"Monetary Shocks in a Model with Loss of Skills"

Unemployment shows persistent and long lasting responses to nominal and real shocks. Standard real business cycle models with search frictions but homogeneous labor force are able to generate some persistence, but not enough to match the empirical evidence. Moreover, empirical studies emphasize the importance of the heterogeneity of the unemployment pool to fully understand unemployment dynamics. In particular, in most European countries the incidence of long term unemployment is big and well known. One of the causes/consequences of long-term unemployment is the skill deterioration of the unemployment pool. In this paper we introduce the loss of skill mechanism, and therefore an heterogeneous labor force, in a New Keynesian framework with search frictions. Calibrating the model to the Spanish economy, we show that the loss of skill mechanism helps to explain the persistence in the response of unemployment to monetary shocks.

Monetary Shocks in a Model with Loss of Skills (Revised in February 2009)

This paper studies the effects of a monetary shock on real and nominal variables, such as output, inflation and especially unemployment, within a framework which combines a New Keynesian business cycle model model with microfounded labor market in the style of the search and matching literature. We assume that unemployed workers can lose their skill over time and show that this mechanism helps explain the slugish response of unemployment to monetary shocks observed in the data, while also replicating the behavior of output, inflation and employment.

In Search of a Theory of Debt Management

A growing literature integrates debt management into models of optimal fiscal policy. One promising theory argues the composition of government debt should be chosen so that fluctuations in its market value offsets changes in expected future deficits. This complete market approach to debt management is valid even when governments only issue non-contingent bonds. Because bond returns are highly correlated it is known this approach implies asset positions which are large multiples of GDP. We show, analytically and numerically, across a wide range of model specifications (habits, productivity shocks, capital accumulation, persistent shocks, etc) that this is only one of the weaknesses of this approach. We find evidence of large fluctuations in positions, enormous changes in portfolios for minor changes in maturities issued and no presumption it is always optimal to issue long term debt and invest in short term assets. We show these extreme, volatile and unstable features are undesirable from a practical perspective for two reasons. Firstly the fragility of the optimal portfolio to small changes in model specification means it is frequently better for fear of model misspecification to follow a balanced budget rather than issue the optimal debt structure. Secondly we show for even miniscule levels of transaction costs governments would prefer a balanced budget rather than the large and volatile positions the complete market approach recommends. We conclude it is difficult to insulate fiscal policy from shocks using the complete markets approach. Due to the yield curve's limited variability maturities are a poor way to substitute for state contingent debt. As a result the recommendations of this approach conflict with a number of features we believe are integral to bond market incompleteness e.g. allowing for transaction costs, liquidity effects, robustness etc. Our belief is that market imperfections need to be explicitly introduced into the model and incorporated into the portfolio problem. Failure to do so means that the complete market approach applied in an incomplete market setting can be seriously misleading.Complete markets, debt management, government debt, maturity structure, yield curve

DOPPLER ULTRASONOGRAPHY AND EXERCISE TESTING IN DIAGNOSING A POPLITEAL ARTERY ADVENTIRIAL CYST

We describe popliteal arterial adventitial cystic disease which causes intermittent claudication in a young athletic man, with atypical manifestation, without loss of foot pulses on knee flexion nor murmur in the popliteal fossa. The findings obtained from Magnetic Resonance Imaging were non-diagnostic. The diagnosis resulted from Echo-Doppler ultrasonography along with peak exercise testing. Ultrasonography also provided useful physiopathological informations suggesting that a popliteal artery adventitial cyst can become symptomatic if muscle exertion increases fluid pressure within the cyst, enough to cause hemodynamically significant endoluminal stenosis. Rapid diagnosis is essential to prevent progressive claudication threatening limb viability. To guarantee this professional sportsman a reliable and durable outcome, instead of less aggressive management, we resected the involved arterial segment and interposed an autologous saphenous-vein graft

In search of a theory of debt management

A growing literature integrates debt management into models of optimal fiscal policy. One promising theory argues the composition of government debt should be chosen so that fluctuations in its market value offsets changes in expected future deficits. This complete market approach to debt management is valid even when governments only issue non-contingent bonds. Because bond returns are highly correlated it is known this approach implies asset positions which are large multiples of GDP. We show, analytically and numerically, across a wide range of model specifications (habits, productivity shocks, capital accumulation, persistent shocks, etc) that this is only one of the weaknesses of this approach. We find evidence of large fluctuations in positions, enormous changes in portfolios for minor changes in maturities issued and no presumption it is always optimal to issue long term debt and invest in short term assets. We show these extreme, volatile and unstable features are undesirable from a practical perspective for two reasons. Firstly the fragility of the optimal portfolio to small changes in model specification means it is frequently better for fear of model misspecification to follow a balanced budget rather than issue the optimal debt structure. Secondly we show for even miniscule levels of transaction costs governments would prefer a balanced budget rather than the large and volatile positions the complete market approach recommends. We conclude it is difficult to insulate fiscal policy from shocks using the complete markets approach. Due to the yield curve’s limited variability maturities are a poor way to substitute for state contingent debt. As a result the recommendations of this approach conflict with a number of features we believe are integral to bond market incompleteness e.g. allowing for transaction costs, liquidity effects, robustness etc. Our belief is that market imperfections need to be explicitly introduced into the model and incorporated into the portfolio problem. Failure to do so means that the complete market approach applied in an incomplete market setting can be seriously misleading

The Impact of Debt Levels and Debt Maturity on Inflation

We examine the implications for optimal inflation of changes in the level and maturity of government debt under the assumption where fiscal and monetary policies co-ordinate, and in the case of an independent central bank following a Taylor rule. Under co-ordination, inflation persistence and volatility depend on the sign, size and maturity of debt. Higher debt leads to higher inflation and longer maturity leads to more persistent inflation although inflation plays a minor role in achieving fiscal sustainability. Under an independent monetary authority, inflation is higher, more volatile and more persistent and plays a significant role in achieving fiscal solvency. The Economic Journal © 2013 Royal Economic Society.Marcet is grateful for support from DGES, Monfispol and Excellence Program if Banco de Espana. Faraglia and Scott gratefully acknowledge funding from the ESRC’s World Economy and Finance Program. Oikonomou is grateful to HEC Montreal for fundingPeer Reviewe

A Short Note on Optimal Debt Management under Asymmetric Information

We show that under asymetric information, if the government holds advanced information relative to the investors.some debt management policies may lead to bond market instability. The In particular, we show that the repurchase/reissuance strategy assumd in most of the current debt management literature would cause such a crisis and it would be therefore highly suboptimal.of a bond below its maturity this does compromise the ability of long bonds to provide fiscal insurance

Fiscal Insurance and Debt Management in OECD Economies

Assuming the role of debt management is to provide hedging against fiscal shocks we consider three questions: i) what indicators can be used to assess the performance of debt management? ii) how well have historical debt management policies performed? and iii) how is that performance affected by variations in debt issuance? We consider these questions using OECD data on the market value of government debt between 1970 and 2000. Motivated by both the optimal taxation literature and broad considerations of debt stability we propose a range of performance indicators for debt management. We evaluate these using Monte Carlo analysis and find that those based on the relative persistence of debt perform best. Calculating these measures for OECD data provides only limited evidence that debt management has helped insulate policy against unexpected fiscal shocks. We also find that the degree of fiscal insurance achieved is not well connected to cross country variations in debt issuance patterns. Given the limited volatility observed in the yield curve the relatively small dispersion of debt management practices across countries makes little difference to the realised degree of fiscal insurance.

Long Term Government Bonds

We study the impact of debt maturity on optimal fiscal policy by focusing on the case where the government issues a bond of maturity N > 1: Isolating these effects helps provide insight into the construction of optimal government debt portfolios. We find long bonds may not complete the market even in the absence of uncertainty, generate an incentive to twist interest rates and induce additional tax volatility compared to short term bonds. By focusing just on the issuance of long bonds we show that as well as their well known advantage in providing fiscal insurance long bonds also have less attractive features that induce additional tax volatility. In the case of long bonds, governments induce tax volatility in order to twist interest rates at maturity. This interest rate twisting effect is what makes optimal debt management models so difficult to solve computationally as the state space rapidly becomes cumbersome due to the need to keep track of promises about future tax rates. We provide an alternative institutional setup (\independent powers\) that eliminates this problem offering a simpler solution method. Introducing maturity requires making more institutional assumptions than is the case for one period bonds. In particular assumptions have to be made whether the government does or doesn't buy back each period all outstanding debt irrespective of maturity and whether long bonds pay coupons. This is important as the literature to date makes assumptions that are diametrically opposite to what is observed in practice. We show that this is an important divide as if we model optimal policy under the empirically motivated assumption that governments do not buyback bonds until maturity then long bonds induce additional tax volatility due to the existence of N period roll over cycles. These can be reduced in magnitude by the government issuing long bonds that pay coupons although because coupons reduce the duration of a bond below its maturity this does compromise the ability of long bonds to provide fiscal insurance