scholarly journals Asset Pricing in OLG Economies With Borrowing Constraints and Idiosyncratic Income Risk

2018 ◽  
Author(s):  
Daniel Harenberg
Keyword(s):  
Asset Pricing ◽  
Borrowing Constraints ◽  
Income Risk

scholarly journals The Power of Forward Guidance Revisited

2016 ◽  
Vol 106 (10) ◽  
pp. 3133-3158 ◽  
Author(s):  
Alisdair McKay ◽  
Emi Nakamura ◽  
Jón Steinsson
Keyword(s):  
Interest Rates ◽  
Borrowing Constraints ◽  
Precautionary Savings ◽  
Complete Markets ◽  
Income Risk ◽  
Forward Guidance ◽  
Highly Sensitive ◽  
Monetary Models ◽  
Central Tool ◽  
Far Future

In recent years, central banks have increasingly turned to forward guidance as a central tool of monetary policy. Standard monetary models imply that far future forward guidance has huge effects on current outcomes, and these effects grow with the horizon of the forward guidance. We present a model in which the power of forward guidance is highly sensitive to the assumption of complete markets. When agents face uninsurable income risk and borrowing constraints, a precautionary savings effect tempers their responses to changes in future interest rates. As a consequence, forward guidance has substantially less power to stimulate the economy. (JEL E21, E40, E50)

scholarly journals EQUILIBRIUM ASSET PRICES AND SAVINGS OF HETEROGENEOUS AGENTS IN THE PRESENCE OF INCOMPLETE MARKETS AND PORTFOLIO CONSTRAINTS

1999 ◽  
Vol 3 (2) ◽  
pp. 243-277 ◽  
Author(s):  
Albert Marcet ◽  
Kenneth J. Singleton
Keyword(s):  
Incomplete Markets ◽  
Asset Prices ◽  
Equity Premium ◽  
Borrowing Constraints ◽  
Income Risk ◽  
Income Uncertainty ◽  
Portfolio Constraints ◽  
State Dependent ◽  
Quantitative Properties ◽  
Premium Puzzle

We study the quantitative properties of a dynamic general equilibrium model. Agents face both idiosyncratic and aggregate income risk, state-dependent borrowing constraints that bind occasionally, and markets that are incomplete. Equilibrium consumption-savings plans and asset prices are computed under various assumptions about income uncertainty. Then, we investigate whether the model replicates two empirical observations: the high correlation between individual consumption and individual income, and the equity premium puzzle. We find that, when the driving processes are calibrated according to the data from wage income in different sectors of the U.S. economy, the results move in the direction of explaining these observations, but we fall short of explaining the observations quantitatively. If the incomes of agents are assumed to be independent of each other, the observations can be explained quantitatively.

scholarly journals On the welfare cost of consumption fluctuations in the presence of memorable goods

2020 ◽  
Vol 11 (4) ◽  
pp. 1177-1214 ◽  
Author(s):  
Rong Hai ◽  
Dirk Krueger ◽  
Andrew Postlewaite
Keyword(s):  
Borrowing Constraints ◽  
Welfare Cost ◽  
Income Shocks ◽  
Income Risk ◽  
Household Level ◽  
Nondurable Goods ◽  
Empirical Estimates ◽  
Percentage Points ◽  
Consumption Fluctuations ◽  
Excess Sensitivity

We propose a new category of consumption goods, memorable goods, that generate a utility flow even after physical consumption. Empirically, memorable goods expenditures exhibit frequent zero monthly purchases and lumpy expenditure spikes. Memorable goods expenditures are 20% the size of nondurable expenditures, but three times as volatile. We then develop a consumption‐savings model with borrowing constraints and income risk that formalizes the notion of memorable goods and distinguishes them from other nondurable goods. We show that consumers optimally choose lumpy consumption of memorable goods. We then measure the welfare cost of consumption fluctuations using our calibrated model and empirically evaluate our calibrated model's predictions for the consumption response to predictable income changes. We find that the welfare cost of household‐level consumption fluctuations induced by income shocks fall from 20.4 to 12.3 percentage points if memorable goods are accounted for, and that empirical estimates of excess sensitivity of consumption may significantly be driven by memorable goods expenditures.

SHOULD THE PRIVATE SECTOR PROVIDE PUBLIC CAPITAL?

2007 ◽  
Vol 11 (3) ◽  
pp. 318-346
Author(s):  
SANTANU CHATTERJEE
Keyword(s):  
Open Economy ◽  
Public Capital ◽  
Borrowing Constraints ◽  
International Capital ◽  
Standard Assumption ◽  
Production Externalities ◽  
International Capital Markets ◽  
Private Provision ◽  
Large Production ◽  
Government Provision

The choice between private and government provision of a productive public good like infrastructure (public capital) is examined in the context of an endogenously growing open economy. The accumulation of public capital need not require government provision, in contrast to the standard assumption in the literature. Even with an efficient government, the relative costs and benefits of government and private provision depend crucially on the economy's underlying structural conditions and borrowing constraints in international capital markets. Countries with limited substitution possibilities and large production externalities may benefit from governments encouraging private provision of public capital through targeted investment subsidies. By contrast, countries with flexible substitution possibilities and relatively smaller externalities may benefit either from governments directly providing public capital or from regulation of private providers. The transitional dynamics also are shown to depend on the underlying elasticity of substitution and the size of the production externality.

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