Corruption and Growth

We study the effects of changes in uncertainty about future fiscal policy on aggregate economic activity. Fiscal deficits and public debt have risen sharply in the wake of the financial crisis. While these developments make fiscal consolidation inevitable, there is considerable uncertainty about the policy mix and timing of such budgetary adjustment. To evaluate the consequences of this increased uncertainty, we first estimate tax and spending processes for the U.S. that allow for time-varying volatility. We then feed these processes into an otherwise standard New Keynesian business cycle model calibrated to the U.S. economy. We find that fiscal volatility shocks have an adverse effect on economic activity that is comparable to the effects of a 25-basis-point innovation in the federal funds rate.

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Fiscal Volatility Shocks and Economic Activity

College Choices: The Economics of Where to Go, When to Go, and How to Pay For It

We study how unexpected changes in uncertainty about fiscal policy affect economic activity. First, we estimate tax and spending processes for the United States with time-varying volatility to uncover evidence of time-varying volatility. Second, we estimate a VAR for the US economy using the time-varying volatility found in the previous step. Third, we feed the tax and spending processes into an otherwise standard New Keynesian model. Both in the VAR and in the model, we find that unexpected changes in fiscal volatility shocks can have a sizable adverse effect on economic activity. An endogenous increase in markups is a key mechanism. (JEL E12, E23, E32, E52, E62)

/pdf/fiscal-volatility-shocks-and-economic-activity-5b3wtufykj.pdf

Fiscal volatility shocks and economic activity

https://www.federalreserve.gov/pubs/feds/2014/201447/201447pap.pdf

OccBin: A toolkit for solving dynamic models with occasionally binding constraints easily

Motivated by the recent experience of the U.S. and the Eurozone, we describe the quantitative properties of a New Keynesian model with a zero lower bound (ZLB) on nominal interest rates, explicitly accounting for the nonlinearities that the bound brings. Besides showing how such a model can be efficiently computed, we find that the behavior of the economy is substantially affected by the presence of the ZLB. In particular, we document 1) the unconditional and conditional probabilities of hitting the ZLB; 2) the unconditional and conditional probabilty distributions of the duration of a spell at the ZLB; 3) the responses of output to government expenditure shocks at the ZLB, 4) the distribution of shocks that send the economy to the ZLB; and 5) the distribution of shocks that keep the economy at the ZLB.

Nonlinear adventures at the zero lower bound

https://www.nber.org/system/files/working_papers/w18058/w18058.pdf

/pdf/nonlinear-adventures-at-the-zero-lower-bound-8rqkpw6hvc.pdf

Nonlinear Adventures at the Zero Lower Bound

Dealing with consumer default: Bankruptcy vs garnishment

How does physical capital accumulation affect the decision to default in developing small open economies? We find that, conditional on a level of foreign indebtedness, more capital improves the sovereign’s ability to meet its obligations, reducing the likelihood of default and the risk premium. This effect, however, is diminishing in the stock of capital because capital also tames the severity of the contraction following default, making autarky more appealing. Access to long-term debt and costly capital adjustment are crucial for matching business cycles. Our quantitative model delivers default episodes that mimic those observed in the data.

/pdf/dynamics-of-investment-debt-and-default-2uu9vwmwqn.pdf

Grey Gordon

Papers

Nonlinear adventures at the zero lower bound

Nonlinear adventures at the zero lower bound

Nonlinear Adventures at the Zero Lower Bound

Dealing with consumer default: Bankruptcy vs garnishment

Dynamics of Investment, Debt, and Default