We study the pricing, design, and desirability of sovereign state-contingent debt instruments. Using a sovereign default model with lenders who fear model misspecification, we find that the commonly used threshold bond structure leads to welfare losses for the government. While this bond would be beneficial when facing rational expectations lenders, its threshold structure increases the variance of promised returns, which robust lenders dislike. Sovereign state-contingent debt instruments can still be welfare improving when facing robust lenders when designed optimally. Our findings tie the lack of popularity of sovereign state-contingent debt instruments to the particular design used thus far.
{"title":"Uncertainty Premia, Sovereign Default Risk, and State-Contingent Debt","authors":"Francisco Roch, Francisco Roldán","doi":"10.1086/723950","DOIUrl":"https://doi.org/10.1086/723950","url":null,"abstract":"We study the pricing, design, and desirability of sovereign state-contingent debt instruments. Using a sovereign default model with lenders who fear model misspecification, we find that the commonly used threshold bond structure leads to welfare losses for the government. While this bond would be beneficial when facing rational expectations lenders, its threshold structure increases the variance of promised returns, which robust lenders dislike. Sovereign state-contingent debt instruments can still be welfare improving when facing robust lenders when designed optimally. Our findings tie the lack of popularity of sovereign state-contingent debt instruments to the particular design used thus far.","PeriodicalId":272883,"journal":{"name":"Journal of Political Economy Macroeconomics","volume":"22 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-03-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129482989","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper develops an open-economy heterogeneous-agent New Keynesian model in which households differ in their income, wealth, and real and financial integration with international markets. We use the model to reassess classic questions in international macroeconomics from a distributional perspective. Our analysis yields two main takeaways. First, heterogeneity in households’ international integration plays a central role in driving the unequal consumption responses to external shocks, more so than income and wealth. Second, the conduct of monetary policy in open economies faces a stabilization-inequality trade-off, with fixed exchange rate regimes leading to amplified but more equal consumption responses to external shocks.
{"title":"Monetary Policy and Redistribution in Open Economies","authors":"Xing Guo, Pablo Ottonello, D. Perez","doi":"10.1086/723410","DOIUrl":"https://doi.org/10.1086/723410","url":null,"abstract":"This paper develops an open-economy heterogeneous-agent New Keynesian model in which households differ in their income, wealth, and real and financial integration with international markets. We use the model to reassess classic questions in international macroeconomics from a distributional perspective. Our analysis yields two main takeaways. First, heterogeneity in households’ international integration plays a central role in driving the unequal consumption responses to external shocks, more so than income and wealth. Second, the conduct of monetary policy in open economies faces a stabilization-inequality trade-off, with fixed exchange rate regimes leading to amplified but more equal consumption responses to external shocks.","PeriodicalId":272883,"journal":{"name":"Journal of Political Economy Macroeconomics","volume":"28 2 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125687693","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Olivier Coibion, Y. Gorodnichenko, Edward S. Knotek, Raphael S. Schoenle
Using a daily survey of US households, we study how the Federal Reserve’s announcement of its new strategy of average inflation targeting affected households’ expectations. Starting with the day of the announcement, there is a small uptick in the minority of households reporting that they had heard news about monetary policy, but this effect fades within a few days. Those who heard news about the announcement do not seem to have understood the announcement. When provided with pertinent information about the new policy, households do not change their expectations. These patterns continue to hold 1 year after the announcement.
{"title":"Average Inflation Targeting and Household Expectations","authors":"Olivier Coibion, Y. Gorodnichenko, Edward S. Knotek, Raphael S. Schoenle","doi":"10.1086/722962","DOIUrl":"https://doi.org/10.1086/722962","url":null,"abstract":"Using a daily survey of US households, we study how the Federal Reserve’s announcement of its new strategy of average inflation targeting affected households’ expectations. Starting with the day of the announcement, there is a small uptick in the minority of households reporting that they had heard news about monetary policy, but this effect fades within a few days. Those who heard news about the announcement do not seem to have understood the announcement. When provided with pertinent information about the new policy, households do not change their expectations. These patterns continue to hold 1 year after the announcement.","PeriodicalId":272883,"journal":{"name":"Journal of Political Economy Macroeconomics","volume":"10 2 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116735946","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
A. Kopytov, N. Roussanov, Mathieu Taschereau-Dumouchel
Recreation prices and hours worked have both fallen over the last century. We construct a macroeconomic model with general preferences that allows for trending recreation prices, wages, and work hours along a balanced-growth path. Estimating the model using aggregate data from OECD countries, we find that the fall in recreation prices can explain a large fraction of the decline in hours. We also use our model to show that the diverging prices of the recreation bundles consumed by different demographic groups can account for much of the increase in leisure inequality observed in the United States over the last decades.
{"title":"Cheap Thrills: The Price of Leisure and the Global Decline in Work Hours","authors":"A. Kopytov, N. Roussanov, Mathieu Taschereau-Dumouchel","doi":"10.1086/723717","DOIUrl":"https://doi.org/10.1086/723717","url":null,"abstract":"Recreation prices and hours worked have both fallen over the last century. We construct a macroeconomic model with general preferences that allows for trending recreation prices, wages, and work hours along a balanced-growth path. Estimating the model using aggregate data from OECD countries, we find that the fall in recreation prices can explain a large fraction of the decline in hours. We also use our model to show that the diverging prices of the recreation bundles consumed by different demographic groups can account for much of the increase in leisure inequality observed in the United States over the last decades.","PeriodicalId":272883,"journal":{"name":"Journal of Political Economy Macroeconomics","volume":"68 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130679848","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Half of the jobs in the United States feature pay for performance. We derive incidence and optimum formulas for the rate of tax progressivity and the top income tax rate when such labor contracts arise from moral hazard frictions within firms. Our first main result is that the sensitivity of the worker’s compensation to performance is roughly invariant to tax progressivity. Second, the optimal tax schedule is strictly less progressive than in standard models that treat pretax earnings risk as exogenous. Quantitatively, the welfare cost of not accounting for performance pay when choosing tax progressivity is 0.3% of consumption.
{"title":"Redistribution with Performance Pay","authors":"Paweł Doligalski, A. Ndiaye, N. Werquin","doi":"10.1086/724511","DOIUrl":"https://doi.org/10.1086/724511","url":null,"abstract":"Half of the jobs in the United States feature pay for performance. We derive incidence and optimum formulas for the rate of tax progressivity and the top income tax rate when such labor contracts arise from moral hazard frictions within firms. Our first main result is that the sensitivity of the worker’s compensation to performance is roughly invariant to tax progressivity. Second, the optimal tax schedule is strictly less progressive than in standard models that treat pretax earnings risk as exogenous. Quantitatively, the welfare cost of not accounting for performance pay when choosing tax progressivity is 0.3% of consumption.","PeriodicalId":272883,"journal":{"name":"Journal of Political Economy Macroeconomics","volume":"49 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114905756","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We formulate a two-country model of trade and creative destruction by domestic and foreign firms. In the model, trade liberalization quickens the pace of creative destruction and the flow of technology across countries. International idea flows are essential for understanding why country technologies do not drift apart and for matching two empirical facts. First, contracting firms are more likely to lose exports than domestic sales, whereas the opposite is true for expanding firms. Second, the product composition of a country’s exports exhibits ample turnover. In our model, a country’s comparative advantage is constantly shifting due to global creative destruction.
{"title":"A Global View of Creative Destruction","authors":"Chang-tai Hsieh, Peter J. Klenow, Ishan Nath","doi":"10.1086/724833","DOIUrl":"https://doi.org/10.1086/724833","url":null,"abstract":"We formulate a two-country model of trade and creative destruction by domestic and foreign firms. In the model, trade liberalization quickens the pace of creative destruction and the flow of technology across countries. International idea flows are essential for understanding why country technologies do not drift apart and for matching two empirical facts. First, contracting firms are more likely to lose exports than domestic sales, whereas the opposite is true for expanding firms. Second, the product composition of a country’s exports exhibits ample turnover. In our model, a country’s comparative advantage is constantly shifting due to global creative destruction.","PeriodicalId":272883,"journal":{"name":"Journal of Political Economy Macroeconomics","volume":"203 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123041867","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
US firms in service industries increasingly operate in more local markets. Employment, sales, and spending on fixed costs have increased rapidly in these industries. These changes have favored top firms, leading to increasing national concentration. Top firms in service industries have grown by expanding into new local markets, predominantly small and mid-sized US cities. Market concentration at the local level has decreased in all US cities, particularly in cities that were initially small. These facts are consistent with the availability of new fixed-cost-intensive technologies that yield lower marginal costs in service sectors. The entry of top service firms into new local markets has led to substantial unmeasured productivity growth, particularly in small markets.
{"title":"The Industrial Revolution in Services","authors":"Chang-tai Hsieh, E. Rossi-Hansberg","doi":"10.1086/723009","DOIUrl":"https://doi.org/10.1086/723009","url":null,"abstract":"US firms in service industries increasingly operate in more local markets. Employment, sales, and spending on fixed costs have increased rapidly in these industries. These changes have favored top firms, leading to increasing national concentration. Top firms in service industries have grown by expanding into new local markets, predominantly small and mid-sized US cities. Market concentration at the local level has decreased in all US cities, particularly in cities that were initially small. These facts are consistent with the availability of new fixed-cost-intensive technologies that yield lower marginal costs in service sectors. The entry of top service firms into new local markets has led to substantial unmeasured productivity growth, particularly in small markets.","PeriodicalId":272883,"journal":{"name":"Journal of Political Economy Macroeconomics","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128819151","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We document the presence of significant liquidity costs in Spanish sovereign debt auctions: the larger the auctioned amounts, the lower the issuance price relative to secondary-market prices. Motivated by this evidence, we characterize the optimal debt-maturity management problem of a government that issues finite-maturity bonds of various maturities, in the presence of such liquidity costs. This characterization allows us to quantify how the government’s relative impatience, yield-curve riding, and expenditure smoothing shape the optimal debt-maturity distribution. The model can rationalize actual debt-management practices.
{"title":"Debt-Maturity Management with Liquidity Costs","authors":"Saki Bigio, Galo Nũno, J. Passadore","doi":"10.1086/723392","DOIUrl":"https://doi.org/10.1086/723392","url":null,"abstract":"We document the presence of significant liquidity costs in Spanish sovereign debt auctions: the larger the auctioned amounts, the lower the issuance price relative to secondary-market prices. Motivated by this evidence, we characterize the optimal debt-maturity management problem of a government that issues finite-maturity bonds of various maturities, in the presence of such liquidity costs. This characterization allows us to quantify how the government’s relative impatience, yield-curve riding, and expenditure smoothing shape the optimal debt-maturity distribution. The model can rationalize actual debt-management practices.","PeriodicalId":272883,"journal":{"name":"Journal of Political Economy Macroeconomics","volume":"52 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115201328","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper argues that standard dynamic stochastic general equilibrium models grossly overestimate the impact of forward guidance on the macroeconomy, a phenomenon we call the “forward guidance puzzle.” Using data from a panel of Blue Chip survey expectations, we show that accommodative forward guidance had effects on output and inflation expectations that were positive and nontrivial, but still 28 and 8 times smaller, respectively, than implied by standard models. We show that incorporating a perpetual youth structure into the benchmark provides one possible resolution to the puzzle.
{"title":"The Forward Guidance Puzzle","authors":"Marco Del Negro, M. Giannoni, Christina Patterson","doi":"10.1086/724214","DOIUrl":"https://doi.org/10.1086/724214","url":null,"abstract":"This paper argues that standard dynamic stochastic general equilibrium models grossly overestimate the impact of forward guidance on the macroeconomy, a phenomenon we call the “forward guidance puzzle.” Using data from a panel of Blue Chip survey expectations, we show that accommodative forward guidance had effects on output and inflation expectations that were positive and nontrivial, but still 28 and 8 times smaller, respectively, than implied by standard models. We show that incorporating a perpetual youth structure into the benchmark provides one possible resolution to the puzzle.","PeriodicalId":272883,"journal":{"name":"Journal of Political Economy Macroeconomics","volume":"11 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131814755","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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