Last updated on 05/25/2019 The Indeterminacy Agenda in Macroeconomics. This article surveys a subset of literature in macroeconomics which embraces the existence of multiple equilibria. This indeterminacy agenda in macroeconomics uses multiple-equilibrium models to integrate economics with psychology. Economists have long argued that business cycles are driven by shocks to the productivity of labour and capital. According to the indeterminacy agenda, the self-fulfilling beliefs of financial market participants are additional fundamental factors that drive periods of prosperity and depression. The indeterminacy agenda provides a microeconomic foundation to Keynes’ General Theory that does not rely on the assumption that prices and wages are costly to change. The paper is published as CEPR Discussion paper 13745.
Last updated 09/03/2019. A Requiem for the The Fiscal Theory of the Price Level, Joint with Pawel Zabczyk, of the IMF. The Fiscal Theory of the Price Level (FTPL) is the claim that, in a popular class of theoretical models, the price level is sometimes determined by fiscal policy rather than monetary policy. The models where this claim has been established assume that all decisions are made by an infinitely-lived representative agent. We present an alternative, arguably more realistic model, populated by sixty-two generations of people. We calibrate our model to an income profile from U.S. data and we show that the FTPL breaks down. In our model, the price level and the real interest rate are indeterminate, even when monetary and fiscal policy are both active. Our findings challenge established views about what constitutes a good combination of fiscal and monetary policies. The paper is also published as CEPR Discussion Paper 13432 and NBER Working paper 25445.
Last updated 04/13/2018. A Sunspot Based Theory of Unconventional Monetary Policy, Joint with Pawel Zabczyk, formerly of the Bank of England and now at the IMF. This paper is about the effectiveness of qualitative easing, a form of unconventional monetary policy that changes the risk composition of the central bank balance sheet with the goal of stabilizing economic activity. It evolved from and earlier single-authored paper "Qualitative Easing: How it Works and Why it Matters" and was written after extensive discussions with Pawel Zabczyk during, and following, Farmer’s visit, as Senior Houblon-Norman Fellow to the Bank of England in 2013. An earlier version appeared as NBER Working Paper 22135, and CPER Discussion Paper 11196.
Some Older Unpublished Papers
Last updated 05/09/2016. The Great Depression . This is a working paper version of material from mybook, Expectations Employment and Prices. It uses a search model of the labor market to provide a micro-founded interpretation of Keynes' explanation of the Great Depression.
Last updated 09/21/2006. A method to generate structural impulse-responses for measuring the effects of shocks in structural macro models. Joint with Andreas Beyer, ECB working paper #586, February 2006. We develop a technique for analyzing the response dynamics of economic variables to structural shocks in linear rational expectations models.
Last updated 09/05/2006. Shooting the Auctioneer. Joint with Andrew Hollenhorst. This paper uses a relatively standard DSGE model with sticky wages to account for labor market facts. Using a second-order approximation to the policy function we simulate moments of an artificial economy with and without sticky wages. We compute the welfare costs of the sticky wage equilibrium and find them to be small.
On the Indeterminacy of New-Keynesian Economics. Joint with Andreas Beyer, ECB working paper #323. This is an extension of On the Indeterminacy of Determinacy and Indeterminacy American Economic Review, 97(1) 2007, pp. 524-529. It generalizes the argument to a class of three equation linear models. A version of the working paper is published in Macroeconomics Dynamics 12, S1, 2008 pp 60-74 under the title What we Don't Know about The Monetary Transmission Mechanism and why we Don't Know it”.
Business Cycles with Heterogeneous Agents. May 2002. This is part of a project that studies the implications of long-lived stochastic overlapping generations models. The main contribution of the paper is a method for solving these models in closed form. I haven't revised the paper in a while although it is still on my agenda.
Fiscal Policy, Equity Premia and Heterogeneous Agents, May 2002. This paper explores the equity premium puzzle in a long-lived agent model and it argues that market incompleteness can be captured by rapid change in the traders who participate in the equity markets.
Last Updated 12-01-2018