Macro-economic Implications of Incomplete Markets
Saturday, Jan. 6, 2018 8:00 AM - 10:00 AM
- Chair: Ivan Werning, Massachusetts Institute of Technology
AbstractThis paper studies the effects of shocks to the degree of market completeness. We present a dynamic stochastic economy where agents can trade in complete markets in normal times, but where financial markets can randomly become incomplete. When this happens, agents cannot trade in state contingent assets and cannot re-hedge their risks. Our model formalizes a new type of purely financial shock, which we call an incompleteness shock. Even if we allow our agents to hedge the incompleteness shock itself, we find that these shocks are sufficient to trigger a recession with misallocation of capital, lower aggregate output and consumption.
Unconventional Monetary Policy in HANK
AbstractWe analyze the effectiveness of forward guidance in HANK. We show that, in contrast to representative-agent economies, the announcement of a future interest rate cut in our baseline economy has a smaller impact on current consumption than an equal-size contemporaneous cut. We explain the role of hand-to-mouth households and fiscal policy in accounting for this finding. In the second part, we study the transmission of a conventional monetary policy shock in an economy where household liquidity is provided by the private sector rather than by the government. Like in our baseline economy, it is also true that indirect general equilibrium effects dominate the direct intertemporal substitution channel for stimulating consumption: lowering the nominal interest rate reduces the cost of funds for firms and induces an investment boom that, in turn, triggers a rise in aggregate labor demand.
Price Theory for Incomplete Markets
AbstractDemand theory provides restrictions and predictions for behavior, stemming from rational consumers operating within classical Walrasian Price Theory settings. Well-known results such as Slutksy symmetry, homogeneity, budget exhaustion have been usefully invoked to derive results, limit free parameters, or impose or test the restrictions implied by rationality. However, outside classical settings, these results do not necessarily hold. A popular class of models features Walrasian static markets, linked over time by imperfectly and incomplete asset markets, including borrowing constraints and lack of insurance. The goal of this paper is to flesh out the behavioral predictions and restrictions in such settings.
Stijn Van Nieuwerburgh,
New York University
University of Pennsylvania
Federal Reserve Board
- E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy
- E4 - Money and Interest Rates