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on Dynamic General Equilibrium |
| By: | Fabio Braggion; Lawrence J. Christiano; Jorge Roldos |
| Abstract: | In the wake of the 1997-98 financial crises, interest rates in Asia were raised immediately, and then reduced sharply. We describe an environment in which this is the optimal monetary policy. The optimality of the immediate rise in the interest rate is an example of the theory of the second best: although high interest rates introduce an inefficiency wedge into the labor market, they are nevertheless welfare improving because they mitigate distortions due to binding collateral constraints. Over time, as various real frictions wear off and the collateral constraint is less binding, the familiar Friedman forces dominate, and interest rates are optimally set as low as possible. |
| JEL: | E4 E44 E5 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13254&r=dge |
| By: | McCarthy, David; Miles, David K |
| Abstract: | We model the asset allocation decision of a defined benefit pension fund using a stochastic dynamic programming approach. Our model recognizes the fact that asset allocation decisions are made by trustees who are mandated to act in the best interests of beneficiaries - not by sponsoring employers - and that trustees face payoffs that are linked in an indirect way to the value of the underlying assets. This is because of the presence of pension insurance - which may cover a portion of deficits in the event of a sponsor default - and a sponsoring employer who may make good any shortfall in assets, and who may reclaim some pension surplus. Our model includes an allowance for uncertainty both of the future value of assets (because of uncertain investment returns) and liabilities (because of uncertainty in future longevity and in future interest rates). We find that we are able to substantially replicate observed DB pension asset allocations in the UK and conclude that institutional details - in particular asymmetries in payoffs to pension trustees - are crucial in understanding pension asset allocation. |
| Keywords: | longevity; pensions; portfolio allocation |
| JEL: | G10 G11 G23 G32 J11 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6394&r=dge |
| By: | Craig Burnside; Martin S. Eichenbaum; Sergio Rebelo |
| Abstract: | High-interest-rate currencies tend to appreciate relative to low-interest-rate currencies. We argue that adverse-selection problems between participants in foreign exchange markets can account for this 'forward premium puzzle.' The key feature of our model is that the adverse selection problem facing market makers is worse when, based on public information, a currency is expected to appreciate. |
| JEL: | E30 F31 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13278&r=dge |
| By: | GuzmÃÂÃÂÃÂán, Ricardo AndrÃÂÃÂÃÂés |
| Abstract: | The shift from hunting and gathering to agriculture, some 10,000 years ago, triggered the first demographic explosion in history. Along with population, working time increased, while food consumption remained at the subsistence level. For that reason, most anthropologists regard the adoption of agriculture as an economical puzzle. I show, using a neoclassical economic model, that there is nothing puzzling about the adoption of agriculture. Agriculture brings four technological changes: an increase in total factor productivity, a stabilization of total factor productivity, less interference of children on production, and the possibility of food storage. In my model, each of those changes induces free, rational and self-interested hunter-gatherers to adopt agriculture. As a result, working time increases while consumption remains at the subsistence level, and population begins to grow until diminishing returns to labor bring it to a halt. Welfare, which depends on consumption, leisure, and fertility, rises at first; but after a few generations it falls below its initial level. Still, the adoption of agriculture is irreversible. The latter generations choose to remain farmers because, at their current levels of population, reverting to hunting and gathering would reduce their welfare. |
| Keywords: | Paleoeconomics; economic anthropology; Neolithic Revolution; hunter-gatherers; agriculture; original affluent society. |
| JEL: | J22 J13 A12 O13 A14 D1 Z1 D71 I31 D6 |
| Date: | 2007–01–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4148&r=dge |