Download or read book Incomplete Markets and Aggregate Demand written by Iván Werning and published by . This book was released on 2015 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt: I study aggregate consumption dynamics under incomplete markets, focusing on the relationship between consumption and the path for interest rates. I first provide a general aggregation result under extreme illiquidity (no borrowing and no outside assets), deriving a generalized Euler relation involving the real interest rate, current and future aggregate consumption. This provides a tractable way of incorporating incomplete markets in macroeconomic models, dealing only with aggregates. Although this relation does not necessarily coincide with the standard representative-agent Euler equation, I show that it does for an important benchmark specification. When this is the case, idiosyncratic uncertainty and incomplete markets leave their imprint by affecting the discount factor in this representation, but the sensitivity of consumption to current and future interest rates is unaffected. An immediate corollary is that "forward guidance" (lower future interest rates) is as powerful as in representative agent models. I show that the same representation holds with positive liquidity (borrowing and outside assets) when utility is logarithmic. I show that away from these benchmark cases, consumption is likely to become more sensitive to interest rate, and especially future interest rates. Finally, I apply my approach to a real business cycle economy, providing an exact analytical aggregation result that complements existing numerical results.
Download or read book Price Theory for Incomplete Markets written by Emmanuel Farhi and published by . This book was released on 2022 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: We provide a price theory for incomplete markets that extends the traditional Walrasian analysis. We derive formulas expressing the consumption response to current and future changes in interest rates and income. Our analysis provides a natural decomposition of these responses into substitution and income effects with structural interpretation, emphasizing statistics such as the marginal propensity to save and local measures of prudence in utility. We handle general uncertainty in a compact and intuitive manner by adjusting probability distributions: a risk-adjusted probability, commonly used in finance, and a novel prudence-adjusted probability, specifically useful for incomplete markets. Our formulas reveal various cross-restrictions implied by the theory on consumer behavior. Numerical explorations show that the new statistics we identify matter significantly to understand aggregate demand in incomplete markets, beyond the impact of heterogeneous marginal propensities to consume or binding borrowing constraints.
Download or read book Inequality Nominal Rigidities and Aggregate Demand written by Mario Giarda and published by . This book was released on 2023 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper studies the role of wage and price rigidities in determining aggregate demand. With incomplete markets, real wages determine consumption. In response to shocks, wages and prices may not respond evenly, affecting how shocks transmit to aggregate demand. Motivated by these observations, we revisit the gains from wage flexibility for output stabilization and find that the relative fluctuations of wages and prices matter. We contribute with three results. First, that wage flexibility generates an excessive response of aggregate demand to aggregate shocks if prices are sufficiently sticky. Second, given wage rigidities, higher price stickiness makes the inversion of the IS more likely. And third, monetary policy should respond to wages if prices are relatively stickier.
Download or read book Excess Demand Functions with Incomplete Markets a Global Result written by Takeshi Momi and published by . This book was released on 2004 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: The purpose of this paper is to give a global characterization of excess demand functions in a two period exchange economy with in-complete real asset markets. We show that continuity, homogeneity and Walras' law characterize the aggregate excess demand functions on any compact price set which maintains the dimension of the budget set.
Download or read book Aggregate Implications of Indivisble Labor Incomplete Markets and Labor Market Frictions written by Per Krusell and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Essays on Uninsured Income Risk Lumpy Investment and Aggregate Demand written by Nathan Gaspar Zorzi and published by . This book was released on 2020 with total page 145 pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis consists of three chapters on uninsured income risk, lumpy investment and aggregate demand. The first chapter analyzes the non-linear response of durable spending to income shocks. Empirically, the average marginal propensity to spend (MPC) on durable goods increases with the size of income changes. I investigate whether a canonical model of lumpy durable investment with incomplete markets can replicate this fact. I first clarify analytically the source of non-linearity in this model, and I show that its sign depends on the relative strength of the extensive and intensive margins of durable adjustment. In numerical exercises, I find that the extensive margin dominates quantitatively, so that the model generates the form of non-linearity observed in the data. However, the magnitudes predicted by this canonical model are substantially lower than their empirical counterparts. I suggest various avenues to improve the quantitative performance of the model. The second chapter investigates the general equilibrium implications of this form of nonlinearity. I recognize that durable spending is strongly pro-cyclical, that workers employed in durable sectors have a more cyclical labor income than those employed in nondurable sectors, and that workers are imperfectly insured against these fluctuations. In turn, the average MPC on durables increases with income changes, so that this redistribution of labor incomes across sectors has aggregate effects. To formalize and quantify this mechansim, I develop a heterogeneous agent New Keynesian (HANK) model with multiple sectors and lumpy durable adjustment. There is no labor mobility between sectors and financial markets are incomplete, so that durable workers are more exposed to aggregate shocks. I first show analytically that the interaction between cyclical investment and redistribution amplifies the aggregate response of durable spending during booms and dampens it during recessions. I then quantify the importance of this mechanism using my structural model. The third chapter focuses on the cyclical reallocation of workers across sectors or occupations. Specifically, I explore how uninsured income risk and liquidity frictions can hinder the efficient matching between workers and occupations. I investigate this question in a continuous-time Lucas-Prescott economy with incomplete markets. In this setting, uninsured income risk induces labor misallocation across occupations through two channels. First, it reduces workers’ incentives to search (ex ante) for an occupation where they have a strong comparative advantage. Second, it induces excess separation (ex post) by forcing productive households to leave their occupation when their liquidity buffers are depleted. In general equilibrium, labor misallocation exacerbates endogeneously the effect of uninsured income risk, by depressing the value of equity that workers use as liquidity buffers
Download or read book A Theory of Aggregate Supply and Aggregate Demand as Functions of Market Tightness with Prices as Parameters written by Pascal Michaillat and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper presents a parsimonious equilibrium business cycle model with trade frictions in the product and labor markets. The model features unemployment and unsold production and its general equilibrium can be represented very simply: as the intersection of an aggregate supply and an aggregate demand, with product market tightness acting as a price. The aggregate supply represents the expected amount of sales by firms given product market tightness and optimal hiring on the labor market. The aggregate demand represents optimal product consumption given product market tightness-consumers can also spend their income on an unproduced good. We use a search-and-matching structure to realistically represent trade frictions in the product and labor markets. In such a structure, it is not price or wage but market tightness that equalizes supply to demand. In fact, the frictions create situations of bilateral monopoly in price and wage setting that make price and wage indeterminate. To resolve this indeterminacy, we take price and wage as parameters, thus disconnecting price and wage determination from our analysis. Since the equilibrium representation is very transparent and tractable, we are able to obtain a broad range of comparative statics with respect to demand and supply shocks. The model is also suited to think about inventories, labor hoarding, income and wealth inequality. It can be extended to a dynamic environment.
Download or read book Household Income Risk Nominal Frictions and Incomplete Markets written by and published by . This book was released on 2013 with total page 27 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the effects of changes in uncertainty of household income on the macroeconomy. Households face substantial idiosyncratic income risk that is up to two orders of magnitude larger than total factor productivity uncertainty, very persistent and varies substantially over the business cycle. We build a New Keynesian model with heterogeneous agents, where changes in precautionary savings due to time-varying uncertainty depress aggregate activity. With countercyclical markups through sticky prices, increased precautionary savings lower aggregate demand and generate significant output losses as the economy is demand-driven in the short-run. The decline in output is more severe, if the central bank is constrained by the zero lower bound. Our results imply that household income uncertainty may be an important factor in explaining the persistent decline of consumption during the Great Recession.
Download or read book Economics of Asymmetric Information written by Indian Economic Association. Annual Conference and published by Deep and Deep Publications. This book was released on 2006 with total page 248 pages. Available in PDF, EPUB and Kindle. Book excerpt: Contributed papers presented at the one of the technical sessions of Indian Economic Association's 85th conference held at the Kerala University in 2002.
Download or read book The Fiscal Multipler written by Marcus Hagedorn and published by . This book was released on 2019 with total page 68 pages. Available in PDF, EPUB and Kindle. Book excerpt: We measure the size of the fiscal multiplier using a heterogeneous-agent model with incomplete markets, capital and rigid prices and wages. The environment encompasses the essential elements necessary for a quantitative analysis of fiscal policy. First, output is partially demand-determined due to pricing frictions in product and labor markets, so that a fiscal stimulus increases aggregate demand. Second, incomplete markets deliver a realistic distribution of dynamic consumption and investment responses to stimulus policies across the population. These elements give rise to the standard textbook Keynesian-cross logic which, and unlike conventional wisdom would suggest, is significantly reinforced in our dynamic forward looking model. We find that market incompleteness is key to determining the size of the fiscal multiplier, which is uniquely determined in our model for any combination of fiscal and monetary policies of interest. The multiplier is 1.34 if deficit-financed and 0.61 if contemporaneously tax-financed for a pegged nominal interest rate, with similar values in a liquidity trap. If monetary policy follows a Taylor rule, the numbers drop to 0.66 and 0.54, respectively. We elucidate the importance of market incompleteness for our results and contrast them to models featuring complete markets or hand-to-mouth consumers.
Download or read book Temporary Equilibrium written by Jean-Michel Grandmont and published by . This book was released on 1988 with total page 520 pages. Available in PDF, EPUB and Kindle. Book excerpt: The collection of journal articles reproduced in this volume provides a synthesis of the progress made in the last 15 years in the theory of temporary equilibrium. Key Features * Decision making * Competitive assets markets * Models of money * Deterministic dynamics * Stochastic processes * Quantity rationing
Download or read book Financial Integration Entrepreneurial Risk and Global Dynamics written by George-Marios Angeletos and published by DIANE Publishing. This book was released on 2011-04 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: How does financial integration impact capital accumulation, current-account dynamics, and cross-country inequality? This paper investigates this question within a two-country, general-equilibrium, incomplete-markets model that focuses on the importance of idiosyncratic entrepreneurial risk -- a risk that introduces, not only a precautionary motive for saving, but also a wedge between the interest rate and the marginal product of capital. This friction provides a simple resolution to the empirical puzzle that capital often fails to flow from the rich or slow-growing countries to the poor or fast-growing ones, and a distinct set of policy lessons regarding the intertemporal costs and benefits of capital-account liberalization. Illus. A print on demand report.
Download or read book Innocent Bystanders Monetary Policy and Inequality in the U S written by Mr.Olivier Coibion and published by International Monetary Fund. This book was released on 2012-08-01 with total page 57 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study the effects and historical contribution of monetary policy shocks to consumption and income inequality in the United States since 1980. Contractionary monetary policy actions systematically increase inequality in labor earnings, total income, consumption and total expenditures. Furthermore, monetary shocks can account for a significant component of the historical cyclical variation in income and consumption inequality. Using detailed micro-level data on income and consumption, we document the different channels via which monetary policy shocks affect inequality, as well as how these channels depend on the nature of the change in monetary policy.
Download or read book The General Theory of Employment Interest and Money written by John Maynard Keynes and published by . This book was released on 1989 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Handbook of Safeguarding Global Financial Stability written by Gerard Caprio and published by Academic Press. This book was released on 2012-11-27 with total page 547 pages. Available in PDF, EPUB and Kindle. Book excerpt: Political and social forces exert pressure on our globalized economy in many forms, from formal and informal policies to financial theories and technical models. Our efforts to shape and direct these forces to preserve financial stability reveal much about the ways we perceive the financial economy. The Handbook of Safeguarding Global Financial Stability examines our political economy, particularly the ways in which these forces inhabit our institutions, strategies, and tactics. As economies expand and contract, these forces also determine the ways we supervise and regulate. This high-level examination of the global political economy includes articles about specific countries, crises, and international systems as well as broad articles about major concepts and trends.. Substantial articles by top scholars sets this volume apart from other information sources Diverse international perspectives result in new opportunities for analysis and research Rapidly developing subjects will interest readers well into the future
Download or read book NBER Macroeconomics Annual 1994 written by Stanley Fischer and published by MIT Press. This book was released on 1994 with total page 340 pages. Available in PDF, EPUB and Kindle. Book excerpt: This is the ninth in a series of annuals from the National Bureau of Economic Research that are designed to stimulate research on problems in applied economics, to bring frontier theoretical developments to a wider audience, and to accelerate the interaction between analytical and empirical research in macroeconomics. Contents On the Speed of Transition in Eastern Europe, Philippe Aghion and Olivier Jean Blanchard * The Costs of Business Cycles with Incomplete Markets, Andrew Atkeson and Christopher Phelan * The U.S. Fiscal Problem: Where We Are, How We Got Here and Where We Are Going, Alan Auerbach * The East Asian Miracle Economies, John Page * What Ends Recessions? Christina Romer and David Romer * Toward a Modern Macroeconomic Model Usable for Policy Analysis, Christopher Sims and Eric Leeper
Download or read book Theory of Incomplete Markets written by Michael Magill and published by MIT Press. This book was released on 2002 with total page 566 pages. Available in PDF, EPUB and Kindle. Book excerpt: Theory of incompl. markets/M. Magill, M. Quinzii. - V.1.
