Gains from second-order approximations

The benefit from using second-order approximations tostochastic dynamic rational expec- tations models is explained. By example of the neoclassical growth model, this note as- sesses the accuracy of the obtained approximation. The implications for optimal policy are discussed.Second-order approximation, accuracy, optimalpolicy

Welfare Effects of Monetary Policy Rules in a Model with Nominal Rigidities and Credit Market Frictions

This paper evaluates monetary policy rules in a business cycle model with staggered prices and wage setting a la Calvo and asymmetric information in the credit market. Rules are compared in a utility based welfare metric, the effects of the model’s nonlinear dynamics are captured by a quadratic approximation to the policy function. The firms net worth crucially affects the terms of obtaining outside finance. Financial frictions dampen the economy’s response to shocks and make them more persistent. For the baseline calibration, the welfare costs of price stickiness are found to be less than 0.04 per cent of steady state consumption. However, wage stickiness can induce welfare costs of up to 0.85 per cent of steady state consumption. An interest rate rule that places high weight on stabilizing wage inflation can eliminate most of these costs. These findings are by and large independent of the existence of other real distortions in the model, namely credit frictionsMonetary policy rules, nominal rigidities, welfare evaluation, quadratic approximation, agency costs, credit frictions.

Can Wage and Price Stickiness Account for Sizeable Costs of Business Cycle Fluctuations?

This paper asks the following two questions: First, can a model with nominal rigidities in wage and price setting account for the average welfare costs of business cycle fluctuations identified in Gali, Gertler, and Lopez- Salido (2003)? Second, do we need to agree on a particular scheme for nominal rigidities to answer that question? We compute a quadratic approximation to agents expected lifetime utility and evaluate welfare for different modeling schemes of nominal rigidities that all have the same average duration of contracts. Calvo (1983) wage and price contracts can deliver sizeable welfare costs, but other contracts of the same average stickiness cannot. Calvo (1983) contracts can imply welfare costs that are up to 4 times higher than those implied by overlapping contracts in the spirit of Taylor (1980) or Wolman (1999). Furthermore, the sticky information framework of Mankiw and Reis (2002) may generate welfare costs that are even smaller. This paper calls for more research into the origins of wage and price stickiness.welfare, Calvo, Taylor, sticky information, costs of nominal rigidities

The role of contracting schemes for the welfare costs of nominal rigidities

This paper asks the following two questions: First, can a model with nominal rigidities in wage and price setting account for the average welfare costs of business cycle fluctuations identified in Gali, Gertler, and Lopez- Salido (2003)? Second, what is the role of contracting schemes for the welfare costs of business cycle fluctuations? We compute a quadratic approximation to agents expected lifetime utility and evaluate welfare for different modeling schemes of nominal rigidities that all have the same average duration of contracts. Calvo (1983) wage and price contracts can deliver sizeable welfare costs, but other contracts of the same average stickiness cannot. Calvo (1983) contracts can imply welfare costs that are up to 4 times higher than those implied by overlapping contracts in the spirit of Taylor (1980) or Wolman (1999). Furthermore, the sticky information framework of Mankiw and Reis (2002) may generate welfare costs that are even smaller. This paper calls for more research into the origins of wage and price stickinesswelfare, Calvo, Taylor, sticky information, costs of nominal rigidities

OPPORTUNITIES FOR AGRICULTURE TO MITIGATE GREENHOUSE GASES: A GRASS ROOTS APPROACH

Environmental Economics and Policy,

Business cycle measurement with some theory

A method to evaluate cyclical models not requiring knowledge of the DGP and the exact specification of the aggregate decision rules is proposed. We derive robust restrictions in a class of models; use some to identify structural shocks in the data and others to evaluate the class or contrast sub-models. The approach has good properties, even in small samples, and when the class of models is misspecified. The method is used to sort out the relevance of a certain friction (the presence of rule-of-thumb consumers) in a standard class of models.Sign restrictions, shock identification, model validation, misspecification.

A hierarchy of models for simulating experimental results from a 3D heterogeneous porous medium

In this work we examine the dispersion of conservative tracers (bromide and fluorescein) in an experimentally-constructed three-dimensional dual-porosity porous medium. The medium is highly heterogeneous ($\sigma_Y^2=5.7$), and consists of spherical, low-hydraulic-conductivity inclusions embedded in a high-hydraulic-conductivity matrix. The bi-modal medium was saturated with tracers, and then flushed with tracer-free fluid while the effluent breakthrough curves were measured. The focus for this work is to examine a hierarchy of four models (in the absence of adjustable parameters) with decreasing complexity to assess their ability to accurately represent the measured breakthrough curves. The most information-rich model was (1) a direct numerical simulation of the system in which the geometry, boundary and initial conditions, and medium properties were fully independently characterized experimentally with high fidelity. The reduced models included; (2) a simplified numerical model identical to the fully-resolved direct numerical simulation (DNS) model, but using a domain that was one-tenth the size; (3) an upscaled mobile-immobile model that allowed for a time-dependent mass-transfer coefficient; and, (4) an upscaled mobile-immobile model that assumed a space-time constant mass-transfer coefficient. The results illustrated that all four models provided accurate representations of the experimental breakthrough curves as measured by global RMS error. The primary component of error induced in the upscaled models appeared to arise from the neglect of convection within the inclusions. Interestingly, these results suggested that the conventional convection-dispersion equation, when applied in a way that resolves the heterogeneities, yields models with high fidelity without requiring the imposition of a more complex non-Fickian model.Comment: 27 pages, 9 Figure

Indexed debt contracts and the financial accelerator

This paper addresses the positive and normative implications of indexing risky debt to observable aggregate conditions. These issues are pursued within the context of the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The principal conclusions are that the optimal degree of indexation is significant, and that the business cycle properties of the model are altered under this level of indexation.Indexation (Economics) ; Financial markets

Agriculture's Role in Greenhouse Gas Mitigation

Examines technical, economic, and policy trends. Explores efforts to encourage farmers to adopt new agricultural practices that reduce agricultural greenhouse gas emissions. Reviews biofuel options, and related policy implications