Presentation

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Cyclicality of fiscal policy

Abstract: The cyclicality of discretionary fiscal policy has been the subject of a large number of papers. However, different studies have come to very different conclusions, even across similar sets of countries and time periods. Conflicting results may stem in part from differences in the included covariates, which can vary substantially from paper to paper. I use Bayesian model averaging (BMA) to estimate the cyclicality of federal discretionary policy in the United States, averaging results from a large number of possible models according to how well each model explains the data. BMA incorporates uncertainty about the true model of fiscal policy conduct and has the additional advantage of clarifying which variables matter to policymakers. The models I consider are motivated primarily by the existing literature, although to my knowledge I am the first to include employment-based measures as cyclical variables.

My results suggest that discretionary policy is countercyclical. However, this finding is driven largely by strong countercyclical responses to recessions. During expansions, in contrast, policy is highly persistent and mostly unresponsive to cyclical variables. I also find that policymakers are much more likely to respond to changes in the unemployment rate than any of the other cyclical variables I consider. Notably, the level of debt does not appear to factor into policy decisions. Finally, policymakers may respond to cyclical conditions during expansions, but with greater delay than during recessions.
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When Does Determinacy Imply Expectational Stability?

Jim Bullard and Stefano Eusepi.
ABSTRACT:
Since the introduction of rational expectations there have been issues
with multiple equilibria and equilibrium selection. We study the
connections between determinacy of rational expectations equilibrium and
learnability of that equilibrium in a general class of purely
forward-looking models. Our framework is sufficiently flexible to
encompass lags in agents’ information and either finite horizon or
infinite horizon approaches to learning. We are able to isolate
conditions under which determinacy does and does not imply learnability,
and also conditions under which long-horizon forecasts make a clear
difference for learnability. Finally, we apply our result to a
relatively general New Keynesian model.

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Mortgage default in an estimated model of the U.S. housing market

“Mortgage default in an estimated model of the U.S. housing market” by Luisa Lambertini, Victoria Nuguer, and Pinar Uysal (JEDC, 2017)

Attached is a copy of the paper. Below is the abstract:

“This paper models the housing sector, mortgages and endogenous default in a DSGE setting
with nominal and real rigidities. We use data for the period 1981–2006 to estimate
our model using Bayesian techniques. We analyze how an increase in risk in the mortgage
market raises the default rate and spreads to the rest of the economy, creating a recession.
In our model two shocks are well suited to replicate the subprime crisis and the Great
Recession: the mortgage risk shock and the housing demand shock. Next we use our estimated
model to evaluate a policy that reduces the principal of underwater mortgages. This
policy is successful in stabilizing the mortgage market and makes all agents better off.”

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Wealth distribution and social mobility in the US: A quantitative approach

“Wealth distribution and social mobility in the US: A quantitative approach”

by Jess Benhabib, Alberto Bisin, and Mi Luo.

Abstract:
This paper attempts to quantitatively identify the factors that drive wealth dynamics in the U.S. and are consistent with its observed skewed cross-sectional distribution and social mobility. We concentrate on three critical factors: a skewed and persistent distribution of earnings, differential savings and bequest rates across wealth levels, and capital income risk. All of these factors are necessary for matching both distribution and mobility, with a distinct role in inducing wealth accumulation near the borrowing constraints, contributing to the thick top tail of wealth, and affecting upward and/or downward social mobility.

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The Optimal Maturity of Government Debt

We study a Ramsey planner who chooses a distorting tax on labor and manages a portfolio of bonds of different maturities in the representative agent economy with aggregate shocks. We show that covariances of holding period returns of these bonds with the primary deficit are the key statistics that determine the optimal composition of Ramsey portfolio. We document properties of these moments in the U.S. data and calibrate a version of a neoclassical model with Epstein-Zin preferences that matches these moments. The optimal portfolio does not short any bond, allocates an approximately equal share of the portfolio in bonds of different maturity with a slight tilt towards longer maturities when the outstanding debt is large and requires little re-balancing in response to aggregate shocks. These prescriptions stand in marked contrast with the prescriptions of standard models used in the business cycle literature. We show that the difference in the results is driven by the counterfactual asset pricing implications of such models.

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Macroeconomic Consequences of Social Security Uncertainty

Macroeconomic Consequences of Social Security Uncertainty

second chapter of Erin’s prospectus/dissertation

Abstract:
Unfunded public pensions in many western nations are unsustainable as currently financed: promised future benefits exceed promised future taxation. Pension reform is inevitable, but uncertain. Governments may raise taxes, cut benefits, or take some action that combine changes to taxes and benefits. The timing and structure of pension reform is uncertain. A rational expectations, multi-period, overlapping generations model is developed to study the consequences of uncertain public pension reform. The pension system is modeled after the United States social security system. Policy uncertainty is modeled as a stochastic process with known underlying probability distributions. Agents in the model form rational expectations based on the distribution of policy outcomes. These beliefs determine the existence and nature of equilibrium. Expectations prior to a reform have large consequences for intergenerational consumption and on aggregate macroeconomic variables.

Key words: Policy Uncertainty, Social Security Reform, Retirement Savings, Overlapping Generations Model, Fiscal Sustainability, Bond-Financed Deficits

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Sources of Lifetime Inequality

Tristan presented “Sources of Lifetime Inequality” by Huggett, Venutra, and Yaron (AER 2011)

Abstract:
“Is lifetime inequality mainly due to differences across people estab- lished early in life or to differences in luck experienced over the work- ing lifetime? We answer this question within a model that features idiosyncratic shocks to human capital , estimated directly from data, as well as heterogeneity in ability to learn, initial human capital, and initial wealth. We find that, as of age 23, differences in initial condi- tions account for more of the variation in lifetime earnings, lifetime wealth, and lifetime utility than do differences in shocks received over the working lifetime.”[embeddoc url=”https://blogs.uoregon.edu/macrogroup/files/2017/04/HugVenYar_2011-10w0zw0.pdf” download=”all” viewer=”google”]

Slides from the presentation are posted below:

MacroGroupSp17-2aboc5m

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Revisiting the Great Moderation

Presentation of two recent papers that revisit the empirical evidence for the Great Moderation and its continuation.

[embeddoc url=”https://blogs.uoregon.edu/macrogroup/files/2016/10/IAAE2016-683-s1i47h.pdf” download=”all” viewer=”google”]

[embeddoc url=”https://blogs.uoregon.edu/macrogroup/files/2016/10/dt1423e-taax0w.pdf” download=”all” viewer=”google”]

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Learning vs News: What Drives Business Cycles?

Brian Dombeck

Previous structural estimates have found that anticipated shocks are responsible for about half of observed fluctuations in macroeconomic data. But endogenous fluctuations in key macroeconomic variables caused by the arrival of news in rational expectations (RE) news-shock models are qualitatively similar to those generated by the adaptive learning process in models which do not feature news shocks but do allow for boundedly rational agents. This paper allows learning and news shocks to compete as explanations explanations for business cycles in a news-rich medium-scale DSGE model using likelihood-based classical and Bayesian methods to determine whether existing estimates of the relative importance of news shocks have been overstated due to model misspecification stemming directly from the assumption of rational expectations.

 

Brian’s research website