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This paper reviews privacy-enhancing technologies (PETs) and explores their benefits when used to make traditional payment processes more private. PETs can decrease privacy risk by reducing the amount of sensitive information accessible to payment-processing personnel and systems. This paper proposes a framework for quantifying the risk-reduction benefits of PETs. This method can be used to calculate the amount of privacy-risk exposure that may be created by a set of payment activities, estimate the amount by which PETs can decrease that exposure, and compare that quantified benefit against possible PET drawbacks. Assessing these drawbacks is outside the scope of this paper. [ABSTRACT FROM AUTHOR]

The U.S. experienced an extraordinary postpandemic surge in unauthorized immigration. This paper combines administrative data on border encounters and immigration court records with household survey data to document two new facts about these immigrants: They tend to be hand-to-mouth consumers and low-skilled workers that complement the existing workforce. We build these features into a model with capital, household heterogeneity, and population growth to study the inflationary effects of this episode. Contrary to the popular view, we find little effect on inflation, as the increase in supply was largely offset by an increase in demand. [ABSTRACT FROM AUTHOR]

This paper introduces a new Stata command, xtpb, that implements the Chudik, Pesaran, and Smith (2023a) Pooled Bewley (PB) estimator of long-run relationships in dynamic heterogeneous panel-data models. The PB estimator is based on the Bewley (1979) transform of the autoregressive-distributed lag model and it is applicable under a similar setting as the widely used pooled mean group (PMG) estimator of Pesaran, Shin, and Smith (1999). Two bias-correction methods and a bootstrapping algorithm for more accurate small-sample inference robust to arbitrary cross-sectional dependence of errors are also implemented. An empirical illustration reproduces the PB estimates of the consumption function as in Chudik, Pesaran, and Smith (2023a). [ABSTRACT FROM AUTHOR]

In this paper, we present a model of repeated first-price private value auctions in which the bidders have access to a cheap talk communication mechanism. In this framework, messages allow bidders to transmit their preference rankings over the goods to be auctioned, similar to Pesendorfer (2000). We show that collusion through this static mechanism not only dominates the static bid rotation mechanism presented by McAfee and McMillan (1992), but it is also not strictly dominated by the dynamic bid rotation mechanism presented by Aoyagi (2003). However, we show that asymptotic efficiency of collusion through increasing the number of ordered goods, presented by Pesendorfer (2000), demands patience rates to asymptotically approach one, making collusion increasingly more difficult to sustain. Finally, we study mechanisms through which the auctioneer may try to break bidders' collusion. [ABSTRACT FROM AUTHOR]

This paper develops a semi-structural model to jointly estimate "stars" - long-run levels of output (its growth rate), the unemployment rate, the real interest rate, productivity growth, price inflation, and wage inflation. It features links between survey expectations and stars, time-variation in macroeconomic relationships, and stochastic volatility. Survey data help discipline stars' estimates and have been crucial in estimating a high-dimensional model since the pandemic. The model has desirable real-time properties, competitive forecasting performance, and superior fit to the data compared to variants without the empirical features mentioned above. The by-products are estimates of various objects of great interest to the broader profession. [ABSTRACT FROM AUTHOR]

This paper tests the existence of capital-skill complementarity in the manufacturing sector using quasi-experimental increases in the relative price of low-skill labor induced by the US shale boom. I find that in response to the shale boom, local manufacturing firms decreased their relative usage of low-skill labor while increasing their capital expenditures. These endogenous changes in the input mix allowed manufacturers to maintain the value added despite the increase in the price of low-skill labor, avoiding the potential short-term crowding-out effects of the natural resource boom. Combined with the findings of previous work, my results indicate that the degree of skill substitutable with capital in manufacturing has increased over the last several decades. [ABSTRACT FROM AUTHOR]

Several recent studies have expressed concern that the Haar prior typically employed in estimating sign-identified VAR models is driving the prior about the structural impulse responses and hence their posterior. In this paper, we provide evidence that the quantitative importance of the Haar prior for posterior inference has been overstated. How sensitive posterior inference is to the Haar prior depends on the width of the identified set of a given impulse response. We demonstrate that this width depends not only on how much the identified set is narrowed by the identifying restrictions imposed on the model, but also depends on the data through the reduced-form model parameters. Hence, the role of the Haar prior can only be assessed on a case-by-case basis. We show by example that, when the identification is sufficiently tight, posterior inference based on a Gaussianinverse Wishart-Haar prior provides a reasonably accurate approximation. [ABSTRACT FROM AUTHOR]

Rising interest rates have prompted concerns about losses on bank assets, especially following the failure of Silicon Valley Bank (SVB) in March 2023. In this working paper, we examine whether US credit unions could be subject to similar losses as banks and analyze how their regulatory capital would be affected. We estimate that after realizing losses from assets that have decreased in value and not yet been sold the overall net worth of the credit union industry would have fallen by 40 percent in 2023:Q1. Unrealized losses were most severe at the largest credit unions. Nonetheless, the bulk of deposits at credit unions were insured, suggesting limited risk of an SVB-style run. In addition, credit union deposit rates are relatively insensitive to market interest rates, providing credit unions with a hedge against a rising rate environment. Overall, credit unions' balance sheet positions seemed to be more resilient to unrealized interest rate risk than banks'. [ABSTRACT FROM AUTHOR]

Companies face different effective marginal tax rates on their income. This can be detrimental to allocative efficiency unless taxes offset other distortions in the economy. This paper estimates the effect of tax rate heterogeneity on aggregate productivity in distorted economies with multiple frictions. Using firm-level balance-sheet data and estimates of marginal tax rates, we find that tax heterogeneity reduces total factor productivity by about 3 percent. Our findings highlight the positive correlation between marginal tax rates and other distortions to capital and especially labor. This implies that tax rate heterogeneity exacerbates the distortionary effects of other frictions in the economy. [ABSTRACT FROM AUTHOR]

An overlapping-generations model with income heterogeneity is developed to analyze the impact of introducing a Central Bank Digital Currency (CBDC) on financial inclusion, and its potential adverse effect on bank funding. We highlight the role of two design parameters: the fixed cost of CBDC usage and the interest rate it pays, and derive principles for maximum inclusion and for mitigating the inclusion-intermediation trade-off. Agents' choice of money instrument is endogenously driven by income heterogeneity. Pre-CBDC, wealthier agents adopt deposits, while poorer agents adopt cash and remain unbanked. CBDCs with low fixed costs (and low interest rates) are adopted by cash holders and directly increase inclusion. CBDCs with high fixed costs (and high interest rates) are adopted by deposit holders and increase inclusion by raising deposit rates. The former allows for more favorable inclusion-intermediation trade-offs. We calibrate the model to match the US income distribution and aggregate share of unbanked households. A CBDC 50% cheaper (30% more expensive) than bank deposits decreases financial exclusion by 93% (71%) without impacting intermediation. In comparison, making the deposit market perfectly competitive would only decrease exclusion by 45%. [ABSTRACT FROM AUTHOR]

The paper considers a New Keynesian framework in which agents form expectations based on a combination of autoregressive mis-specified forecasts and myopia. The proposed expectations formation process is shown to be consistent with all three empirical facts on consensus inflation forecasts. However, while mis-specified forecasts can be both sufficient and necessary to match all three facts, myopia alone is neither. The paper then derives the general equilibrium solution consistent with the proposed expectations formation process and estimates the model with likelihood-based Bayesian methods, yielding three novel results: (i) macroeconomic data strongly prefer a combination of autoregressive mis-specified forecasting rules - of the VAR(1) or AR(1) type - and myopia over other alternatives; (ii) no strong evidence is found in favor of VAR(1) forecasts over simple AR(1) rules; and (iii) frictions such as habit in consumption, which are typically necessary for models with full-information rational expectations, are significantly less important, because the proposed expectations generate substantial internal persistence and amplification to exogenous shocks. Simulated inflation expectations data from the estimated general equilibrium model reflect the three empirical facts on forecasting data. [ABSTRACT FROM AUTHOR]

This paper examines the predictive relationship between the distribution of realized inflation in the US and measures of inflation expectations from households, firms, financial markets, and professional forecasters. To allow for nonlinearities in the predictive relationship we use quantile regression methods. We find that the ability of households to predict future inflation, relative to that of professionals, firms, and the market, increases with inflation. While professional forecasters are more accurate in the middle of the inflation density, households' expectations are more useful in the upper tail. The predictive ability of measures of inflation expectations is greatest when combined. We show that it is helpful to let the combination weights on different agents' expectations of inflation vary by quantile when assessing inflationary pressures probabilistically. [ABSTRACT FROM AUTHOR]

We evaluate the decentralized structure of the Federal Reserve System as a mechanism for generating and processing new ideas on monetary policy over the 1960 - 2000 period. We document the introduction of monetarism, rational expectations, credibility, transparency, and other monetary policy ideas by Reserve Banks into the Federal Reserve System. We argue that the Reserve Banks were willing to support and develop new ideas due to internal reforms to the FOMC that Chairman William McChesney Martin implemented in the 1950s and the increased ties with academia that developed in this period. Furthermore, the Reserve Banks were able to succeed at this because of their private-public governance structure. We illustrate this with a time-consistency model in which a decentralized organization is better at producing new ideas than a centralized one. We argue that this role of the Reserve Banks is an important benefit of the Federal Reserve's decentralized structure by allowing for more competition in formulating ideas and by reducing groupthink. [ABSTRACT FROM AUTHOR]

This paper seeks to understand the general equilibrium effects of time-varying geopolitical risk in oil markets. Answering this question requires simultaneously modeling several features including macroeconomic disasters and geopolitically driven oil production disasters, oil storage and precautionary savings, and the endogenous determination of uncertainty about output and the price of oil. We find that oil price uncertainty tends to be driven by macroeconomic uncertainty. Shifts in the probability of a geopolitically driven major oil supply disruption have meaningful effects on the price of oil and the macro economy, but the resulting oil price uncertainty is not a major driver of fluctuations in macroeconomic aggregates. [ABSTRACT FROM AUTHOR]

This paper investigates how a government should manage international reserves when it faces the risk of a rollover crisis. We ask, should the government accumulate reserves or reduce debt to make itself less vulnerable? We show that the optimal policy entails initially reducing debt, followed by a subsequent increase in both debt and reserves as the government approaches a safe zone. Furthermore, we uncover that issuing additional debt to accumulate reserves can lead to a reduction in sovereign spreads. [ABSTRACT FROM AUTHOR]

This paper shows that regime shifts in Full-Information Rational Expectations (FIRE) models generate predictable regime-dependent forecast errors in macro aggregates. Hence, forecast error predictability alone is neither sufficient to reject FIRE nor informative about alternative expectations theories. We instead propose a regime-robust test of FIRE and apply it to a medium-scale New Keynesian model with monetary policy regime shifts that is estimated on US data. While the test fails to decisively reject FIRE, the model conditional on macro data implies expectations that are generally different from observed survey forecasts, thus providing a new empirical motivation for alternative expectations theories. [ABSTRACT FROM AUTHOR]

This essay was written in memory of Marvin Goodfriend for a Federal Reserve Bank of Richmond book called Essays in Honor of Marvin Goodfriend: Economist and Central Banker. We discuss his Carnegie-Rochester conference paper titled "The Role of a Regional Bank in a System of Central Banks." In that paper, Marvin argued that the Federal Reserve's decentralized structure allowed for competing ideas about monetary and banking policy to develop with the central bank. In our essay, we describe how Marvin demonstrated this argument during his long career at the Federal Reserve Bank of Richmond. We also describe the institutional developments that led to this competition, including reforms that Chairman William McChesney Martin made to the operation of the Federal Open Market Committee in the 1950s and the introduction of monetary policy ideas such as monetarism and rational expectations by the Reserve Banks. [ABSTRACT FROM AUTHOR]

An increasing share of corporate loans, a critical source of firm credit, are sold off banks' balance sheets and actively traded in a secondary over-the-counter market. We develop a microfounded equilibrium search-theoretic model with labor, credit, and financial markets to explore how this secondary loan market affects the real economy, highlighting a trade-off: while the market reduces the steady-state level of unemployment by 0.6pp, it amplifies its response to a 1% productivity drop from 3.6% to 4.3%. Secondary market frictions matter significantly: eliminating them would not only reduce unemployment by 1.2pp, but also dampen its volatility down to 2.7%. [ABSTRACT FROM AUTHOR]

Following Manzan (2021), this paper examines how professional forecasters revise their fixed-event uncertainty (variance) forecasts and tests the Bayesian learning prediction that variance forecasts should decrease as the horizon shortens. We show that Manzan’s (2021) use of first moment “efficiency” tests are not applicable to studying revisions of variance forecasts. Instead, we employ monotonicity tests developed by Patton and Timmermann (2012) in the first application of these tests to second moments of survey expectations. We find strong evidence that the variance forecasts are consistent with the Bayesian learning prediction of declining monotonicity. [ABSTRACT FROM AUTHOR]

We use high-frequency interbank payments data to trace deposit flows in March 2023 and identify twenty-two banks that suffered a run, significantly more than the two that failed but fewer than the number that experienced large negative stock returns. The runs were driven by a small number of large depositors and were related to weak fundamentals. However, we find evidence for the importance of coordination because run bankswere disproportionately publicly traded and many banks with similarly bad fundamentals did not suffer a run. Banks survived the run by borrowing new funds and raising deposit rates, not by selling securities. [ABSTRACT FROM AUTHOR]

This paper studies the impacts of state appropriations on staffing and salaries at public higher education institutions in the United States using employment and revenue data from the Integrated Postsecondary Education Data System, along with an instrumental variables strategy borrowed from Deming and Walters (2018) and Chakrabarti, Gorton, and Lovenheim (2020). The instrument sidesteps the potential endogeneity of state appropriations for a given institution in a given year by interacting an institution's historical reliance on state appropriations with total state appropriations for all higher education institutions in a given year. The results suggest that higher state appropriations are associated with an increase in tenure-track assistant professors at four-year institutions. They are also associated with an increase in part-time instructional staff at both four-year and two-year institutions. However, they are not associated with a change in the number of tenured faculty. Appropriations are also positively related to salaries for a variety of employee groups, although notably not for instructional staff who are instructors, lecturers, or without an academic rank. Overall, the results show that public higher education institutions use state appropriations in a variety of ways, but I do not find evidence that they replace contingent faculty with tenured or tenure-track faculty when appropriations rise. [ABSTRACT FROM AUTHOR]

It is common in applied work to estimate responses of macroeconomic aggregates to news shocks derived from surprise changes in daily futures prices around the date of policy announcements. This requires mapping the daily surprises into a monthly shock that may be used as an external instrument in a monthly VAR model or local projection. The standard approach has been to sum these daily surprises over the course of a given month when constructing the monthly proxy variable, ignoring the accounting relationship between daily and average monthly price data. In this paper, I provide a new approach to constructing monthly proxies from daily surprises that takes account of this link and revisit the question of how to use OPEC announcements to identify news shocks in VAR models of the global oil market. The proposed approach calls into question the interpretation of the identified shock as oil supply news and implies quantitatively and qualitatively different estimates of the macroeconomic impact of OPEC announcements. [ABSTRACT FROM AUTHOR]

In this paper we study neural networks and their approximating power in panel data models. We provide asymptotic guarantees on deep feed-forward neural network estimation of the conditional mean, building on the work of Farrell et al. (2021), and explore latent patterns in the cross-section. We use the proposed estimators to forecast the progression of new COVID-19 cases across the G7 countries during the pandemic. We find significant forecasting gains over both linear panel and nonlinear time-series models. Containment or lockdown policies, as instigated at the national level by governments, are found to have out-of-sample predictive power for new COVID-19 cases. We illustrate how the use of partial derivatives can help open the "black box" of neural networks and facilitate semi-structural analysis: school and workplace closures are found to have been effective policies at restricting the progression of the pandemic across the G7 countries. But our methods illustrate significant heterogeneity and time variation in the effectiveness of specific containment policies. [ABSTRACT FROM AUTHOR]

The past 15 years have been eventful. The Global Financial Crisis (GFC) reminded us of the importance of a stable financial system to a well-functioning economy, one with low and stable inflation and maximum employment. Given the recent banking stress, we ponder this issue again. The pandemic was a huge shock surrounded by much uncertainty, making precise forecasts within traditional models difficult. And more recently, there has been continuous talk of a soft landing and recession risks. In this paper, I focus on some of the lessons we have learned over the years: (i) uncertainty and tail risk have cyclical variation; (ii) financial shocks can have a significant effect on macroeconomic outcomes; (iii) the impact of shocks is stronger in periods of high volatility. These lessons have important implications for policymakers in today's environment. [ABSTRACT FROM AUTHOR]

This paper outlines the dynamic stochastic general equilibrium (DSGE) model developed at the Federal Reserve Bank of Cleveland as part of the suite of models used for forecasting and policy analysis by Cleveland Fed researchers, which we have nicknamed Clementine (CLeveland Equilibrium ModEl iNcluding Trend INformation and the Effective lower bound). This document adopts a practitioner’s guide approach, detailing the construction of the model and offering practical guidance on its use as a policy tool designed to support decision-making through forecasting exercises and policy counterfactuals. [ABSTRACT FROM AUTHOR]

This paper examines the forecasting efficacy and implications of the recently popular breakdown of core inflation into three components: goods excluding food and energy, services excluding energy and housing, and housing. A comprehensive historical evaluation of the accuracy of point and density forecasts from a range of models and approaches shows that a BVAR with stochastic volatility in aggregate core inflation, its three components, and wage growth is an effective tool for forecasting inflation’s components as well as aggregate core inflation. Looking ahead, the model’s baseline projection puts core inflation at 2.6 percent in 2026, well below its 2023 level but still elevated relative to the Federal Reserve’s 2 percent objective. The probability that core inflation will return to 2 percent or less is much higher when conditioning on goods or non-housing services inflation slowing to pre-pandemic levels than when conditioning on these components remaining above the same thresholds. Scenario analysis indicates that slower wage growth will likely be associated with reduced inflation in all three components, especially goods and non-housing services, helping to return core inflation to near the 2 percent target by 2026. [ABSTRACT FROM AUTHOR]

This paper provides a narrative analysis of postwar federal appropriations for the research and development (R&D) activities of the Department of Defense, Department of Energy, National Aeronautics and Space Administration, National Institutes of Health, and National Science Foundation--five agencies that consistently account for the vast majority of federal outlays for all types of R&D. We build a novel dataset quantifying the enacted fullyear appropriations for all budgetary accounts funding R&D activities at these five agencies over fiscal years 1947-2019. We use this dataset to isolate a subset of 218 "significant" changes in real appropriations for each agency, and we analyze numerous primary and secondary sources to understand the context and motivation. Based on these sources, we classify each significant change in federal R&D appropriations as either "endogenous" or "exogenous" to short-run macroeconomic developments. The exogenous changes in R&D appropriations are intended as instrumental variables for studying the causal effects of government R&D in appropriately specified empirical models. [ABSTRACT FROM AUTHOR]

After the events in March 2020, it became clear to policymakers that the 2014 reform of the money market funds (MMFs) industry had not successfully addressed all associated stability concerns related to surges in withdrawals. In December 2021, the SEC proposed a new set of rules governing how money market funds can operate. A fundamental problem behind the instability of (some) money market funds is the expectation that backstop liquidity support will be provided by the government in the event of financial distress, along with the government's inability to credibly commit to not provide such support. This expectation dampens funds' incentives to take steps ahead of time to mitigate the risk of sudden withdrawals. The newly proposed reforms aim to address this problem by constraining withdrawals or penalizing them with "swing pricing." We argue that if the commitment problem is the fundamental issue, it would be more useful to reduce expectations of ex post support by requiring MMFs to have contractual commitments in place, ex ante, for liquidity support from private parties. [ABSTRACT FROM AUTHOR]

Interest in regional economic issues coupled with advances in administrative data is driving the creation of new regional economic data. Many of these data series could be useful for nowcasting regional economic activity, but they suffer from a short (albeit constantly expanding) time series which makes incorporating them into nowcasting models problematic. Regional nowcasting is already challenging because the release delay on regional data tends to be greater than that at the national level, and “short” data imply a “ragged edge” at both the beginning and the end of regional data sets, which adds a further complication. In this paper, via an application to the UK, we develop methods to include a wide range of short data into a regional mixed-frequency VAR model. These short data include hitherto unexploited regional VAT turnover data. We address the problem of the ragged edge at both the beginning and end of our sample by estimating regional factors using different missing data algorithms that we then incorporate into our mixed-frequency VAR model. We find that nowcasts of regional output growth are generally improved when we condition them on the factors, but only when the regional nowcasts are produced before the national (UK-wide) output growth data are published. [ABSTRACT FROM AUTHOR]

In this paper, we revisit the scope for macroprudential policy in production economies with pecuniary externalities and collateral constraints. We study competitive equilibria and constrained-efficient equilibria and examine the extent to which the gap between the two depends on the production structure and the policy instruments available to the planner. We argue that macroprudential policy is desirable regardless of whether the competitive equilibrium features more or less borrowing than the constrained-efficient equilibrium. In our quantitative analysis, macroprudential taxes on borrowing turn out to be larger when the government has access to ex-post stabilization policies. [ABSTRACT FROM AUTHOR]

Quantile regression methods are increasingly used to forecast tail risks and uncertainties in macroeconomic outcomes. This paper reconsiders how to construct predictive densities from quantile regressions. We compare a popular two-step approach that fits a specific parametric density to the quantile forecasts with a nonparametric alternative that lets the "data speak." Simulation evidence and an application revisiting GDP growth uncertainties in the US demonstrate the flexibility of the nonparametric approach when constructing density forecasts from both frequentist and Bayesian quantile regressions. They identify its ability to unmask deviations from symmetrical and unimodal densities. The dominant macroeconomic narrative becomes one of the evolution, over the business cycle, of multimodalities rather than asymmetries in the predictive distribution of GDP growth when conditioned on financial conditions. [ABSTRACT FROM AUTHOR]

Recent decades have seen advances in using econometric methods to produce more timely and higher-frequency estimates of economic activity at the national level, enabling better tracking of the economy in real time. These advances have not generally been replicated at the sub-national level, likely because of the empirical challenges that nowcasting at a regional level presents, notably, the short time series of available data, changes in data frequency over time, and the hierarchical structure of the data. This paper develops a mixed-frequency Bayesian VAR model to address common features of the regional nowcasting context, using an application to regional productivity in the UK. We evaluate the contribution that different features of our model provide to the accuracy of point and density nowcasts, in particular the role of hierarchical aggregation constraints. We show that these aggregation constraints, imposed in stochastic form, play a key role in delivering improved regional nowcasts; they prove to be more important than adding region-specific predictors when the equivalent national data are known, but not when this aggregate is unknown. [ABSTRACT FROM AUTHOR]

We study the optimal one-shot tax reform in the standard incomplete markets model where households differ in their wealth, earnings, permanent labor skill, and age. The government can provide transfers by raising tax revenue and has several tax instruments at its disposal: a flat capital income tax, a flat consumption tax, and a non-linear labor income tax. We compute the equilibrium and transitional dynamics for 3888 different tax combinations and find that the optimal fiscal policy funds a transfer that is above 60 percent of GDP through a combination of very high taxes on consumption and capital income. The labor tax schedule has a high average rate and more progressivity than the current US system. We explore the role of transitional dynamics, debt issuance, intergenerational disagreement, and fiscal spending rules in shaping the optimal policy. Policy is broadly similar if it is determined through majority voting rather than by a utilitarian planner. [ABSTRACT FROM AUTHOR]

How does competition affect banks’ adaptation to emergent risks for which there is limited supervisory oversight? The analysis matches detailed supervisory data on home equity lines of credit with high resolution flood projections to identify climate risks. Following Hurricane Harvey, banks updated their internal risk models to better reflect flood risk projections, even in areas unaffected by the disaster. These updates are only detected in banks with exposures to the disaster, indicating heterogeneous bank learning. We use this heterogeneity to identify how bank adaptation is affected by competition. Exposed banks reduce lending to areas with higher flood risks, but only in less competitive markets, suggesting that competition fosters risk-taking over risk mitigation. Additionally, banks are less likely to adapt in markets where competitors are also less likely to do so, suggesting a strategic complementarity in bank adaptation. More broadly, our paper sheds light on the role of competitive forces in how banks manage emerging risks and relevant supervisory challenges. [ABSTRACT FROM AUTHOR]

We study climate policy in an economy with heterogeneous households, two types of goods (clean and dirty), and a climate externality from the dirty good. Using household expenditure and emissions data, we document that low-income households have higher emissions per dollar spent than high-income households, making a carbon tax regressive. We build a model that captures this fact and study climate policies that are neutral with respect to the income distribution. A central feature of these policies is that resource transfers across consumers are ruled out. We show that the constrained optimal carbon tax in a heterogeneous economy is heterogeneous: Higher-income households face a higher rate. Our main result shows that when the planner is limited to a uniform carbon tax, the tax follows the Pigouvian rule but is lower than the unconstrained carbon tax. Finally, we embed this model into a standard incomplete markets framework to quantify the policy effects on the economy, climate, and welfare, and we find a Pareto-improving result. The climate policy is welfare-improving for every consumer. [ABSTRACT FROM AUTHOR]

A significant share of commercial real estate (CRE) investment properties--about half by our estimates--are purchased without a mortgage. Using comprehensive microdata on transactions in the US CRE market, we analyze which types of properties are purchased without a mortgage, highlighting the important role of renovation or redevelopment options. We show that mortgage-financed properties are less likely to be subsequently redeveloped, and that owners anticipate these redevelopment frictions and avoid mortgage financing for properties with greater redevelopment options. These effects were even stronger during the COVID-19 pandemic, when uncertainty increased redevelopment option values. [ABSTRACT FROM AUTHOR]

Repeatedly solving the Aiyagari (1994) model with random parameters, we construct hundreds of examples with multiple stationary equilibria. We never find multiplicity with risk aversion less than ≈ 1.49, depreciation less than ≈ 0.19, or income persistence less than ≈ 0.47, and multiplicity requires a disaster state for income. In cases with multiplicity, the lowest rental rate occurs near depreciation times the capital share. It is possible for the economy, without a change in fundamentals, to transition rationally from a higher-rate equilibrium to one with a lower rental rate, lower inequality, and lower welfare (for most agents). We also construct the first Krusell and Smith (1998) examples with multiple recursive competitive equilibria. [ABSTRACT FROM AUTHOR]

We show that inflation expectations are heterogeneous and depend on past individual experiences. We propose a diagnostic expectations-augmented Kalman filter to represent consumers' heterogeneous inflation expectations-formation process, where heterogeneity comes from an anchoring-to-the-past mechanism. We estimate the diagnosticity parameter that governs the inflation expectations-formation process and show that the model can replicate systematic differences in inflation expectations across cohorts in the US. We introduce this mechanism into a New Keynesian model and find that heterogeneous expectations anchor aggregate responses to the agents' memory, making shocks more persistent. Central banks should be more active to prevent agents from remembering current shocks far into the future. [ABSTRACT FROM AUTHOR]

This paper offers a solution to the international co-movement puzzle found in open-economy macroeconomic models. We develop a small open-economy (SOE) dynamic stochastic general equilibrium (DSGE) model describing three endogenous channels that capture spillovers from the world to a commodity exporter: a world commodity price channel, a domestic commodity supply channel, and a financial channel. We estimate our model with Bayesian methods on two commodity-exporting SOEs, namely Canada and South Africa. In addition to explaining international business cycle synchronization, the new model attributes an important fraction of business cycle fluctuations to foreign shocks in the SOEs. [ABSTRACT FROM AUTHOR]

The paper considers a New Keynesian framework in which agents form expectations based on a combination of mis-specified forecasts and myopia. The proposed expectations formation process is found to be consistent with all three empirical facts on consensus inflation forecasts, namely, that forecasters under-react to ex-ante forecast revisions, that forecasters over-react to recent events, and that the response of forecast errors to a shock initially under-shoots but then over-shoots. The paper then derives the general equilibrium solution consistent with the proposed expectations formation process and estimates the model with likelihood-based Bayesian methods, yielding three novel results: (i) The data strongly prefer the combination of autoregressive mis-specified forecasting rules and myopia over other alternatives; (ii) The best fitting expectations formation process for both households and firms is characterized by high degrees of myopia and simple AR(1) forecasting rules; (iii) Frictions such as habit in consumption, which are typically necessary for models with Full-information Rational Expectations, are significantly less important, because the proposed expectations generate substantial internal persistence and amplification to exogenous shocks. Simulated inflation expectations data from the estimated general equilibrium model reflect the three empirical facts on forecasting data. [ABSTRACT FROM AUTHOR]