Last updated 03/18 2018. The Household Fallacy, joint with Pawel Zabczyk. We refer to the idea that government must ‘tighten its belt’ as a necessary policy response to higher indebtedness as the household fallacy. We provide a reason to be skeptical of this claim that holds even if the economy always operates at full employment and all markets clear. Our argument rests on the fact that, in an overlapping-generations (OLG) model, changes in government debt cause changes in the real interest rate that redistribute the burden of repayment across generations. We do not rely on the assumption that the equilibrium is dynamically inefficient, and our argument holds in a version of the OLG model where the real interest rate is always positive. Published as NBER WP 24393, CEPR DP 12770 and NIESR DP 487.
Last updated 01/29/2018. Animal Spirits in a Monetary Economy, Joint with Konstantin Platonov of UCLA. We integrate Keynesian economics with general equilibrium theory in a new way. We develop a simple graphical apparatus, the IS-LM-NAC framework, that can be used by policy makers to understand how policy affects the economy. A new element, the NAC curve, connects the interest rate to current and expected future values of the stock market and it explains how `animal spirits' influence economic activity. Our framework provides a rich new approach to policy analysis that explains the short-run and long-run effects of policy, without the assumption that prices are prevented from moving by artificial barriers to price adjustment. NBER WP 22136.
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Some Older Unpublished Papers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 04-13-2018