Commodity Price Volatility with Endogenous Natural Resources, forthcoming European Economic Review, with Hansen, J.
Natural resource reserves are exogenous in models of small commodity exporters. We consider richer supply dynamics and model exploration and depletion. These are important for capturing the effects of commodity price shocks including a commodity currency and crowding-out of non-commodity activity. We also consider how welfare and the ranking of optimal monetary and taxation policies change. Without exploration or depletion, optimal monetary and taxation policies can efficiently stabilise the economy in response to commodity price shocks. However, when exploration and depletion are accounted for, changing interest rates to offset price shocks becomes inefficient. Using taxation policy, specifically an ad valorem royalty, remains efficient.
Anticipated Changes in Household Debt and Consumption – Job Market Paper
This paper evaluates how anticipated changes in household debt associated with the leveraged purchase of housing affects consumption. I build a heterogeneous agent model, calibrated to match the distribution of income and wealth within the US economy, in which households are subject to uninsurable income shocks and can save in both liquid and illiquid assets. I show that the marginal propensity to consume of households who are saving for a house deposit is negative as they decrease their consumption in anticipation of being credit constrained after they purchase a house. I verify the model’s predictions using micro-data from the PSID to show that (i) consumption falls in anticipation of and after increases in household debt and that (ii) households who are planning on purchasing housing stock have negative marginal propensities to consume. Finally, I use this model to examine the general equilibrium effects of tax credits for first home buyers and show that they can lead to a decrease in aggregate consumption.
We estimate optimal monetary policy in a non-linear New Keynesian model in which nominal wages are downwardly rigid. In our economy there is a welfare trade-off over the optimal rate of inflation. A higher rate of inflation gives workers more flexibility when setting real wages, at the cost of greater price dispersion in the goods market. After outlining a numerical algorithm to solve the model we use micro-data on the distribution of workers’ change in wages to calibrate the nominal wage rigidity. We find that the optimal inflation rate is positive, around 5.4 per cent, and that this optimal rate is inversely related to the assumed rate of productivity growth. Furthermore, we find that downward nominal wage rigidities bend the Phillips curve constraining the inflation rate from falling in times of low demand. This indicates that an inflation rate that is only moderately below its target can mask large falls in the output gap. Finally, we find that the optimal monetary policy rule is given by strictly targeting either wage inflation or the output gap.
Double Down: How Downwardly Rigid Wages Affects the Economy at the Zero Lower Bound
We build a non-linear New Keyesian model to investigate the interaction between two asymmetric rigidities: the lower bound on nominal interest rates and the inability for nominal wages to decrease. We show that downwardly rigid wages can either amplify or mitigate the welfare loss caused by the zero lower bound depending on the weight the central bank places on stabilisation inflation over the outgap. Finally, we show that the optimal rate of inflation is increased by the presence of both nominal frictions, when modelled either separately or in tandem, and is 2.5 per cent in the baseline calibration.