Essays on Incomplete Information, Model Uncertainty, and Macroeconomic Policy PDF Download

Author: Giacomo Rondina
Publisher:
ISBN:
Category :
Languages : en
Pages : 204

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Author: Mingjun Zhao
Publisher:
ISBN:
Category : Bayesian statistical decision theory
Languages : en
Pages : 76

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Abstract: My dissertation grapples with the issues of model uncertainty in macroeconomics, and analyzes its consequences for monetary policy. It consists of three essays. In the first essay (Chapter 1), "Monetary Policy under Misspecified Expectations", I examine policy choices for the central bank that faces uncertainty about the process of expectation formation by economic agents. The economy contains both "rule-of-thumb" agents who base their expectations on recent observations and agents who have rational expectations. The central bank is uncertain about the fraction of the rule-of-thumb agents. This uncertainty concern enables me to partially rationalize the over cautious policy stance of the Fed: empirically observed policy in the past two decades involves much weaker responses than optimal policies derived from various micro-founded models. It is well understood that when the economy is more forward-looking, the central bank displays more aggressive responses to inflation and output. But the uncertainty-averse central bank evaluates policies by the performance in the worst case. In my economy this has a high fraction of agents that are backward-looking. The best policy the central bank chooses thus involves moderate responses. That is to say, this minimax policy moves closer toward actual less responsive policy. In the second essay (Chapter 2), "Phillips Curve Uncertainty and Monetary Policy", I investigate the effect of model uncertainty on policy choices employing a more general approach, which nests the minimax and Bayesian approaches as limiting cases. The central bank is uncertain about whether the economy has a sticky price Phillips curve or a sticky information Phillips curve. I argue that how the central bank chooses a policy depends both on its perception of uncertainty environment and on its attitude towards uncertainty. I find that as the central bank either becomes more uncertainty-averse or considers sticky information more plausible, the response to inflation decreases and to output increases. The third essay (Chapter 3) is entitled "Optimal Simple Rules in RE Models with Risk Sensitive Preferences". This paper provides a useful method to solve optimal simple rules under risk sensitive preference in macro models with forward looking behavior. An application to a new Keynesian model with lagged dynamics is offered and risk sensitive preference is found to amplify policy responses.

Author: Jennifer La'O
Publisher:
ISBN:
Category :
Languages : en
Pages : 220

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This dissertation consists of four chapters analyzing the effects of heterogeneous and asymmetric information in macroeconomic and financial settings, with an emphasis on short-run fluctuations. Within these chapters, I study the implications these informational frictions may have for the behavior of firms and financial institutions over the business cycle and during crises episodes. The first chapter examines how collateral constraints on firm-level investment introduce a powerful two-way feedback between the financial market and the real economy. On one hand, real economic activity forms the basis for asset dividends. On the other hand, asset prices affect collateral value, which in turn determines the ability of firms to invest. In this chapter I show how this two-way feedback can generate significant expectations-driven fluctuations in asset prices and macroeconomic outcomes when information is dispersed. In particular, I study the implications of this two-way feedback within a micro-founded business-cycle economy in which agents are imperfectly, and heterogeneously, informed about the underlying economic fundamentals. I then show how tighter collateral constraints mitigate the impact of productivity shocks on equilibrium output and asset prices, but amplify the impact of "noise", by which I mean common errors in expectations. Noise can thus be an important source of asset-price volatility and business-cycle fluctuations when collateral constraints are tight. The second chapter is based on joint work with George-Marios Angeletos. In this chapter we investigate a real-business-cycle economy that features dispersed information about underlying aggregate productivity shocks, taste shocks, and-potentially-shocks to monopoly power. We show how the dispersion of information can (i) contribute to significant inertia in the response of macroeconomic outcomes to such shocks; (ii) induce a negative short-run response of employment to productivity shocks; (iii) imply that productivity shocks explain only a small fraction of high-frequency fluctuations; (iv) contribute to significant noise in the business cycle; (v) formalize a certain type of demand shocks within an RBC economy; and (vi) generate cyclical variation in observed Solow residuals and labor wedges. Importantly, none of these properties requires significant uncertainty about the underlying fundamentals: they rest on the heterogeneity of information and the strength of trade linkages in the economy, not the level of uncertainty. Finally, none of these properties are symptoms of inefficiency: apart from undoing monopoly distortions or providing the agents with more information, no policy intervention can improve upon the equilibrium allocations. The third chapter is also based on joint work with George-Marios Angeletos. This chapter investigates how incomplete information affects the response of prices to nominal shocks. Our baseline model is a variant of the Calvo model in which firms observe the underlying nominal shocks with noise. In this model, the response of prices is pinned down by three parameters: the precision of available information about the nominal shock; the frequency of price adjustment; and the degree of strategic complementarity in pricing decisions. This result synthesizes the broader lessons of the pertinent literature. However, this synthesis provides only a partial view of the role of incomplete information: once one allows for more general information structures than those used in previous work, one cannot quantify the degree of price inertia without additional information about the dynamics of higher-order beliefs, or of the agents' forecasts of inflation. We highlight this with three extensions of our baseline model, all of which break the tight connection between the precision of information and higher-order beliefs featured in previous work. Finally, the fourth chapter studies how predatory trading affects the ability of banks and large trading institutions to raise capital in times of temporary financial distress in an environment in which traders are asymmetrically informed about each others' balance sheets. Predatory trading is a strategy in which a trader can profit by trading against another trader's position, driving an otherwise solvent but distressed trader into insolvency. The predator, however, must be sufficiently informed of the distressed trader's balance sheet in order to exploit this position. I find that when a distressed trader is more informed than other traders about his own balances, searching for extra capital from lenders can become a signal of financial need, thereby opening the door for predatory trading and possible insolvency. Thus, a trader who would otherwise seek to recapitalize is reluctant to search for extra capital in the presence of potential predators. Predatory trading may therefore make it exceedingly difficult for banks and financial institutions to raise credit in times of temporary financial distress.

Author: Jeffrey A. Levy
Publisher:
ISBN:
Category : Macroeconomics
Languages : en
Pages : 90

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In this dissertation I examine economic uncertainty, particularly from the perspective of disaggregation below the national level. In part one I outline the building of news-based uncertainty measures for all 50 US states plus Washington DC. I analyze different search specifications, finding that the simplest set of terms involving one group for "economy" and one group for "uncertainty" has the highest resolution, while yielding similar results to more focused news searches, including one similar to the ubiquitous policy search from Baker et al. (2016), and an alternative specification designed to eliminate false positives. I also explore the differences between two other national uncertainty measures - the VIX stock market volatility index from the Chicago Board Options Exchange, and the unforecastable macroeconomic factors from Jurado et al. (2015). In part two, I build upon the analysis of the state uncertainty measures begun in part one. I show that analyzing uncertainty at the national level obscures significant state-level variation, with state-to-national uncertainty correlations ranging from 0.124 to 0.913, while some inter-state uncertainty correlations even turn negative. I then show that VAR analysis using state-level unemployment figures yields impulse response functions that are remarkably similar to existing national-level uncertainty research, with 92% of states exhibiting a rise in unemployment that peaks near 12 months after an uncertainty shock, then overshoots the starting point for a time. Finally, in part three I attempt to get at the causal effects of an uncertainty shock, as VAR analysis is unable to do, by applying a difference-in-difference framework to the natural experiment of military base closures. I look at the 1991, 1993, 1995, and 2005 rounds of the Base Realignment and Closure (BRAC) process, whereby the government moves military jobs in and out of bases through a process that is, at least initially, heavily insulated from confounding economic indicators and political influence. This creates asymmetric and exogenous uncertainty shocks in places with different military employment, which I use to show that a one-percentage point higher military share of employment causes a tenth of a percentage point higher unemployment rate in a given Metropolitan Statistical Area (MSA) during a BRAC round.

Author:
Publisher:
ISBN:
Category : Dissertations, Academic
Languages : en
Pages : 582

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Author: Peter B. Kenen
Publisher: Princeton University Press
ISBN: 0691231133
Category : Business & Economics
Languages : en
Pages : 566

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Drawing together new papers by some of today's leading figures in international economics and finance, Understanding Interdependence surveys the current state of knowledge on the international monetary system and, by implication, defines the research horizon for the future. Covering topics including the behavior of exchange rates, the choice of exchange-rate regime, current-account adjustment in classical and Keynesian models, the extent and effects of capital mobility, international debt, the stabilization and reform of the formerly planned economies, European monetary union, and international policy coordination, the book underscores the importance of these subjects and identifies lessons for policymakers. The contributors to the volume are Michael Bruno, Ralph C. Bryant, Richard N. Cooper, Michael P. Dooley, Barry Eichengreen, Stanley Fischer, Charles A. E. Goodhart, Peter Hooper, Peter B. Kenen, Paul R. Krugman, Henri Lorie, Jaime Marquez, Ronald I. McKinnon, Michael Mussa, Maurice Obstfeld, John Odling-Smee, Assaf Razin, Dani Rodrik, Mark P. Taylor, and John Williamson.

Author: Sean Holly
Publisher: Cambridge University Press
ISBN: 0521264448
Category : Business & Economics
Languages : en
Pages : 258

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An examination of how the rational expectations revolution and game theory have enhanced the understanding of how an economy functions.

Author: Neri Salvadori
Publisher: Routledge
ISBN: 1136731156
Category : Business & Economics
Languages : en
Pages : 451

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Heinz Kurz is recognised internationally as a leading economic theorist and a foremost historian of economic thought. This book pays tribute to his outstanding contributions on the occasion of his 65th birthday by bringing together a unique collection of new essays by distinguished economists from around the world. Keynes, Sraffa, and the Criticism of Neoclassical Theory comprises twenty-three essays, covering themes in Keynesian economic theory, in the development of the modern classical approach to economic theory, linear production models, and the critique of neoclassical theory. The essays in this book will be an invaluable source of inspiration for economists interested in economic theory and in the evolution of economic thought. They will also be of interest to postgraduate and research students specialising in economic theory and in the history of economic thought.

Author: Laurence J. Kotlikoff
Publisher: MIT Press
ISBN: 9780262263344
Category : Business & Economics
Languages : en
Pages : 596

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This collection of essays, coauthored with other distinguished economists, offers new perspectives on saving, intergenerational economic ties, retirement planning, and the distribution of wealth. The book links life-cycle microeconomic behavior to important macroeconomic outcomes, including the roughly 50 percent postwar decline in America's rate of saving and its increasing wealth inequality. The book traces these outcomes to the government's five-decade-long policy of transferring, in the form of annuities, ever larger sums from young savers to old spenders. The book presents new theoretical and empirical analyses of altruism that rule out the possibility that private intergenerational transfers have offset those by the government.While rational life-cycle behavior can explain broad economic outcomes, the book also shows that a significant minority of households fail to make coherent life-cycle saving and insurance decisions. These mistakes are compounded by reliance on conventional financial planning tools, which the book compares with Economic Security Planner (ESPlanner), a new life-cycle financial planning software program. The application of ESPlanner to U.S. data indicates that most Americans approaching retirement age are saving at much lower rates than they should be, given potential major cuts in Social Security benefits.

Author: Manuel Ramos-Francia
Publisher:
ISBN:
Category : Budget deficits
Languages : en
Pages : 220

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