With Juan F. Rubio-Ramirez and Serhiy Stepanchuk, forthcoming The Review of Economic Studies
We develop a new algorithm to solve large scale dynamic stochastic general equilibrium models over a large transition. The method consists of Taylor expanding the equilibrium conditions of the model not just around the steady state, but along the entire equilibrium path. The method can be applied to a broad class of models and is orders of magnitudes more accurate than solutions based on local perturbation of the steady state. Matlab code is available in the page Codes.
forthcoming Journal of Money Credit and Banking
This paper develops a model where money is demanded in excess of spending needs. As a result money coexists with large availabilities of credit and the model explains the levels of monetary aggregates held in modern economies via the endogenous creation of inside money. At the heart of the model there is a search friction in the goods market which generates spare production and spending capacity. As a consequence there is an endogenous productivity wedge, due to spare production capacity, and an endogenous money velocity, due to spare spending capacity.
European Economic Review,Volume 116, July 2019, Pages 83–106.
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Labour composition by gender, age, and education has undergone dramatic changes over the last half century in the United States. Furthermore, the volatility of total market hours differs systematically between genders, age, and education groups. Reduced form exercises and a large-scale business cycle model suggest that these demographic patterns account for between 15% and 30% of the observed changes in aggregate volatility over this period of time. Furthermore, these demographic changes are responsible for a considerable fraction of the average growth rate of GDP. To solve the model over this large transition, a new algorithm is developed which extends perturbation methods to the stochastic transition path and can be applied to a broad class of DSGE models.
Click here for a previous version which also included endogenous education and marriage decisions.
With Martin Gervais
European Economic Review,Volume 73, January 2015, Pages 1–17.
This paper studies optimal taxation in a version of the neoclassical growth model in which investment becomes productive within the period, thereby making the supply of capital elastic in the short run. Because taxing capital is distortionary in the short run, the government's ability/desire to raise revenues through capital income taxation in the initial period or when the economy is hit with a bad shock is greatly curtailed. Our timing assumption also leads to tractable Ramsey and Markov-perfect specifications without state-contingent debt. We find that the cyclical properties of taxes are robust to the commitment assumptions.
April 2021
This paper documents that during recession agents hold more liquidity and more production capacity remains unutilized than during booms. Traditional models straggle to generate spare liquidity and capacity in times of scarcity. This paper uses a model where liquid accounts and spare capacity emerge because of a search friction in the goods market. Specifically, the friction implies a link between money demand and the mismatch between the demand and supply of goods. As a result, it is possible to account for the comovement between the velocity of money and capacity utilization. Furthermore, the model generates endogenous movement in Total Factor Productivity and the labour wedge, which are also consistent with evidence.
With Michael Hatcher and Richard Kima
April 2021
This paper investigates the quantitative importance of credit shocks for the UK economy through a Bayesian vector auto-regression (VAR) analysis. Credit shocks are identified using a minimum set of sign restrictions on impulse responses. We first analyse the effects of a general credit shock that we disentangle from housing demand and standard monetary VAR shocks. We find that credit shocks have mild effects on output fluctuations, about 0.10% on impact. Lending endogenously grows over time following a positive housing demand shock as predicted by theory. We then decompose the generic credit shock into its supply and demand components, combining macroeconomic and survey data. The estimation of the related model suggests that both loan supply and demand shocks lead to quantitatively similar impact effects on GDP, with loan demand disturbances having short-lived effects whereas credit supply shocks have persistent effects on output growth and inflation.
July 2013
A test of the paradox of thrift is conducted throughout the lens of a business cycle model. To this aim, a simple extension of the neoclassical framework with concave frontier is developed which leads to a dramatic improvement on the prediction of the saving rate. Then, it is possible to isolate periods when saving changes are not a consequence of technology shocks. A VAR identified through these episodes suggests that a 1% increase in the saving rate leads to half a percentage point decrease in output growth.
Latest version March 2014.
The vast majority of the business cycle literature assumes a linear transformation frontier between consumption and investment goods. This assumption neglects a relationship, present in the data, between the relative price of investments and total factor productivity. This assumption also leads to counterfactual saving rates. A simple extension of the real business cycle model is proposed where the transformation frontier can be concave. Alternative identification strategies lead to similar estimates of the curvature with a dramatic improvement of the prediction of the saving rate.