Commodity Price Volatility with Endogenous Natural Resources, 2018 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.
This paper evaluates how anticipated purchases of housing affect households’ consumption of non-durable goods. I build a non-linear, heterogeneous agent model in which households save in liquid assets and illiquid housing, where the latter can be used as collateral for borrowing. I show that it is able to replicate the empirical distributions of income and wealth within the US economy. In the model there is substantial heterogeneity in households’ marginal propensities to consume. Households with a high probability of buying housing stock lower their consumption of non-durable goods in anticipation of being credit constrained after their purchase. This results in households with low, even negative, marginal propensities to consume. I verify the model’s predictions using micro-data from the PSID to show that (i) consumption falls in anticipation of, and after, changes in the stock of housing and (ii) households who are planning on purchasing housing 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 lead to decreases in aggregate consumption.
A QC Approximation of Optimal Policy with James Hansen
We derive a second-order analytic approximation of optimal policy in a nonlinear economy with forward-looking constraints. Using a cubic expansion of household welfare and a quadratic expansion of the economyís equilibrium conditions, this Quadratic Cubic (QC) approximation relaxes the restriction of a symmetric welfare objective, allows uncertainty to a§ect optimal policy design, and implies that the coefficients in optimal policy rules are state-contingent. These results contrast the usual First-order Linear Quadratic (LQ) approximation where the welfare objective is symmetric, certainty equivalence holds and the coefficients in optimal policy rules are constant. We compare the two approximations of optimal policy in a New Keynesian model with price and wage rigidity.
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.