The macroeconomic effects of world trade in financial assets

This article analyzes some of the potential effects of increased international financial integration within a simple two-country model. In the model, the article considers a switch in the menu of internationally traded financial securities from bonds to complete contingent claims and examines the impact of this switch on the stochastic properties, including the cross-country correlations, of standard macroeconomic aggregates like output, consumption, and labor effort, as well as the trade balance.International finance

Can the Mortonson-Pissarides matching model match the business cycle facts?

We examine whether the Mortensen-Pissarides matching model can account for the business cycle facts on employment, job creation, and job destruction. A novel feature of our analysis is its emphasis on the reduced-form implications of the matching model. Our main finding is that the model can account for the business cycle facts, but only if the average duration of a nonemployment spell is relatively high—about nine months or longer.Business cycles

Zero nominal interest rates: why they're good and how to get them

This study shows that in a standard one-sector neoclassical growth model, in which money is introduced with a cash-in-advance constraint, zero nominal interest rates are optimal. Milton Friedman argued in 1969 that zero nominal rates are necessary for efficient resource allocation. This study shows that they are not only necessary but sufficient. The study also characterizes the monetary policies that will implement zero rates. The set of such policies is quite large. The only restriction these policies must satisfy is that asymptotically money shrinks at a rate no greater than the rate of discount.Interest rates

Valuation equilibria with clubs

This paper considers model worlds in which there is a continuum of individuals who form finite-sized associations to undertake joint activities. We show how, through a suitable choice of commodity space, restrictions on the composition of feasible groups can be incorporated into the specification of the consumption and production sets of the economy. We also show that if there are a finite number of types, then the classical results from the competitive analysis of convex finite-agent economies can be reinterpreted to apply.Consumption (Economics)

Self-fulfilling debt crises

We characterize the values of government debt and the debt's maturity structure under which financial crises brought on by a loss of confidence in the government can arise within a dynamic, stochastic general equilibrium model. We also characterize the optimal policy response of the government to the threat of such a crisis. We show that when the country's fundamentals place it inside the crisis zone, the government is motivated to reduce its debt and exit the crisis zone because this leads to an economic boom and a reduction in the interest rate on the government's debt. We show that this reduction may be quite gradual if debt is high or the probability of a crisis is low. We also show that, while lengthening the maturity of the debt can shrink the crisis zone, credibility-inducing policies can have perverse effects.Debt

New Deal policies and the persistence of the Great Depression: a general equilibrium analysis

There are two striking aspects of the recovery from the Great Depression in the United States: the recovery was very weak and real wages in several sectors rose significantly above trend. These data contrast sharply with neoclassical theory, which predicts a strong recovery with low real wages. We evaluate the contribution of New Deal cartelization policies designed to limit competition and increase labor bargaining power to the persistence of the Depression. We develop a model of the bargaining process between labor and firms that occurred with these policies, and embed that model within a multi-sector dynamic general equilibrium model. We find that New Deal cartelization policies are an important factor in accounting for the post-1933 Depression. We also find that the key depressing element of New Deal policies was not collusion per se, but rather the link between paying high wages and collusion.Depressions

The Great Depression in the United States from a neoclassical perspective

Can neoclassical theory account for the Great Depression in the United States—both the downturn in output between 1929 and 1933 and the recovery between 1934 and 1939? Yes and no. Given the large real and monetary shocks to the U.S. economy during 1929–33, neoclassical theory does predict a long, deep downturn. However, theory predicts a much different recovery from this downturn than actually occurred. Given the period’s sharp increases in total factor productivity and the money supply and the elimination of deflation and bank failures, theory predicts an extremely rapid recovery that returns output to trend around 1936. In sharp contrast, real output remained between 25 and 30 percent below trend through the late 1930s. We conclude that a new shock is needed to account for the Depression’s weak recovery. A likely culprit is New Deal policies toward monopoly and the distribution of income.Depressions

The demand for money and the nonneutrality of money

Many economists have worried about changes in the demand for money, since money demand shocks can affect output variability and have implications for monetary policy. This paper studies the theoretical implications of changes in money demand for the nonneutrality of money in the limited participation (liquidity) model and the predetermined (sticky) price model. In the liquidity model, we find that an important connection exists between the nonneutrality of money and the relative money demands of households and firms. This model predicts that the real effect of a money shock rose by 100 percent between 1952 and 1980, and subsequently declined 65 percent. In contrast, we find that the nonneutrality of money in the sticky price model is invariant to changes in money demands or other monetary factors. Several researchers have concluded from VAR analyses that the effects of money shock over time are roughly stable. This view is consistent with the predictions of the sticky price model, but is harder to reconcile with the specific pattern of time variation predicted by the liquidity model.Money