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on Dynamic General Equilibrium |
| By: | Mario J. Crucini (Department of Econics, Vanderbilt University); James Kahn (Research Department, Federal Reserve Bank of New York) |
| Abstract: | In this paper we revisit the issues addressed in Crucini and Kahn (1996) in the light of recent research on the Great Depression. In that paper we had argued that particular features of the Hawley-Smoot tariffs could have provided them with a stronger impact than conventional wisdom had held, and we described the magnitudes in a calibrated general equilibrium model. We suggested that while the tariffs could directly account for only a small part of the Great Depression, they nonetheless had a significant, recession-sized impact, "small" only in the context of the Great Depression. Here we reformulate our arguments in the context of the business cycle accounting framework of Chari, Kehoe, and McGrattan (2002) and show that tariff increases in our model correspond primarily to an increased efficiency wedge in a prototype one-sector model. Moreover, the efficiency wedge implied by tariffs correlates well with the productivity wedge measured by CKM. Our model fails to produce a labor wedge of any consquence, which combined with large empirical estimates of the labor wedge in the U.S. by Mulligan (2002a) is the basis of his critique of the role we attribute to tariffs. While we agree that a complete understanding of the Great Depression will require an accounting for the labor wedge, its existence does not in any way contradict our case for a modest e¢ciency effect of the tariff war. |
| Keywords: | Business cycles, great depression, Smoot-Hawley tariff, |
| JEL: | F4 F13 |
| Date: | 2003–08 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:0316&r=dge |
| By: | Raj Chetty; Adam Szeidl |
| Abstract: | This paper studies consumption and portfolio choice in a model where agents have neoclassical preferences over two consumption goods, one of which involves a commitment in that its consumption can only be adjusted infrequently. Aggregating over a population of such agents implies dynamics identical to those of a representative consumer economy with habit formation utility. In particular, aggregate consumption is a slow-moving average of past consumption levels, and risk aversion is amplified because the marginal utility of wealth is determined by excess consumption over the prior commitment level. We test the model's prediction that commitments amplify risk aversion by using home tenure (years spent in current house) as a proxy for commitment: Recent home purchasers are unlikely to move in the near future, and are therefore more constrained by their housing commitment. We use a set of control groups to establish that the timing of marital shocks such as marriage and divorce can be used to create exogenous variation in home tenure conditional on age and wealth. Using these marital shocks as instruments, we find that the average investor reallocates $1,500 from safe assets to stocks per year in a house. Hence, recent home purchasers have highly amplified risk aversion, suggesting that real commitments are a quantitatively powerful source of habit-like behavior. |
| JEL: | D8 E21 G11 G12 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:10970&r=dge |
| By: | Ruy Lama; Juan Pablo Medina |
| Abstract: | This paper studies optimal monetary policy in a two-sector small open economy model under segmented asset markets and sticky prices. We solve the Ramsey problem under full commitment, and characterize the optimal monetary policy in a version of the model calibrated to the Chilean economy. The contributions of the paper are twofold. First, under the optimal policy the volatility of nontradable inflation is near zero. Second, stabilizing non-tradable inflation is optimal regardless of the financial structure of the small open economy. Even for a moderate degree of price stickiness, implementing a monetary policy that mitigates asset market segmentation is highly distortionary. This last result suggests that policymakers should resort to other instruments in order to correct financial imperfections. |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:286&r=dge |
| By: | N. Gergory Mankiw; Matthew Weinzierl |
| Abstract: | This paper uses the neoclassical growth model to examine the extent to which a tax cut pays for itself through higher economic growth. The model yields simple expressions for the steady-state feedback effect of a tax cut. The feedback is surprisingly large: for standard parameter values, half of a capital tax cut is self-financing. The paper considers various generalizations of the basic model, including elastic labor supply departures from infinite horizons, and non-neoclassical production settings. It also examines how the steady-state results are modified when one considers the transition path to the steady state. |
| JEL: | E1 H3 H6 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11000&r=dge |