Information, heterogeneity and market incompleteness in the stochastic growth model

We provide a microfounded account of imperfect information in the stochastic growth model which dramatically changes the properties of the model. We describe heterogenous households that acquire information about aggregates through their participation in markets. If markets are incomplete, household information will be imperfect. We solve the model taking account of the infinite regress of expectations that this lack of information implies. We derive analytical and numerical results to show that imperfect information can significantly change the properties of the model: under virtually all calibrations the impact response of consumption to a positive aggregate technology shock is negative.imperfect information; higher order expectations; Kalman filter; dynamic general equilibrium

Hyperbolic Discounting and Positive Optimal Inflation

The Friedman rule states that steady-state welfare is maximized when there is deflation at the real rate of interest. Recent work by Khan et al (2003) uses a richer model but still finds deflation optimal. In an otherwise standard new Keynesian model we show that, if households have hyperbolic discounting, small positive rates of inflation can be optimal. In our baseline calibration, the optimal rate of inflation is 2.1% and remains positive across a wide range of calibrations.optimal monetary policy, inflation targeting, unemployment, Phillips curve, nominal inertia, monetary policy

Inspecting the noisy mechanism: the stochastic growth model with partial information

We derive a framework (and provide a software toolkit) which allows the dynamic general equilibrium modeller to specify what variables are in households' information sets, and the degree to which these variables are measured with error. We apply this framework to a canonical real business cycle model and show that which variables are observable has a significant effect, both qualitatively and quantitatively, on the dynamics of the model. Specifically, we find (i) The standard decentralised equilibrium, with households only observing returns and not aggregate quantities, is not stable to arbitrarily small measurement error (ii) A stable solution does exist, but it is dramatically different from the full-information case (iii) Having aggregate output data, even if relatively noisy, brings the economy much closer to the full-information solutionDGE, Partial information, Measurement error

Hyperbolic Discounting and Positive Optimal Inflation

The Friedman rule states that steady-state welfare is maximized when there is deflation at the real rate of interest. Recent work by Khan et al (2003) uses a richer model but still finds deflation optimal. In an otherwise standard new Keynesian model we show that, if households have hyperbolic discounting, small positive rates of inflation can be optimal. In our baseline calibration, the optimal rate of inflation is 2.1% and remains positive across a wide range of calibrations.optimal monetary policy, inflation targeting, unemployment, Phillips curve, nominal inertia, monetary policy

The real effects of money growth in dynamic general equilibrium

We analyse the effects of money growth within a standard New Keynesian framework and show that the interaction between staggered nominal contracts and money growth leads to a long-run trade-off between output and money growth. We explore the microeconomic mechanisms that lead to this trade-off, and show that it remains even when the contract length is endogenised. JEL Classification: E20, E40, E50inflation, nominal inertia, Phillips curve, Unemployment

Hedonic Capital

This paper proposes a new way to think about happiness. It distinguishes between stocks and flows. Central to the analysis is a concept we call ‘hedonic capital’. The paper sets out a model of the dynamics of wellbeing in which bad life-shocks are smoothed by the drawing down of hedonic capital. The model fits the patterns found in the empirical literature: the existence of a stable level of wellbeing and a tendency to return gradually towards that level. It offers a theory of hedonic adaptation.Adaptation ; wellbeing ; evolution ; happiness ; habituation

Hyperbolic Discounting and the Phillips Curve

Using a standard dynamic general equilibrium model, we show that the interaction of staggered nominal contracts with hyperbolic discounting leads to inflation having significant long-run effects on real variables.inflation, unemployment, Phillips curve, nominal inertia, monetary policy, dynamic general equilibrium

Electroweak baryogenesis in the Z3-invariant NMSSM

We calculate the baryon asymmetry of the Universe in the Z3-invariant Next-to-Minimal Supersymmetric Standard Model where the interactions of the singlino provide the necessary source of charge and parity violation. Using the closed time path formalism, we derive and solve transport equations for the cases where the singlet acquires a vacuum expectation value (VEV) before and during the electroweak phase transition. We perform a detailed scan to show how the baryon asymmetry varies throughout the relevant parameter space. Our results show that the case where the singlet acquires a VEV during the electroweak phase transition typically generates a larger baryon asymmetry, although we expect that the case where the singlet acquires a VEV first is far more common for any model in which parameters unify at a high scale. Finally, we examine the dependence of the baryon asymmetry on the three-body interactions involving gauge singlets.Comment: 24 pages, version submitted to the journa

Oil Prices, Profits, and Recessions : An Inquiry Using Terrorism as an Instrumental Variable

Nearly all post-war recessions have been preceded by oil-price shocks, but is this because spikes in the price of petroleum cause economic downturns? Most research has ignored an identification problem : oil prices and the state of the world economy are endogenously determined. This paper uses terrorist incidents as an instrumental variable. In an international panel of industries, we show that after correction for simultaneity bias — though not before — the price of oil has large negative effects upon profitability. Our results seem to lend support to the claim that oil-price spikes can be a source of recessions.