenous grid method (EGM). • We introduce accurate EGM and ECM that approximate derivatives of value function. • Codes are available. a r t i c l e i n f o Article history: