"Money Creation, Reserve Requirements, and Seigniorage" with Joseph H. Haslag. In this paper, we examine the impact that changes in the rate of money creation and reserve requirements have on real seigniorage revenue. We consider two additional features that differ from previous analyses. First, the model economies grow endogenously, and that growth depends on the accumulation of intermediated capital. Second, agents have two means of financing; one is bank deposits against which reserves must be held, and the other is a nonbank intermediary. Thus, growth-rate effects and financing-substitution effects are both present, and one can assess the quantitiative importance of each factor. Published, Review of Economic Dynamics 1(3), pp. 677-98.
Federal Reserve Bank of Dallas Working Paper 98-01 (older version)
"Unemployment Insurance and Capital Accumulation." In this paper, I examine a model economy with production, search, and unemployment insurance. The introduction of capital into the economy of Wang and Williamson (J. Monetary Econom. 49(7)(2001)1337) generates the result that optimal replacement ratios are always zero. The result arises from the decline in aggregate activity caused by unemployment insurance: both capital and labor inputs to production fall when benefits rise. Unlike most of the literature, I compute explicitly the cost of the transition path; agents are made better off by switching to a steady state with no unemployment insurance, but the welfare gain is approximately cut in half. Only the very poor and unemployed suffer welfare losses along the transition path. I then briefly investigate the implications of negative replacement ratios. Published, Journal of Monetary Economics 51(8), pp. 1683-710.
Programs to Solve Benchmark Allocation:
Supplemental and Input Files:
xkpts150.in, roots.f, matrix4.f
Computational Appendix:
"Generalized Quasi-Geometric Discounting." This paper derives the ‘generalized Euler equation’ for an agent with multi-period deviations from geometric discounting. The functional equation that describes optimal consumption-savings decisions involves manipulation of future selves and indirect manipulation of more distant selves through intervening selves. Published, Economics Letters 96(3), pp. 343-50.
"The Wealth Distribution and the Demand for Status" with Yulei Luo. Standard economic theories of asset markets assume that assets are valued entirely for the consumption streams they can finance. This paper examines the introduction of the demand for status (as a function of wealth) into a model of uninsurable idiosyncratic risk – the ’spirit of capitalism’ assumption. We find that soc preferences lead to less inequality in wealth; placing wealth into the utility function leads to a shrinking wealth distribution. The drop in wealth concentration is smaller if the utility function implies status is a luxury good, but no parametrization leads to higher wealth Gini coefficients than the benchmark case. We then consider the consequences of revenue-neutral tax reforms with and without soc preferences, finding that they make little difference for this policy experiment. Published, Macroeconomic Dynamics 13(S1), pp. 1-30 (lead article).
"Unsecured Credit Markets Are Not Insurance Markets" with Kartik Athreya and Xuan S. Tam. We study the extent to which unsecured credit markets have altered the transmission of increased income risk to consumption variability over the past several decades. We find that unsecured credit markets pass through increased income risk to consumption, irrespective of bankruptcy policy and the information possessed by lenders. If risk sharing has indeed improved over this period, the reasons do not therefore lie in the unsecured credit market. Published, Journal of Monetary Economics 56(1) pp. 83-103.
"The Stationary Distribution of Wealth under Progressive Taxation" with Daniel R. Carroll. This paper considers the long-run distribution of capital holdings in a model with complete asset markets and progressive taxation. Households are assumed to be heterogeneous in their labor market productivity. We show that this model is capable of producing a nondegenerate determinate wealth distribution. However, it also predicts that capital and labor income will be negatively correlated. These results are robust to the introduction of elastic labor supply and borrowing constraints. Published, Review of Economic Dynamics 12(3), pp. 469-78.
"Rational Inattention and Aggregate Fluctuations" with Yulei Luo. This paper introduces the rational inattention hypothesis (RI) -- that agents process information subject to finite channel constraints -- into a stochastic growth model with permanent technology shocks. We find that RI raises consumption volatility relative to output by introducing an endogenous demand shock. Furthermore, it is shown that incorporating RI can provide an additional internal propagation mechanism (measured by the impulse response function and the autocorrelation function of output growth) and generate higher variance of forecastable movements in output. However, we find that RI cannot resolve these puzzles in the RBC literature -- weak internal propagation and low variance of forecastable movements in output, even with what appears to be a very low capacity channel. Finally, we show that in a model where general equilibrium effects are absent and idiosyncratic shocks cannot be distinguished from aggregate ones, RI has strong propagational effects. Published, BE Journal of Macroeconomics (Contributions) 9(1), Article 14.
"Solving the Incomplete Markets Model with Aggregate Uncertainty Using the Krusell-Smith Algorithm and Non-Stochastic Simulations." This article describes the approach to computing the version of the stochastic growth model with idiosyncratic and aggregate risk that relies on collapsing the aggregate state space down to a small number of moments used to forecast future prices. One innovation relative to most of the literature is the use of a nonstochastic simulation routine. Published, Journal of Economic Dynamics and Control 34(1), pp. 36-41.
Program Files: Programs
"Risk-sensitive Consumption and Savings under Rational Inattention" with Yulei Luo. This paper studies the consumption-savings behavior of households who have risk-sensitive preferences and suffer from limited information-processing capacity (rational inattention or RI). We first solve the model explicitly and show that RI increases precautionary savings by interacting with income uncertainty and risk-sensitivity. Given the closed-form solutions, we find that the RI model displays a wide range of observational equivalence properties, implying that consumption and savings data cannot distinguish between risk-sensitivity, robustness, or the discount factor, in any combination. We then show that the welfare costs from RI are larger for risk-sensitive households than any other observationally-equivalent settings. Forthcoming, American Economic Journal: Macroeconomics.