Robust Predictions for DSGE Models with Incomplete Information

We study the quantitative potential of DSGE models with incomplete information. In contrast to existing literature, we offer predictions that are robust across all possible private information structures that agents may have. Our approach maps DSGE models with information-frictions into a parallel economy where deviations from fullinformation are captured by time-varying wedges. We derive exact conditions that ensure the consistency of these wedges with some information structure. We apply our approach to an otherwise frictionless business cycle model where firms and households have incomplete information. We show how assumptions about information interact with the presence of idiosyncratic shocks to shape the potential for confidence-driven fluctuations. For a realistic calibration, we find that correlated confidence regarding idiosyncratic shocks (aka “sentiment shocks”) can account for up to 51 percent of U.S. business cycle fluctuations. By contrast, confidence about aggregate productivity can account for at most 3 percent

Optimal Capital Taxation and Consumer Uncertainty

This paper analyzes the impact of consumer uncertainty on optimal fiscal policy in a model with capital. The consumers lack confidence about the probability model that characterizes the stochastic environment and so apply a max-min operator to their optimization problem. An altruistic fiscal authority does not face this Knightian uncertainty. We show analytically that, in responding to consumer uncertainty, the government no longer sets the expected capital tax rate exactly equal to zero, as is the case in the full-confidence benchmark model. Rather, our numerical results indicate that the government chooses to subsidize capital income, albeit at a modest rate. We also show that the government responds to consumer uncertainty by smoothing the labor tax across states and by making the labor tax persistent

Optimal Capital Taxation and Consumer Uncertainty

This paper analyzes the impact of consumer uncertainty on optimal fiscal policy in a model with capital. The consumers lack confidence about the probability model that characterizes the stochastic environment and so apply a max-min operator to their optimization problem. An altruistic fiscal authority does not face this Knightian uncertainty. We show analytically that, in responding to consumer uncertainty, the government no longer sets the expected capital tax rate exactly equal to zero, as is the case in the full-confidence benchmark model. Rather, our numerical results indicate that the government chooses to subsidize capital income, albeit at a modest rate. We also show that the government responds to consumer uncertainty by smoothing the labor tax across states and by making the labor tax persistent

Information-driven Business Cycles: A Primal Approach

We develop a methodology to characterize equilibrium in DSGE models, free of parametric restrictions on information. First, we define a “primal” economy in which deviations from full information are captured by wedges in agents' expectations. Then, we provide conditions ensuring some information-structure can implement these wedges. We apply the approach to estimate a business cycle model where firms and households have dispersed information. The estimated model fits the data, attributing the majority of fluctuations to a single shock to households' expectations. The responses are consistent with an implementation in which households become optimistic about local productivities and gradually learn about others' optimism

Information-driven Business Cycles: A Primal Approach

We develop a methodology to characterize equilibrium in DSGE models, free of parametric restrictions on information. First, we define a “primal” economy in which deviations from full information are captured by wedges in agents' expectations. Then, we provide conditions ensuring some information-structure can implement these wedges. We apply the approach to estimate a business cycle model where firms and households have dispersed information. The estimated model fits the data, attributing the majority of fluctuations to a single shock to households' expectations. The responses are consistent with an implementation in which households become optimistic about local productivities and gradually learn about others' optimism

Robust Predictions for DSGE Models with Incomplete Information

We study the quantitative potential of DSGE models with incomplete information. In contrast to existing literature, we offer predictions that are robust across all possible private information structures that agents may have. Our approach maps DSGE models with information-frictions into a parallel economy where deviations from fullinformation are captured by time-varying wedges. We derive exact conditions that ensure the consistency of these wedges with some information structure. We apply our approach to an otherwise frictionless business cycle model where firms and households have incomplete information. We show how assumptions about information interact with the presence of idiosyncratic shocks to shape the potential for confidence-driven fluctuations. For a realistic calibration, we find that correlated confidence regarding idiosyncratic shocks (aka “sentiment shocks”) can account for up to 51 percent of U.S. business cycle fluctuations. By contrast, confidence about aggregate productivity can account for at most 3 percent

Optimal Fiscal and Monetary Policy in Customer Markets

This paper presents a model in which some goods trade in \customer markets." In these markets, advertising plays a critical role in facilitating long-lived relationships. We estimate both policy and non-policy parameters of the model (which includes New-Keynesian frictions) on U.S. data, including advertising expenditures. The estimated parameters imply a large congestion externality in the pricing of customer market goods. This pricing inefficiency motivates the analysis of optimal policy. When the planner has access to a complete set of taxes and chooses them optimally, fiscal policy eliminates the externalities with large adjustments in the tax rates that operate directly in customer markets; labor tax volatility remains low. If available policy instruments are constrained to the interest rate and labor tax, then the latter displays large and procyclical uctuations, while the implications for monetary policy are largely unchanged from the model with no customer markets

A Model-Based Evaluation of the Debate on the Size of the Tax Multiplier

The SVAR and narrative approaches to estimating tax multipliers deliver significantly different results. The former yields multipliers of about 1 percent, whereas the latter produces much larger multipliers of about 3 percent. The SVAR and narrative approaches differ along two important dimensions: the identification scheme and the reduced-form transmission mechanism. This paper uses a DSGE-model approach to evaluate the hypothesis that the different tax multipliers stemming from the SVAR and narrative approaches are due to differences in the assumed reduced-form transmission mechanisms. The main finding of the paper is that in the context of the DSGE model employed this hypothesis is rejected. Instead, the observed differences in estimated multipliers are due either to both models failing to identify the same tax shock, or to small-sample uncertainty.

RAB1A Haploinsufficiency Phenocopies the 2p14-p15 Microdeletion and Is Associated With Impaired Neuronal Differentiation

Hereditary spastic parapareses (HSPs) are clinically heterogeneous motor neuron diseases with variable age of onset and severity. Although variants in dozens of genes are implicated in HSPs, much of the genetic basis for pediatric-onset HSP remains unexplained. Here, we re-analyzed clinical exome-sequencing data from siblings with HSP of unknown genetic etiology and identified an inherited nonsense mutation (c.523C\u3eT [p.Arg175Ter]) in the highly conserved RAB1A. The mutation is predicted to produce a truncated protein with an intact RAB GTPase domain but without two C-terminal cysteine residues required for proper subcellular protein localization. Additional RAB1A mutations, including two frameshift mutations and a mosaic missense mutation (c.83T\u3eC [p.Leu28Pro]), were identified in three individuals with similar neurodevelopmental presentations. In rescue experiments, production of the full-length, but not the truncated, RAB1a rescued Golgi structure and cell proliferation in Rab1-depleted cells. In contrast, the missense-variant RAB1a disrupted Golgi structure despite intact Rab1 expression, suggesting a dominant-negative function of the mosaic missense mutation. Knock-down of RAB1A in cultured human embryonic stem cell-derived neurons resulted in impaired neuronal arborization. Finally, RAB1A is located within the 2p14-p15 microdeletion syndrome locus. The similar clinical presentations of individuals with RAB1A loss-of-function mutations and the 2p14-p15 microdeletion syndrome implicate loss of RAB1A in the pathogenesis of neurodevelopmental manifestations of this microdeletion syndrome. Our study identifies a RAB1A-related neurocognitive disorder with speech and motor delay, demonstrates an essential role for RAB1a in neuronal differentiation, and implicates RAB1A in the etiology of the neurodevelopmental sequelae associated with the 2p14-p15 microdeletion syndrome

MeCP2 binds to nucleosome free (linker DNA) regions and to H3K9/H3K27 methylated nucleosomes in the brain

Methyl-CpG-binding protein 2 (MeCP2) is a chromatin-binding protein that mediates transcriptional regulation, and is highly abundant in brain. The nature of its binding to reconstituted templates has been well characterized in vitro. However, its interactions with native chromatin are less understood. Here we show that MeCP2 displays a distinct distribution within fractionated chromatin from various tissues and cell types. Artificially induced global changes in DNA methylation by 3-aminobenzamide or 5-aza-2′-deoxycytidine, do not significantly affect the distribution or amount of MeCP2 in HeLa S3 or 3T3 cells. Most MeCP2 in brain is chromatin-bound and localized within highly nuclease-accessible regions. We also show that, while in most tissues and cell lines, MeCP2 forms stable complexes with nucleosome, in brain, a fraction of it is loosely bound to chromatin, likely to nucleosome-depleted regions. Finally, we provide evidence for novel associations of MeCP2 with mononucleosomes containing histone H2A.X, H3K9me2 and H3K27me3 in different chromatin fractions from brain cortex and in vitro. We postulate that the functional compartmentalization and tissue-specific distribution of MeCP2 within different chromatin types may be directed by its association with nucleosomes containing specific histone variants, and post-translational modifications