American Economic Association Nashville, TN 1945-7707 1945-7715 American Economic Journal: Macroeconomics http://www.aeaweb.org/aej-macro/ 4 1 January 2012 http://www.aeaweb.org/issue.php?journal=MAC&volume=4&issue=1 Journal Article Front Matter i vi http://www.aeaweb.org/articles.php?doi=10.1257/mac.4.1.i 10.1257/mac.4.1.i American Economic Association Nashville, TN 1945-7707 1945-7715 American Economic Journal: Macroeconomics http://www.aeaweb.org/aej-macro/ 4 1 January 2012 http://www.aeaweb.org/issue.php?journal=MAC&volume=4&issue=1 Articles Contagious Adverse Selection StephenMorrisPrinceton U Hyun SongShinPrinceton U 1 21 We illustrate the corrosive effect of even small amounts of adverse selection in an asset market and show how it can lead to the total breakdown of trade. The problem is the failure of "market confidence," defined as approximate common knowledge of an upper bound on expected losses. Small probability events can unravel market confidence. We discuss the role of contagious adverse selection and the problem of "toxic assets" in the recent financial crisis. (JEL D82, G01, G12, G14) http://www.aeaweb.org/articles.php?doi=10.1257/mac.4.1.1 10.1257/mac.4.1.1 American Economic Association Nashville, TN 1945-7707 1945-7715 American Economic Journal: Macroeconomics http://www.aeaweb.org/aej-macro/ 4 1 January 2012 http://www.aeaweb.org/issue.php?journal=MAC&volume=4&issue=1 Articles Effects of Fiscal Stimulus in Structural Models GunterCoenenEuropean Central Bank Christopher J.ErcegFederal Reserve Board CharlesFreedmanCarleton University DavideFurceriUniversity of Palermo MichaelKumhofInternational Monetary Fund Rene LalondeBank of Canada DouglasLaxtonInternational Monetary Fund JesperLindeFederal Reserve Board AnnabelleMourouganeOECD DirkMuirInternational Monetary Fund SusannaMursulaInternational Monetary Fund Carlos de ResendeBank of Canada JohnRobertsFederal Reserve Board Werner RoegerDG ECFIN, European Commission StephenSnuddenInternational Monetary Fund MathiasTrabandtEuropean Central Bank Janin't VeldDG ECFIN, European Commission 22 68 The paper subjects seven structural DSGE models, all used heavily by policymaking institutions, to discretionary fiscal stimulus shocks using seven different fiscal instruments, and compares the results to those of two prominent academic DSGE models. There is considerable agreement across models on both the absolute and relative sizes of different types of fiscal multipliers. The size of many multipliers is large, particularly for spending and targeted transfers. Fiscal policy is most effective if it has moderate persistence and if monetary policy is accommodative. Permanently higher spending or deficits imply significantly lower initial multipliers. (JEL E12, E13, E52, E62) http://www.aeaweb.org/articles.php?doi=10.1257/mac.4.1.22 10.1257/mac.4.1.22 http://www.aeaweb.org/aej/mac/data/2010-0090_data.zip http://www.aeaweb.org/aej/mac/app/2010-0090_app.pdf American Economic Association Nashville, TN 1945-7707 1945-7715 American Economic Journal: Macroeconomics http://www.aeaweb.org/aej-macro/ 4 1 January 2012 http://www.aeaweb.org/issue.php?journal=MAC&volume=4&issue=1 Articles How Does the US Government Finance Fiscal Shocks? AntjeBerndtCarnegie Mellon U HannoLustigUCLA SevinYeltekinCarnegie Mellon U 69 104 We develop a method for identifying and quantifying the fiscal channels that help finance government spending shocks. We define fiscal shocks as surprises in defense spending and show that they are more precisely identified when defense stock data are used in addition to aggregate macroeconomic data. Our results show that in the postwar period, about 9 percent of the US government's unanticipated spending needs were financed by a reduction in the market value of debt and more than 70 percent by an increase in primary surpluses. Additionally, we find that long-term debt is more effective at absorbing fiscal risk than short-term debt. (JEL E62, H56, and H63) http://www.aeaweb.org/articles.php?doi=10.1257/mac.4.1.69 10.1257/mac.4.1.69 http://www.aeaweb.org/aej/mac/data/2010-0136_data.zip http://www.aeaweb.org/aej/mac/app/2010-0136_app.pdf American Economic Association Nashville, TN 1945-7707 1945-7715 American Economic Journal: Macroeconomics http://www.aeaweb.org/aej-macro/ 4 1 January 2012 http://www.aeaweb.org/issue.php?journal=MAC&volume=4&issue=1 Articles The Bond Premium in a DSGE Model with Long-Run Real and Nominal Risks Glenn D.RudebuschFederal Reserve Bank of San Francisco Eric T.SwansonFederal Reserve Bank of San Francisco 105 43 The term premium in standard macroeconomic DSGE models is far too small and stable relative to the data--an example of the "bond premium puzzle." However, in endowment economy models, researchers have generated reasonable term premiums by assuming investors have recursive Epstein-Zin preferences and face long-run economic risks. We show that introducing Epstein-Zin preferences into a canonical DSGE model can also produce a large and variable term premium without compromising the model's ability to fit key macroeconomic variables. Long-run nominal risks further improve the model's empirical fit, but do not substantially reduce the need for high risk aversion. (JEL E13, E31, E43, E44) http://www.aeaweb.org/articles.php?doi=10.1257/mac.4.1.105 10.1257/mac.4.1.105 http://www.aeaweb.org/aej/mac/data/2009-0171_data.zip American Economic Association Nashville, TN 1945-7707 1945-7715 American Economic Journal: Macroeconomics http://www.aeaweb.org/aej-macro/ 4 1 January 2012 http://www.aeaweb.org/issue.php?journal=MAC&volume=4&issue=1 Articles International Portfolio Allocation under Model Uncertainty PierpaoloBenignoLUISS "Guido Carli", Rome and EIEF SalvatoreNisticoU Rome "La Sapienza" and LUISS "Guido Carli", Rome 144 89 This paper revisits an old argument, hedging real exchange rate risk, as an explanation of the international home bias in equity. In a dynamic model, the relevant risk to be hedged is the long-run risk as opposed to the short-run risk. Domestic equity is indeed a good hedge with respect to long-run real-exchange-rate risk. Two new frameworks are able to explain a large share of the observed US home bias: a model with Hansen-Sargent preferences in which agents fear model misspecification and a model with Epstein-Zin preferences. These two models are also immune to the risk-free rate puzzle. (JEL C58, F31, G11, G15) http://www.aeaweb.org/articles.php?doi=10.1257/mac.4.1.144 10.1257/mac.4.1.144 http://www.aeaweb.org/aej/mac/data/2010-0007_data.zip American Economic Association Nashville, TN 1945-7707 1945-7715 American Economic Journal: Macroeconomics http://www.aeaweb.org/aej-macro/ 4 1 January 2012 http://www.aeaweb.org/issue.php?journal=MAC&volume=4&issue=1 Symposia Tranching, CDS, and Asset Prices: How Financial Innovation Can Cause Bubbles and Crashes AnaFostelGeorge Washington U JohnGeanakoplosYale U and Santa Fe Institute 190 225 We show how the timing of financial innovation might have contributed to the mortgage bubble and then to the crash of 2007-2009. We show why tranching and leverage first raised asset prices and why CDS lowered them afterward. This may seem puzzling, since it implies that creating a derivative tranche in the securitization whose payoffs are identical to the CDS will raise the underlying asset price, while the CDS outside the securitization lowers it. The resolution of the puzzle is that the CDS lowers the value of the underlying asset since it is equivalent to tranching cash. (JEL E32, E44, G01, G12, G13, G21). http://www.aeaweb.org/articles.php?doi=10.1257/mac.4.1.190 10.1257/mac.4.1.190 http://www.aeaweb.org/aej/mac/data/2011-0037_data.zip American Economic Association Nashville, TN 1945-7707 1945-7715 American Economic Journal: Macroeconomics http://www.aeaweb.org/aej-macro/ 4 1 January 2012 http://www.aeaweb.org/issue.php?journal=MAC&volume=4&issue=1 Symposia Stories of the Twentieth Century for the Twenty-First Pierre-OlivierGourinchasU CA, Berkeley MauriceObstfeldU CA, Berkeley 226 65 A key precursor of twentieth-century financial crises in emerging and advanced economies alike was the rapid buildup of leverage. Those emerging economies that avoided leverage booms during the 2000s also were most likely to avoid the worst effects of the twenty-first century's first global crisis. A discrete-choice panel analysis using 1973-2010 data suggests that domestic credit expansion and real currency appreciation have been the most robust and significant predictors of financial crises, regardless of whether a country is emerging or advanced. For emerging economies, however, higher foreign exchange reserves predict a sharply reduced probability of a subsequent crisis. (JEL E44, F34, F44, G01, G21, O19) http://www.aeaweb.org/articles.php?doi=10.1257/mac.4.1.226 10.1257/mac.4.1.226 http://www.aeaweb.org/aej/mac/data/2011-0020_data.zip http://www.aeaweb.org/aej/mac/app/2011-0020_app.pdf American Economic Association Nashville, TN 1945-7707 1945-7715 American Economic Journal: Macroeconomics http://www.aeaweb.org/aej-macro/ 4 1 January 2012 http://www.aeaweb.org/issue.php?journal=MAC&volume=4&issue=1 Symposia The Optimal Conduct of Monetary Policy with Interest on Reserves Anil K.KashyapU Chicago Jeremy C.SteinHarvard U 266 82 In a world with interest on reserves, the central bank has two distinct tools that it can use to raise the short-term policy rate: it can either increase the interest it pays on reserve balances, or it can reduce the quantity of reserves in the system. We argue that by using both of these tools together, and by broadening the scope of reserve requirements, the central bank can simultaneously pursue two objectives: it can manage the inflation-output tradeoff using a Taylor-type rule, and it can regulate the externalities created by socially excessive shortterm debt issuance on the part of financial intermediaries. (JEL E43, E52, E58, G21) http://www.aeaweb.org/articles.php?doi=10.1257/mac.4.1.266 10.1257/mac.4.1.266 American Economic Association Nashville, TN 1945-7707 1945-7715 American Economic Journal: Macroeconomics http://www.aeaweb.org/aej-macro/ 4 1 January 2012 http://www.aeaweb.org/issue.php?journal=MAC&volume=4&issue=1 Corrigendum Corrigendum: Emerging Market Currency Excess Returns StephenGilmoreFuture Fund, Melbourne FumioHayashiHitotsubashi U 283 283 http://www.aeaweb.org/articles.php?doi=10.1257/mac.4.1.283 10.1257/mac.4.1.283