Showing papers by "Guido Lorenzoni published in 2011"
Posted Content•
TL;DR: In this article, the effects of a credit crunch on consumer spending in a heterogeneous-agent incomplete-market model were studied, where some consumers are forced to deleverage and others increase their precautionary savings.
Abstract: We study the effects of a credit crunch on consumer spending in a heterogeneous-agent incomplete-market model. After an unexpected permanent tightening in consumers' borrowing capacity, some consumers are forced to deleverage and others increase their precautionary savings. This depresses interest rates, especially in the short run, and generates an output drop, even with flexible prices. The output drop is larger with nominal rigidities, if the zero lower bound prevents the interest rate from adjusting downwards. Adding durable goods to the model, households take larger debt positions and the output response may be larger.
152 citations
TL;DR: The main question in this literature is: how does the aggregate economy respond to a shock that raises consumers' and firms' expectations about future productivity growth? as mentioned in this paper discuss how different papers have addressed this question, emphasizing the mechanisms at work under different specifications of preferences and technology, under different assumptions about nominal and real rigidities, and under different assumption about the agents' information structure.
Abstract: In this review, I look at the recent literature on news as a source of economic fluctuations. The main question in this literature is: how does the aggregate economy respond to a shock that raises consumers’ and firms’ expectations about future productivity growth? I discuss how different papers have addressed this question, emphasizing the mechanisms at work under different specifications of preferences and technology, under different assumptions about nominal and real rigidities, and under different assumptions about the agents’ information structure. I also briefly discuss some challenges faced by the empirical literature on the topic.
50 citations
Posted Content•
TL;DR: In this article, the effects of a credit crunch on consumer spending in a heterogeneous-agent incomplete-market model were studied, where some consumers are forced to deleverage and others increase their precautionary savings.
Abstract: We study the effects of a credit crunch on consumer spending in a heterogeneous-agent incomplete-market model. After an unexpected permanent tightening in consumers' borrowing capacity, some consumers are forced to deleverage and others increase their precautionary savings. This depresses interest rates, especially in the short run, and generates an output drop, even with flexible prices. The output drop is larger with nominal rigidities, if the zero lower bound prevents the interest rate from adjusting downwards. Adding durable goods to the model, households take larger debt positions and the output response may be larger.
37 citations
Posted Content•
TL;DR: In this paper, the authors develop a simple theory of capital controls as dynamic terms-of-trade manipulation and show that capital controls are not guided by the absolute desire to alter the intertemporal price of the goods produced in any given period, but rather by the relative strength of this desire between two consecutive periods.
Abstract: This paper develops a simple theory of capital controls as dynamic terms-of-trade manipulation. We study an infinite horizon endowment economy with two countries. One country chooses taxes on international capital flows in order to maximize the welfare of its representative agent, while the other country is passive. We show that capital controls are not guided by the absolute desire to alter the intertemporal price of the goods produced in any given period, but rather by the relative strength of this desire between two consecutive periods. Specifically, it is optimal for the strategic country to tax capital inflows (or subsidize capital outflows) if it grows faster than the rest of the world and to tax capital outflows (or subsidize capital inflows) if it grows more slowly. In the long-run, if relative endowments converge to a steady state, taxes on international capital flows converge to zero. Although our theory emphasizes interest rate manipulation, the country's net financial position per se is irrelevant.
26 citations
Posted Content•
TL;DR: In this article, the authors develop a simple theory of capital controls as dynamic terms-of-trade manipulation and show that capital controls are not guided by the absolute desire to alter the intertemporal price of the goods produced in any given period, but rather by the relative strength of this desire between two consecutive periods.
Abstract: This paper develops a simple theory of capital controls as dynamic terms-of-trade manipulation. We study an infinite horizon endowment economy with two countries. One country chooses taxes on international capital flows in order to maximize the welfare of its representative agent, while the other country is passive. We show that capital controls are not guided by the absolute desire to alter the intertemporal price of the goods produced in any given period, but rather by the relative strength of this desire between two consecutive periods. Specifically, it is optimal for the strategic country to tax capital inflows (or subsidize capital outflows) if it grows faster than the rest of the world and to tax capital outflows (or subsidize capital inflows) if it grows more slowly. In the long-run, if relative endowments converge to a steady state, taxes on international capital flows converge to zero. Although our theory emphasizes interest rate manipulation, the country's net financial position per se is irrelevant.
10 citations