On the perils of stabilizing prices when agents are learning
(with K. Molnar and S. Santoro)
Abstract
We show that price level stabilization is not optimal in an economy where agents have incomplete knowledge about the policy implemented and try to learn it. A systematically more accommodative policy than what agents expect generates short term gains without triggering an abrupt loss of confidence, since agents update expectations sluggishly. In the long run agents learn the policy implemented, and the economy converges to a rational expectations equilibrium in which policy does not stabilize prices, economic volatility is high, and agents suffer the corresponding welfare losses. However, these losses are outweighed by short term gains from the learning phase.
Velocity in the long run: money and structural transformation
(with R. Stefanski)
Review of Economic Dynamics, vol. 31, pages 393-410, January 2019.
Abstract
Monetary velocity declines as economies grow. We demonstrate that this is due to the process of structural transformation - the shift of workers from agricultural to non-agricultural production associated with rising income. A calibrated, two-sector model of structural transformation with monetary and non-monetary trade accurately generates the long run monetary velocity of the US between 1869 and 2013 as well as the velocity of a panel of 102 countries between 1980 and 2010. Three lessons arise from our analysis: 1) Developments in agriculture, rather than non-agriculture, are key in driving monetary velocity; 2) Inflationary policies are disproportionately more costly in richer than in poorer countries; and 3) Nominal prices and inflation rates are not ‘always and everywhere a monetary phenomenon’: the composition of output also influences money demand and hence the secular trends of price levels.
Journal of Economic Dynamics and Control, Volume 42, May 2014, Pages 69-85
Abstract
This paper shows how to solve dynamic agency models by extending recursive Lagrangean techniques à la Marcet and Marimon (2011) to problems with hidden actions. The method has many advantages with respect to the promised utilities approach (Abreu et al., 1990): it is a significant improvement in terms of simplicity, tractability and computational speed. Solutions can be easily computed for hidden actions models with several endogenous state variables and several agents, while the promised utilities approach becomes extremely difficult and computationally intensive even with just one state variable or two agents.
Current Version: published, May 2014
First Version: July 2008
Keywords: Repeated moral hazard; Recursive Lagrangean; Computational methods; Collocation
I characterize the optimal risk sharing contract in dynamic economies with moral hazard. In a full information environment, an optimal contractual arrangement prescribes that agents pool their income and divide it according to a constant sharing rule. When moral hazard is present, the sharing rule changes through time in order to reward effort. As a consequence, consumption inequality is very persistent. If agents have access to unmonitorable asset markets, then they can use their assets to smooth consumption and reduce effort. An optimal contract would avoid that, by imposing an additional cost (a wedge) on savings. As a result, trading in the asset market is restricted.
Current Version: October 2011
First Version: July 2009
Keywords: dynamic risk sharing, moral hazard, hidden savings
Unemployment insurance, human capital and financial markets
Abstract
I characterize optimal unemployment insurance in the presence of human capital life-cycle trends and incomplete financial markets. Each worker is subject to unemployment risk, and exerts unobservable effort either to keep her job (if employed) or to find one (if unemployed). Human capital accumulates when she is employed, while depreciates when unemployed. She has access to financial (incomplete) markets, where she can buy or sell risk-free bonds at a constant interest rate to self-insure against unemployment risk. Trading in the financial market is not observable. Numerical examples show that the optimal system has a decreasing but almost flat subsidy, financed by an almost constant payroll tax.
Current Version: April 2016
First Version: July 2009
Keywords: optimal unemployment insurance, hidden savings, human capital, learning-by-doing
