Narayana R. Kocherlakota

Is There Endogenous Long-Run Growth? Evidence from the United States and the United Kingdom.

The key feature of endogenous growth models is that they imply that perrnanent changes in government policy can have permanent effects on growth rates. In this paper we develop and implement an empirical framework to test this implication. In a regression of growth rates on current and lagged policy variables the sum of the slope coefficients for each policy variable should be nonzero (zero) for endogenous (exogenous) growth models. In our estimation we use time series data spanning up to 100 years for the United States and 160 years for the United Kingdom. We find that the implication for exogenous growth is usually rejected when both a tax variable and a public capital variable are included in the regression; failing to include both variables biases the results in favor of exogenous growth models. Our findings show that it is possible to have endogenous growth even when U.S. and U.K. GDP growth rates appear to be stable over time. We conclude that at the aggregate level, the production function appears to exhibit constant returns to scale in reproducible inputs.

The Variability of Velocity in Cash-in-Advance Models

Monetary models based on cash-in-advance constraints make strong predictions about the stochastic properties of endogeneous variables such as the velocity of circulation of money, the rate of inflation, and real and nominal interest rates. We develop numerical methods to understand these predictions because the models cannot be characterized analytically. We calibrate some cash-in-advance models using driving processes estimated from U. S. time-series data to generate model predictions that are compared to sample statistics. Formulations of the models that generate variability in velocity corresponding to the U.S. data typically fail along other dimensions.

Asset Pricing Implications of Pareto Optimality with Private Information

We compare the empirical performance of a standard incomplete markets asset pricing model with that of a novel model with constrained Pareto‐optimal allocations. We represent the models’ stochastic discount factors in terms of the cross‐sectional distribution of consumption and use these representations to evaluate the models’ empirical implications. The first model is inconsistent with the equity premium in the United States, United Kingdom, and Italy. The second model is consistent with the equity premium and the risk‐free rate in all three countries if the coefficient of relative risk aversion is roughly 5 and the quarterly discount factor is less than 0.5.

Dynamic Games with Hidden Actions and Hidden States

We consider the large class of dynamic games in which each player’s actions are unobservable to the other players, and each player’s actions can influence a state variable that is unobservable to the other players. We develop an algorithm that solves for the subset of sequential equilibria in which equilibrium strategies are Markov in the privately observed state.

Forbearance and Prompt Corrective Action

This paper investigates whether a bank regulator should terminate problem banks promptly or exercise forbearance. We construct a dynamic model economy in which entrepreneurs pledge collateral, borrow from banks, and invest in long-term projects. We assume that collateral value has aggregate risk over time, that in any period entrepreneurs can abscond with the projects but losing the collateral, and that depositors can withdraw deposits. We show that optimal regulation exhibits forbearance if the ex-ante probability of collapse in collateral value is sufficiently low, but exhibits prompt termination of problem banks if this probability is sufficiently high.

Nonseparable Preferences and Optimal Social Security Systems

In this paper, we consider economies in which agents are privately informed about their skills, which evolve stochastically over time. We require agents preferences to be weakly separable between the lifetime paths of consumption and labor. However, we allow for intertemporal nonseparabilities in preferences like habit formation. In this environment, we derive a generalized version of the Inverse Euler Equation and use it to show that intertemporal wedges characterizing optimal allocations of consumption can be strictly negative. We also show that preference nonseparabilities imply that optimal differentiable asset income taxes are necessarily retrospective in nature. We show that under weak conditions, it is possible to implement a socially optimal allocation using a social security system in which taxes on wealth are linear, and taxes/transfers are history-dependent only at retirement. The average asset income tax in this system is zero.

On the robustness of laissez-faire

This paper considers a model economy in which agents are privately informed about their type: their endowments of various goods and their preferences over these goods. While preference orderings over observable choices are allowed to be correlated with an agents private type, we assume that the planner/government is both uncertain about the nature of this joint distribution and unable to choose among multiple equilibria of any given social mechanism. We model the planner/government as having a maxmin objective in the face of this uncertainty. Our main theorem is as follows: Once we allow for this kind of uncertainty and assume no wealth effects in preferences, the uniquely optimal social contract is laissez-faire, in which agents trade in unfettered markets with no government intervention of any kind.

Why Do Different Countries Use Different Currencies

During long periods of history, countries have pegged their currencies to an international standard (such as gold or the U.S. dollar), severely restricting their ability to create money and affect output, prices, or government revenue. Nevertheless, countries generally have maintained their own currencies. The paper presents a model where agents have heterogeneous preferences—that are private information—over goods of different national origin. In this environment, it may be optimal for countries to have different currencies; we also identify conditions where separate national currencies do not expand the set of optimal allocations. Implications for a currency union in Europe are discussed.

Introduction to monetary and macro economics

This introduces the symposium on monetary and macro economics.