Patrick J. Kehoe

Jel Numbers F, Patrick J. Kehoe, Fabrizio Perri, Patrick J. Kehoe

Under a narrow set of assumptions, Chamley (1986) established that the optimal tax rate on capital income is eventually zero. This study examines and extends that result by relaxing Chamley’s...

and (2008)

Key words: credit constraints, debt constraints

North American Free Trade Agreement (NAFTA) included (2008)

On the Need for a New Approach to Analyzing Monetary Policy ∗ (2008)

The recent debate in the United States over ratifying the

Federal Reserve Bank of Minneapolis (2008)

andUniversityofMinnesota We present a pricing kernel that summarizes well the main features of the dynamics of interest rates and risk in postwar U.S. data and use it to uncover how the pricing...

On the Need for a New Approach to Analyzing Monetary Policy ∗ (2008)

andUniversityofMinnesota Macroeconomists have largely converged on method, model design, reduced-form shocks, and principles of policy advice. Our main disagreements today are about implementing the...

Sophisticated Monetary Policies ∗ (2008)

and University of Minnesota. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. The main...

Federal Reserve Bank of Minneapolis, (2008)

The Ramsey approach to policy analysis finds the best competitive equilibrium given a set of available instruments. This approach is silent about unique implementation, namely designing policies so...

Federal Reserve Bank of Minneapolis, (2008)

The Ramsey approach to policy analysis finds the best competitive equilibrium given a set of available instruments but is silent about unique implementation, namely, designing policies so that the...

The New Keynesian Model is Not Yet Useful for Policy Analysis. Mimeo, Federal Reserve Bank of Minneapolis (2008)

In the data, prices change both temporarily and permanently. Standard Calvo models focus on permanent price changes and take one of two shortcuts when confronted with the data: drop temporary changes...

Technical Notes on Facts and Myths about the Financial Crisis of 2008 (2008)

In the 1970s macroeconomists often disagreed bitterly. Macroeconomists have now largely converged on method, model design, and macroeconomic policy advice. The disagreements that remain all stem from...

Maxim Troshkin, Lawrence Christiano, Patrick J. Kehoe

Technical details and speci…c data sources are provided for "Facts and Myths about the Financial

Facts and Myths about the Financial Crisis of 2008 (2008)

V. V. Chari, Lawrence Christiano, Patrick J. Kehoe

The United States is indisputably undergoing a …nancial crisis and is perhaps headed for a deep recession. Here we examine three claims about the way the …nancial crisis is a¤ecting the economy...

Federal Reserve Bank of Minneapolis, (2008)

The Time Consistency of Monetary and Fiscal Policies (2007)

In monetary policy environments interest rate rules often lead to indeterminacy. We show that sophisticated policies, whichdependonthehistoryofprivateactionsandcandiffer on and off the equilibrium...

O Alvarez, Patrick J. Kehoe, Nber Pablo Neumeyer, Conicet Alvafez

Are optimal monetary and fiscal policies time consistent in a monetary economy? Yes, but if and only if under commitment the Friedman rule of setting nominal interest rates to zero is optimal. This...

Federal Reserve Bank of Minneapolis (2007)

Raphael Bergoeing, Timothy J. Kehoe, Raimundo Soto, ...

Both Chile and Mexico experienced severe economic crises in the early 1980s, yet Chile recovered much faster than Mexico. This study analyzes four possible explanations for this difference and rules...

Reviving Reputation Models of International Debt (2007)

Federal Reserve Bank Federal Reserve Bank Federal Reserve Bank (2007)

A traditional explanation for why sovereign countries repay debt is that they want to keep a good reputation so they can easily borrow more. This explanation does not hold if a country has access to...

Running Head: Sustainable Plans and Debt Please send correspondence to: (2007)

Under a narrow set of assumptions, Chamley (1986) established that the optimal tax rate on capital income is eventually zero. This study examines and extends that result by relaxing Chamley's...

Patrick J. Kehoe, Patrick J. Kehoe, B Chari, Patrick J

*We thank an anonymous referee for very useful comments and suggestions. Both authors acknowledge support from the National Science Foundation. The views expressed herein are those of the authors and...

Money, interest rates, and exchange rates with endogenously segmented markets (2007)

Federal Reserve Bank of Minneapolis Research Department Staff Report 292 September 2001 A Decade Lost and Found: Mexico and Chile in the 1980s* (2007)

We analyze effects money injections on interest rates and exchange rates when agents must a Baumol-Tobin style fixed cost exchange bonds and money. Asset markets are endogenously segmented because...

Raphael Bergoeing Universidad, Raphael Bergoeing, Patrick J. Kehoe, Timothy J. Kehoe, Raimundo Soto

Chile and Mexico experienced severe economic crises in the early 1980s. This paper analyzes four possible explanations for why Chile recovered much faster than did Mexico. Comparing data from the two...

Federal Reserve Bank of Minneapolis (2007)

If Exchange Rates Are Random Walks Then Almost Everything We Say About Monetary Policy Is Wrong (2007)

andUniversityofMinnesota The central finding of the recent structural vector autoregression (SVAR) literature with a differenced specification of hours is that technology shocks lead to a fall in...

O Alvarez, Andrew Atkeson, Patrick J. Kehoe

editorial assistance. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. The key question asked of...

Sticky Prices and Sectoral Real Exchange Rates ∗ (2007)

Federal Reserve Bank of Minneapolis, (2006)

The classic explanation for the persistence and volatility of real exchange rates is that they are the result of nominal shocks in an economy with sticky goods prices. A key implication of this...

Modern Macroeconomics in Practice: How Theory Is Shaping Policy* (2006)

Monetary policy instruments differ in tightness–how closely they are linked to inflation–and transparency–how easily they can be monitored. Tightness is always desirable in a monetary policy...

Federal Reserve Bank of Minneapolis, (2006)

ABSTRACT __________________________________________________________________________ Theoretical advances in macroeconomics made in the last three decades have had a major influence on macroeconomic...

Comparing Alternative Representations, Methodologies, and Decompositions in Business Cycle Accounting ∗ (2006)

Many view the period after the Second Industrial Revolution as a paradigmatic example of a transition to a new economy following a technological revolution and conjecture that this historical...

V. V. Chari, Ellen R. Mcgrattan, Patrick J. Kehoe

We make three comparisons relevant for the business cycle accounting approach. We show that in theory representing the investment wedge as a tax on investment is equivalent to representing this wedge...

Time-Varying Risk, Interest Rates, and Exchange Rates in General Equilibrium (2005)

O Alvarez, Andrew Atkeson, Patrick J. Kehoe

Time-varying risk is the primary force driving nominal interest rate differentials on currencydenominated bonds. This finding is an immediate implication of the fact that exchange rates are roughly...

A critique of structural VARs using business cycle theory,” Staff Report 364, Federal Reserve Bank of Minneapolis (2005)

Financial Crises as Herds: Overturning the Critiques (2003)

The main substantive finding of the recent structural vector autoregression literature with a differenced specification of hours (DSVAR) is that technology shocks lead to a fall in hours. Researchers...

The Time Consistency of Optimal Monetary and Fiscal Policies (2003)

Financial crises are widely argued to be due to herd behavior. Yet recently developed models of herd behavior have been subjected to two critiques which seem to make them inapplicable to financial...

Fernando Alvarez, Patrick J. Kehoe, Pablo Andrs Neumeyer

We show that optimal monetary and fiscal policies are time consistent for a class of economies often used in applied work, economies appealing because they are consistent with the growth facts. We...

Hot money (2003)

Federal Reserve Bank of Minneapolis (2002)

Recent empirical work on financial crises documents that crises tend to occur when macroeconomic fundamentals are weak, but that even after conditioning on an exhaustive list of fundamentals, a...

Time Inconsistency and Free-Riding in a Monetary Union ∗ (2002)

This paper proposes a simple method for guiding researchers in developing quantitative models of economic fluctuations. We show that a large class of models, including models with various frictions,...

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We analyze the setting of monetary and nonmonetary policies in monetary unions. We show that in these unions a time inconsistency problem in monetary policy leads to a novel type of free-rider...

The Optimal Degree of Discretion in Monetary Policy ∗ (2002)

The Advantage of Transparent Instruments of Monetary Policy (2001)

How much discretion is it optimal to give the monetary authority in setting its policy? We analyze this mechanism design question in an economy with an agreed-upon social welfare function that...

The Andrew, Andrew Atkeson, Patrick J. Kehoe

classic question international economics whether it is better exchange rate or money growth instrument monetary policy. common argument that exchange rate has natural advantage since exchange rates...

Paths of Development for Early- and LateBloomers in a Dynamic Heckscher-Ohlin Model (2000)

Optimal Monetary and Fiscal Policy (1999)

andUniversityofMinnesota We show that in a dynamic Heckscher-Ohlin model the timing of a country’s development relative to the rest of the world affects the path of the country’s development. A...

O Alvarez, Patrick J. Kehoe, Pablo Neumeyer, Nber Pablo Neumeyer, Conicet Alvarez

Are optimal monetary and fiscal policies time consistent in a monetary economy? Yes, but if and only if under commitment the Friedman rule of setting nominal interest rates to zero is optimal. This...

Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates (1998)

ABSTRACT Models of Sovereign Debt: Partial vs. General Reputations (1997)

The central puzzle in international business cycles is that real exchange rates are volatile and persistent. The most popular story for real exchange rate fluctuations is that they are generated by...

A Primer on Static Applied General Equilibrium Models. Federal Reserve Bank of Minneapolis Quarterly Review 18(1). Resources for the Future Pizer et al (1994)

Bulow and Rogoff (1989b) show that as long as governments can earn the market rate of return by saving abroad, standard reputation models cannot support debt. We argue that these standard reputation...

Macroeconomics in a world economy /--by Patrick James Michael Kehoe. (1986)

The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank

Kehoe, Patrick J.

Thesis (Ph. D.)--Harvard University, 1986.

Macroeconomics in a world economy [microform] / (1986)

Kehoe, Patrick J.

Thesis (Ph. D.)--Harvard University, 1986.

Accounting for the Great Depression

International policy cooperation may be undesirable

Economists have offered many theories for the U.S. Great Depression, but no consensus has formed on the main forces behind it. Here we describe and demonstrate a simple methodology for determining...

Time consistency and policy

This paper presents a simple counterexample to the belief that international policy cooperation is desirable. It also explains circumstances under which such a counterexample is possible.

V.V. Chari, Patrick J. Kehoe, Edward C. Prescott

Economic policy ; Monetary policy

On the denomination of government debt: a critique of the portfolio balance approach

International coordination of fiscal policy in limiting economies

We show that some classes of sterilized interventions have no effect on equilibrium prices and quantities. The proof does not require complete markets, Ricardian equivalence, monetary neutrality, or...

We examine the limiting behavior of cooperative and noncooperative fiscal policies as countries’ market power goes to zero. We show that these policies converge if countries raise revenues through...

Sustainable plans

Sustainable plans and mutual default

We propose a definition of time consistent policy for infinite horizon economies with competitive private agents. Allocations and policies are defined as functions of the history of past policies. A...

Sustainable plans and debt

This paper presents a simple general equilibrium model of optimal taxation in which both private agents and the government can default on their debt. As a benchmark we consider Ramsey equilibria in...

Reputation with multiple relationships: reviving reputation models of debt

This paper presents a simple general equilibrium model of optimal taxation similar to that of Lucas and Stokey (1983), except that we let the government default on its debt. As a benchmark, we...

International evidence on the historical properties of business cycles

A traditional explanation for why sovereign governments repay debts is that they want to keep a good reputation so they can easily borrow more. Bulow and Rogoff have challenged this explanation. They...

International real business cycles

We document properties of business cycles in ten countries over the last hundred years, contrasting the behavior of real quantities with that of the price level and the stock of money. Although the...

Optimal fiscal and monetary policy: some recent results

We ask whether a two-country real business cycle model can account simultaneously for domestic and international aspects of business cycles. With this question in mind, we document a number of...

V. V. Chari, Lawrence J. Christiano, Patrick J. Kehoe

This paper studies the quantitative properties of fiscal and monetary policy in business cycle models. In terms of fiscal policy, optimal labor tax rates are virtually constant and optimal capital...

In search of scale effects in trade and growth

David K. Backus, Patrick J. Kehoe, Timothy J. Kehoe

We look for the scale effects predicted by some theories of trade and growth based on the dynamic returns to scale that arise from learning by doing, investment in human capital, or development of...

Optimality of the Friedman rule in economies with distorting taxes

V.V. Chari, Lawrence J. Christiano, Patrick J. Kehoe

We find conditions for the Friedman rule to be optimal in three standard models of money. These conditions are homotheticity and separability assumptions on preferences similar to those in the public...

Optimal fiscal policy in a business cycle model

V.V. Chari, Lawrence J. Christiano, Patrick J. Kehoe

This paper develops the quantitative implications of optimal fiscal policy in a business cycle model. In a stationary equilibrium the ex ante tax rate on capital income is approximately zero. There...

Industry evolution and transition: the role of information capital

The role of institutions in reputation models of sovereign debt

In this paper, we build a model of the transition following large-scale economic reforms that predicts both a substantial drop in output and a prolonged pause in physical investment as the initial...

Industry evolution and transition: measuring investment in organization

A standard explanation for why sovereign governments repay their debts is that they must maintain a good reputation to easily borrow more. We show that the ability of reputation to support debt...

Social insurance and transition

We use a calibrated model of the dynamics of organization capital and industry evolution to measure the size of investment in organization capital in the steady state and the dynamics of organization...

The poverty of nations: a quantitative exploration

We study the general equilibrium effects of social insurance on the transition in a model in which the process of moving workers from matches in the state sector to new matches in the private sector...

Reputation spillover across relationships: reviving reputation models of debt

We ask what fraction of the variation in incomes across countries can be accounted for by investment distortions. In our neoclassical growth model the relative price of investment to consumption is a...

Sticky price models of the business cycle: can the contract multiplier solve the persistence problem?

A traditional explanation for why sovereign governments repay debts is that they want to keep good reputations so they can easily borrow more. Bulow and Rogoff show that this argument is invalid...

On the Desirability of Fiscal Constraints in a Monetary Union

We construct a quantitative equilibrium model with price setting and use it to ask whether with staggered price setting monetary shocks can generate business cycle fluctuations. These fluctuations...

Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?

The desirability of fiscal constraints in monetary unions depends critically on whether the monetary authority can commit to follow its policies. If it can commit, then debt constraints can only...

Backus, David K, Kehoe, Patrick J, Kydland, Finn E

The authors provide a theoretical interpretation of two features of international data: the countercyclical movements in net exports and the tendency for the trade balance to be negatively correlated...

Policy-Driven Productivity in Chile and Mexico in the 1980s and 1990s

Raphael Bergoeing, Patrick J. Kehoe, Timothy J. Kehoe, Raimundo Soto

Both Chile and Mexico experienced severe economic crises in the early 1980s, but Chile recovered much faster than did Mexico. Using growth accounting and a calibrated dynamic general equilibrium...

International Real Business Cycles.

Backus, David K, Kehoe, Patrick J, Kydland, Finn E

The authors ask whether a two-country business cycle model can account simultaneously for domestic and international aspects of business cycles. With this question in mind, the authors document a...

Optimal Fiscal Policy in a Business Cycle Model.

Chari, V V, Christiano, Lawrence J, Kehoe, Patrick J

This paper develops the quantitative implications of optimal fiscal policy in a business cycle model. In a stationary equilibrium, the ex ante tax rate on capital income is approximately zero. The...

Dynamics of the Trade Balance and the Terms of Trade: The S-Curve

David Backus, Patrick J. Kehoe, Finn E. Kydland

We provide a theoretical interpretation of two features of international data: the countercyclical movements in net exports and the tendency for the trade balance to be negatively correlated with...

Business Cycle Accounting

V.V. Chari, Patrick J. Kehoe, Ellen McGrattan

We propose a simple method to help researchers develop quantitative models of economic fluctuations. The method rests on the insight that many models are equivalent to a prototype growth model with...

Money, Interest Rates, and Exchange Rates with Endogenously Segmented Markets

We analyze the effects of money injections on interest rates and exchange rates when agents must pay a Baumol-Tobin-style fixed cost to exchange bonds and money. Asset markets are endogenously...

Hot Money

Business cycle accounting

Recent empirical work on financial crises documents that crises tend to occur when macroeconomic fundamentals are weak; but even after conditioning on an exhaustive list of fundamentals, a sizable...

Time-varying risk, interest rates, and exchange rates in general equilibrium

We propose a simple method to help researchers develop quantitative models of economic fluctuations. The method rests on the insight that many models are equivalent to a prototype growth model with...

On the desirability of fiscal constraints in a monetary union

Under mild assumptions, the data indicate that fluctuations in nominal interest rate differentials across currencies are primarily fluctuations in time-varying risk. This finding is an immediate...

Trade and Exchange-Rate Dynamics in a Dynamic Competitive Economy

The desirability of fiscal constraints in monetary unions depends critically on whether the monetary authority can commit to follow its policies. If it can commit, then debt constraints can only...

Optimal Fiscal Policy in a Business Cycle Model

We apply recent advances in dynamic competitive analysis to open economy macroeconomics and draw out implications for comovement among consumption, output, trade balances, government deficits, and...

V. V. Chari, Lawrence J. Christiano, Patrick J. Kehoe

This paper develops the quantitative implications of optimal fiscal policy in a business cycle model. In a stationary equilibrium the ex ante tax rate on capital income is approximately zero. There...

Optimality of the Friedman Rule in Economies with Distorting Taxes

V. V. Chari, Lawrence J. Christiano, Patrick J. Kehoe

We find conditions for the Friedman rule to be optimal in three standard models of money. These conditions are homotheticity and separability assumptions on preferences similar to those in the public...

Competitive equilibria with limited enforcement

Kehoe, Patrick J., Perri, Fabrizio

Can sticky price models generate volatile and persistent real exchange rates?

The conventional wisdom is that monetary shocks interact with sticky goods prices to generate the observed volatility and persistence in real exchange rates. We investigate this conventional wisdom...

Hot money

Models of energy use: putty-putty vs. putty-clay

Recent empirical work on financial crises documents that crises tend to occur when macroeconomic fundamentals are weak, but that even after conditioning on an exhaustive list of fundamentals, a...

How to Advance Theory with Structural VARs: Use the Sims-Cogley-Nason Approach

Energy use is inelastic in time-series data, but elastic in international cross-section data. Two models of energy use reproduce these elasticities: a putty-putty model with adjustment costs...

Modern macroeconomics in practice: how theory is shaping policy

The common approach to evaluating a model in the structural VAR literature is to compare the impulse responses from structural VARs run on the data to the theoretical impulse responses from the...

International business cycles: theory vs. evidence

Theoretical advances in macroeconomics made in the last three decades have had a major influence on macroeconomic policy analysis. Moreover, over the last several decades, the United States and other...

A primer on static applied general equilibrium models

This article reviews recent work comparing properties of international business cycles with those of dynamic general equilibrium models. Two discrepancies between theory and data are described. One...

Capturing NAFTA's impact with applied general equilibrium models

In this paper, we describe and analyze the basic structure of the applied general equilibrium (AGE) models used to assess the effects of government trade policies. Once we have constructed the basic...

Reviving reputation models of international debt

We examine the results of four static applied general equilibrium (AGE) modeling teams' analyses of the effects of NAFTA. What they show is that Mexico's economy, because it's the smallest, will see...

Decades lost and found: Mexico and Chile since 1980

A traditional explanation for why sovereign countries repay debt is that they want to keep a good reputation so they can easily borrow more. This explanation does not hold if a country has access to...

Raphael Bergoeing, Patrick J. Kehoe, Timothy J. Kehoe, Raimundo Soto

Both Chile and Mexico experienced severe economic crises in the early 1980s, yet Chile recovered much faster than Mexico. This study analyzes four possible explanations for this difference and rules...

Accounting for the Great Depression

A Decade Lost and Found: Mexico and Chile in the 1980s

Economists have offered many theories for the U.S. Great Depression, but no consensus has formed on the main forces behind it. Here we describe and demonstrate a simple methodology for determining...

Raphael Bergoeing, Patrick J. Kehoe, Raimundo Soto

Chile and Mexico experienced severe economic crises in the early 1980s. This paper analyzes four possible explanations for why Chile recovered much faster than did Mexico. Comparing data from the two...

Sales and the real effects of monetary policy

Comparing alternative representations and alternative methodologies in business cycle accounting

In the data, a sizable fraction of price changes are temporary price reductions referred to as sales. Existing models include no role for sales. Hence, when confronted with data in which a large...

Modern macroeconomics in practice: how theory is shaping monetary policy

We make three comparisons relevant for the business cycle accounting approach. We show that in theory, representing the investment wedge as a tax on investment is equivalent to representing this...

Are structural VARs with long-run restrictions useful in developing business cycle theory?

Over the last three decades, macroeconomic theory and the practice of macroeconomics by economists have changed significantly—for the better. Macroeconomics is now firmly grounded in the principles...

Sticky prices and sectoral real exchange rates

The central finding of the recent structural vector autoregression (SVAR) literature with a differenced specification of hours is that technology shocks lead to a fall in hours. Researchers have used...

International Business Cycles with Endogenous Incomplete Markets

The classic explanation for the persistence and volatility of real exchange rates is that they are the result of nominal shocks in an economy with sticky goods prices. A key implication of this...

Policy-Driven Productivity in Chile and Mexico in the 1980's and 1990's

Backus, Kehoe, and Kydland (1992), Baxter and Crucini (1995), and Stockman and Tesar (1995) find two major discrepancies between standard international business cycle models with complete markets and...

Raphael Bergoeing, Patrick J. Kehoe, Timothy J. Kehoe, Raimundo Soto

Asking the right questions about the IMF

Taxing capital income: a bad idea

1998 Annual Report essay

Andrew Atkeson, V.V. Chari, Patrick J. Kehoe

Under a narrow set of assumptions, Chamley (1986) established that the optimal tax rate on capital income is eventually zero. This study examines and extends that result by relaxing Chamley’s...

Models of Sovereign Debt: Partial versus General Reputations.

Cole, Harold L, Kehoe, Patrick J

Some economists argue that as long as governments can earn the market rate of return by saving abroad, standard reputation models cannot support debt. The authors argue that these standard reputation...

Social Insurance and Transition.

Atkeson, Andrew, Kehoe, Patrick J

The authors study the general equilibrium effects of social insurance on transition in a model in which the process of moving workers from matches in the state sector to new matches in the private...

Financial crises as herds: overturning the critiques

Chari, V. V., Kehoe, Patrick J.

In search of scale effects in trade and growth

Backus, David K., Kehoe, Patrick J., Kehoe, Timothy J.

Optimality of the Friedman rule in economies with distorting taxes

Chari, V. V., Christiano, Lawrence J., Kehoe, Patrick J.

The role of institutions in reputation models of sovereign debt

Cole, Harold L., Kehoe, Patrick J.

On the denomination of government debt : A critique of the portfolio balance approach

Backus, David K., Kehoe, Patrick J.

Coordination of fiscal policies in a world economy

Kehoe, Patrick J.

Comment on M. Obstfeld, "Open-Economy Macroeconomics: Developments in Theory and Policy."

Kehoe, Patrick J

Optimal fiscal and monetary policy

Chari, V.V., Kehoe, Patrick J., J. B. Taylor, M. Woodford

We provide an introduction to optimal fiscal and monetary policy using the primal approach to optimal taxation. We use this approach to address how fiscal and monetary policy should be set over the...

Modern Macroeconomics in Practice: How Theory Is Shaping Policy

On the need for fiscal constraints in a monetary union

Over the last three decades, macroeconomic theory and the practice of macroeconomics by economists have changed significantly—for the better. Macroeconomics is now firmly grounded in the principles...

Chari, V.V., Kehoe, Patrick J.

If exchange rates are random walks, then almost everything we say about monetary policy is wrong

The key question asked by standard monetary models used for policy analysis, How do changes in short-term interest rates affect the economy? All of the standard models imply that such changes in...

Reply to Solow

On the optimal choice of a monetary policy instrument

Here we reply to Robert Solow’s comment (forthcoming) on our work (Chari and Kehoe (2007)).

The heterogeneous state of modern macroeconomics: a reply to Solow

The optimal choice of a monetary policy instrument depends on how tight and transparent the available instruments are and on whether policymakers can commit to future policies. Tightness is always...

The optimal degree of discretion in monetary policy.

Robert Solow has criticized our 2006 Journal of Economic Perspectives essay describing ?Modern Macroeconomics in Practice.? Solow eloquently voices the commonly heard complaint that too much...

A Decade Lost and Found: Mexico and Chile in the 1980s

How much discretion should the monetary authority have in setting its policy? This question is analyzed in an economy with an agreed-upon social welfare function that depends on the randomly...

Raphael Bergoeing, Patrick J. Kehoe, Timothy J. Kehoe, Raimundo Soto

Chile and Mexico exoperienced severe economic crises in the early 1980s. This paper analyzes four possible explanations for why Chile recovered much faster than did Mexico. Comparing data from the...

If exchange rates are random walks then almost everything we say about monetary policy is wrong

Business Cycle Accounting

The key question asked by standard monetary models used for policy analysis is how do changes in short term interest rates affect the economy. All of the standard models imply that such changes in...

Dynamics of the trade balance and the terms of trade: the S-curve

We propose a simple method to help researchers develop quantitative models of economic fluctuations. The method rests on the insight that many models are equivalent to a prototype growth model with...

Relative price movements in dynamic general equilibrium models of international trade

We provide a theoretical interpretation of two features of international data: the countercyclical movements in net exports and the tendency for the trade balance to be negatively correlated with...

Modeling the Transition to a New Economy: Lessons from Two Technological Revolutions

We examine the behavior of international relative prices from the perspective of dynamic general equilibrium theory, with particular emphasis on the variability of the terms of trade and the relation...

If Exchange Rates are Random Walks, Then Almost Everything We Say About Monetary Policy is Wrong

Many view the period after the Second Industrial Revolution as a paradigm of a transition to a new economy following a technological revolution, including the Information Technology Revolution. We...

Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?

Chari, V V, Kehoe, Patrick J, McGrattan, Ellen R

The central puzzle in international business cycles is that fluctuations in real exchange rates are volatile and persistent. We quantify the popular story for real exchange rate fluctuations: they...

Sustainable Plans and Mutual Default.

Chari, V V, Kehoe, Patrick J

This paper presents a model of optimal taxation in which private agents and the government can default on debt. As a benchmark, the authors consider Ramsey equilibria in which the government can...

Policy Cooperation among Benevolent Governments May Be Undesirable.

Kehoe, Patrick J

This paper presents a simple counterexample to the belief that policy cooperation among benevolent governments is desirable. It also explains circumstances under which such counterexamples are...

The Optimal Degree of Discretion in Monetary Policy

The Time Consistency of Optimal Monetary and Fiscal Policies

How much discretion should the monetary authority have in setting its policy? This question is analyzed in an economy with an agreed-upon social welfare function that depends on the economy's...

Fernando Alvarez, Patrick J. Kehoe, Pablo Andrés Neumeyer

We show that optimal monetary and fiscal policies are time consistent for a class of economies often used in applied work, economies appealing because they are consistent with the growth facts. We...

Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?

Sudden Stops and Output Drops

Deflation and Depression: Is There an Empirical Link?

Accounting for the Great Depression

Models of Energy Use: Putty-Putty versus Putty-Clay

International Evidence of the Historical Properties of Business Cycles.

Backus, David K, Kehoe, Patrick J

The authors contrast properties of real quantities with those of price levels and stocks of money for ten countries over the last century. Although the magnitude of output fluctuations has varied...

Coordination of fiscal policies in a world economy

Optimal fiscal and monetary policy

This paper provides a simple counterexample to the standard belief that in a world economy in which all countries are small, strategic interactions between policymakers are trivial and thus...

Money and interest rates with endogeneously segmented markets

We provide an introduction to optimal fiscal and monetary policy using the primal approach to optimal taxation. We use this approach to address how fiscal and monetary policy should be set over the...

Paths of development for early- and late-bloomers in a dynamic Heckscher-Ohlin model

This paper analyses the effects of open market operations on interest rates in a model in which agents must pay a fixed cost to exchange assets and cash. Asset markets are endogenously segmented in...

International business cycles with endogenous incomplete markets

We show that in a dynamic Heckscher-Ohlin model the timing of a country’s development relative to the rest of the world affects the path of the country’s development. A country that begins the...

Money, interest rates, and exchange rates with endogenously segmented markets

Backus, Kehoe and Kydland (1992), Baxter and Crucini (1995) and Stockman and Tesar (1995) find two major discrepancies between standard international business cycle models with complete markets and...

A decade lost and found: Mexico and Chile in the 1980s

This paper analyzes the effects of money injections on interest rates and exchange rates in a model in which agents must pay a Baumol-Tobin style fixed cost to exchange bonds and money. Asset markets...

Raphael Bergoeing, Patrick J. Kehoe, Timothy J, Raimundo Soto

Chile and Mexico experienced severe economic crises in the early 1980s. This paper analyzes four possible explanations for why Chile recovered much faster than did Mexico. Comparing data from the two...

Can sticky price models generate volatile and persistent real exchange rates?

Time inconsistency and free-riding in a monetary union

The central puzzle in international business cycles is that fluctuations in real exchange rates are volatile and persistent. We quantity the popular story for real exchange rate fluctuations: they...

Competitive equilibria with limited enforcement

We analyze the setting of monetary and nonmonetary policies in monetary unions. We show that in these unions a time inconsistency problem in monetary policy leads to a novel type of free-rider...

Financial crises as herds: overturning the critiques

We show how to decentralize constrained efficient allocations that arise from enforcement constraints between sovereign nations. In a pure exchange economy, these allocations can be decentralized...

The time consistency of monetary and fiscal policies

Financial crises are widely argued to be due to herd behavior. Yet recently developed models of herd behavior have been subjected to two critiques which seem to make them inapplicable to financial...

Fernando Alvarez, Patrick J. Kehoe, Pablo Neumeyer

We show that optimal monetary and fiscal policies are time consistent for a class of economies often used in applied work, economies appealing because they are consistent with the growth facts. We...

The optimal degree of discretion in monetary policy

Deflation and depression: is there an empirical link?

How much discretion should the monetary authority have in setting its policy? This question is analyzed in an economy with an agreed-upon social welfare function that depends on the randomly...

Patrick Kehoe?s comment on ?Determinants of business cycle comovement: a robust analysis? by Marianne Baxter and Michael Kouparitsas

Are deflation and depression empirically linked? No, concludes a broad historical study of inflation and real output growth rates. Deflation and depression do seem to have been linked during the...

Modeling and measuring organization capital

This paper by Baxter and Kouparitsas is an ambitious attempt to explore which variables are robust in explaining the correlations of bilateral GDP between countries at business cycle frequencies....

Sudden stops and output drops

Manufacturing plants have a clear life cycle: they are born small, grow substantially as they age, and eventually die. Economists have long thought that this life cycle is driven by the accumulation...

Modeling the transition to a new economy: lessons from two technological revolutions

We develop a positive theory of the adoption of child labor laws. Workers who compete with children in the labor market support the introduction of a child labor ban, unless their own working...

The advantage of transparency in monetary policy instruments

Many view the period after the Second Industrial Revolution as a paradigmatic example of a transition to a new economy following a technological revolution and conjecture that this historical...

Appendices: Business cycle accounting

Monetary policy instruments differ in tightness?how closely they are linked to inflation?and transparency?how easily they can be monitored. Tightness is always desirable in a monetary policy...

How to advance theory with structural VARs: use the Sims-Cogley-Nason approach

Business cycles - Econometric models

The optimal degree of discretion in monetary policy

The common approach to evaluating a model in the structural VAR literature is to compare the impulse responses from structural VARs run on the data to the theoretical impulse responses from the...

Optimal fiscal and monetary policy: some recent results

How much discretion should the monetary authority have in setting its policy? This question is analyzed in an economy with an agreed-upon social welfare function that depends on the randomly...

V.V. Chair, Lawrence J. Christiano, Patrick J. Kehoe

Fiscal policy ; Monetary policy

International real business cycles

Optimal fiscal policy in a stochastic growth model (technical appendix)

We ask whether a two-country real business cycle model can account simultaneously for domestic and international aspects of business cycles. With this question in mind, we document a number of...

V. V. Chari, Lawrence J. Christiano, Patrick J. Kehoe

Optimal social insurance, incentives, and transition

Putty-clay capital and energy

We study transition in a model in which the process of moving workers from matches in the state sector to new matches in the private sector takes time and involves uncertainty. When there are...

Social insurance and transition

We evaluate the ability of models with putty-clay capital and stochastic energy prices to account for the dynamics of energy use and output. Economists have noted a close relationship between changes...

Optimal fiscal policy in a business cycle model (technical appendix)

We evaluate the ability of models with putty-clay capital and stochastic energy prices to account for the dynamics of energy use and output. Economists have noted a close relationship between changes...

V. V. Chari, Lawrence J. Christiano, Patrick J. Kehoe

Business cycles - Econometric models

Models of sovereign debt: partial vs. general reputations

On the need for fiscal constraints in a monetary union

Bulow and Rogoff (1989b) show that as long as governments can earn the market rate of return by saving abroad, standard reputation models cannot support debt. We argue that these standard reputation...

Money, interest rates, and exchange rates with endogenously segmented asset markets

Fiscal policy ; Monetary unions

Financial crises as herds

This paper analyzes the effects of money injections on interest rates and exchange rates in a model in which agents must pay a Baumol-Tobin style fixed cost to exchange bonds and money. Asset markets...

The transition to a new economy after the Second Industrial Revolution

Financial crises ; Investments

The advantage of transparent instruments of monetary policy

During the Second Industrial Revolution, 1860–1900, many new technologies, including electricity, were invented. These inventions launched a transition to a new economy, a period of about 70 years...

On the optimality of transparent monetary policy

A classic question in international economics is whether it is better to use the exchange rate or the money growth rate as the instrument of monetary policy. A common argument is that the exchange...

Accounting for the Great Depression (technical appendix)

We analyze the optimal design of monetary rules. We suppose there is an agreed upon social welfare function that depends on the randomly fluctuating state of the economy and that the monetary...

On the robustness of herds

Depressions

The optimal degree of discretion in monetary policy

Herd behavior is argued by many to be present in many markets. Existing models of such behavior have been subjected to two apparently devastating critiques. The continuous investment critique is that...

Business cycle accounting

How much discretion is it optimal to give the monetary authority in setting its policy? We analyze this mechanism design question in an economy with an agreed-upon social welfare function that...

Competitive equilibria with limited enforcement

This paper proposes a simple method for guiding researchers in developing quantitative models of economic fluctuations. We show that a large class of models, including models with various frictions,...

The time consistency of monetary and fiscal policies

Previous literature has shown that the study and characterization of constrained efficient allocations in economies with limited enforcement is useful to understand the limited risk sharing observed...

Fernando Alvarez, Patrick J. Kehoe, Pablo Neumeyer

Are optimal monetary and fiscal policies time consistent in a monetary economy? Yes, but if and only if under commitment the Friedman rule of setting nominal interest rates to zero is optimal. This...

Time-varying risk, interest rates and exchange rates in general equilibrium

A critique of structural VARs using real business cycle theory

Time-varying risk is the primary force driving nominal interest rate differentials on currency-denominated bonds. This finding is an immediate implication of the fact that exchange rates are roughly...

Comparing alternative representations and alternative methodologies in business cycle accounting

The main substantive finding of the recent structural vector autoregression literature with a differenced specification of hours (DSVAR) is that technology shocks lead to a fall in hours. Researchers...

Data Appendix to A Decade Lost and Found: Mexico and Chile in the 1980s

We make two comparisons relevant for the business cycle accounting approach. We show that in theory representing the investment wedge as a tax on investment is equivalent to representing this wedge...

Raphael Bergoeing, Patrick J. Kehoe, Timothy J. Kehoe, Raimundo Soto

Detailed macroeconomic data to accompany the article in the Review of Economic Dynamics

Backus_Kehoe_Kydland

Backus, David K., Kehoe, Patrick J., Kydland, Finn E.

Data from Dynamics of the Trade Balance and the Terms of Trade; The J-Curve?, American Economic Review, 84:1, March 1994. Quarterly, 1955q1 to 1991q4.

A Decade Lost and Found: Mexico and Chile in the 1980s

Raphael Bergoeing, Patrick J. Kehoe, Timothy J. Kehoe, Raimundo Soto

Chile and Mexico experienced severe economic crises in the early 1980s. This paper analyzes four possible explanations for why Chile recovered much faster than did Mexico. Comparing data from the two...

Relative Price Movements in Dynamic General Equilibrium Models of International Trade

International Evidence on the Historical Properties of Business Cycles

International Business Cycles: Theory and Evidence

Optimal Fiscal and Monetary Policy: Some Recent Results.

Chari, V V, Christiano, Lawrence J, Kehoe, Patrick J

On the Roles of International Financial Markets and Their Relevance for Economic Policy: Comment.

Kehoe, Patrick J

Sophisticated monetary policies

Temporary price changes and the real effects of monetary policy

The Ramsey approach to policy analysis finds the best competitive equilibrium given a set of available instruments. This approach is silent about unique implementation, namely designing policies so...

On the Need for a New Approach to Analyzing Monetary Policy

In the data, a large fraction of price changes are temporary. We provide a simple menu cost model which explicitly includes a motive for temporary price changes. We show that this simple model can...

New Keynesian Models: Not Yet Useful for Policy Analysis

We present a pricing kernel that summarizes well the main features of the dynamics of interest rates and risk in postwar U.S. data and use it to uncover how the pricing kernel has moved with the...

Time Inconsistency and Free-Riding in a Monetary Union

Macroeconomists have largely converged on method, model design, reduced-form shocks, and principles of policy advice. Our main disagreements today are about implementing the methodology. Some think...

VARADARAJAN V. CHARI, PATRICK J. KEHOE

In monetary unions, a time inconsistency problem in monetary policy leads to a novel type of free-rider problem in the setting of non-monetary policies. The free-rider problem leads union members to...

On the need for a new approach to analyzing monetary policy

Asking the right questions about the IMF

We present a pricing kernel that summarizes well the main features of the dynamics of interest rates and risk in postwar U.S. data and use it to uncover how the pricing kernel has moved with the...

Modern macroeconomics in practice: how theory is shaping monetary policy

1998 Annual Report essay

On the need for a new approach to analyzing monetary policy

Over the last three decades, macroeconomic theory and the practice of macroeconomics by economists have changed significantly—for the better. Macroeconomics is now firmly grounded in the principles...

New Keynesian models: not yet useful for policy analysis

Monetary policy

If exchange rates are random walks, then almost everything we say about monetary policy is wrong

Macroeconomists have largely converged on method, model design, reduced-form shocks, and principles of policy advice. Our main disagreements today are about implementing the methodology. Some think...

Sudden Stops and Output Drops

The key question asked by standard monetary models used for policy analysis is, How do changes in short-term interest rates affect the economy? All of the standard models imply that such changes in...

A Critique of Structural VARs Using Real Business Cycle Theory

Business Cycle Accounting

V V Chari, Patrick J Kehoe, Ellen R. McGrattan

Hot Money

Time Inconsistency and Free-Riding in a Monetary Union

Relative Price Movements in Dynamic General Equilibrium Models of International Trade

Social Insurance and Transition

We examine the behavior of international relative prices from the perspective of dynamic general equilibrium theory, with particular emphasis on the variability of the terms of trade and the relation...

International Business Cycles: Theory and Evidence

We study the general equilibrium effects of social insurance on the transition in a model in which the process of moving workers from matches in the state sector to new matches in the private sector...

David Backus, Patrick J. Kehoe, Finn E. Kydland

We review recent work comparing properties of international business cycles with those of dynamic general equilibrium models, emphasizing two discrepancies between theory and data that we refer to as...

Models of Energy Use: Putty-Putty versus Putty-Clay

The Poverty of Nations: A Quantitative Exploration

In this paper, we build a version of the putty-clay model in which there is a large variety of types of capital goods which are combined with energy in different fixed proportions. Our principal...

Reputation Spillover Across Relationships with Enduring and Transient Beliefs: Reviving reputation Models of Debt

We document regularities in the distribution of relative incomes and patterns of investment in countries and over time. We develop a quantitative version of the neoclassical growth model with a broad...

Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?

A traditional explanation for why sovereign governments repay debts is that they want to keep good reputations so they can easily borrow more. Bulow and Rogoff show that this argument is invalid...

Monetary Shocks and Real Exchange Rates in Sticky Price Models of International Business Cycles

The purpose of this paper is to construct a quantitative equilibrium model with price setting and use it to ask whether staggered price setting can generate persistent output fluctuations following...

Optimal Fiscal and Monetary Policy

The data show large and persistent deviations of real exchange rates from purchasing power parity. Recent work has shown that to a large extent these movements are driven by deviations from the law...

Money and Interest Rates with Endogeneously Segmented Markets

We provide an introduction to optimal fiscal and monetary policy using the primal approach to optimal taxation. We use this approach to address how fiscal and monetary policy should be set over the...

Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?

This paper analyses the effects of open market operations on interest rates in a model in which agents must pay a fixed cost to exchange assets and cash. Asset markets are endogenously segmented in...

International Business Cycles with Endogenous Incomplete Markets

The central puzzle in international business cycles is that real exchange rates are volatile and persistent. The most popular story for real exchange rate fluctuations is that they are generated by...

Money, Interest Rates, and Exchange Rates with Endogenously Segmented Asset Markets

Backus, Kehoe and Kydland (1992), Baxter and Crucini (1995) and Stockman and Tesar (1995) find two major discrepancies between standard international business cycle models with complete markets and...

A Decade Lost and Found: Mexico and Chile in the 1980s

This paper analyzes the effects of money injections on interest rates and exchange rates in a model in which agents must pay a Baumol-Tobin style fixed cost to exchange bonds and money. Asset markets...

Raphael Bergoeing, Patrick J. Kehoe, Timothy J. Kehoe, Raimundo Soto

Chile and Mexico experienced severe economic crises in the early 1980s. This paper analyzes four possible explanations for why Chile recovered much faster than did Mexico. Comparing data from the two...

The Transition to a New Economy After the Second Industrial Revolution

The Advantage of Transparent Instruments of Monetary Policy

During the Second Industrial Revolution, 1860-1900, many new technologies, including electricity, were invented. These inventions launched a transition to a new economy, a period of about 70 years of...

Measuring Organization Capital

Is the exchange rate or the money growth rate the better instrument of monetary policy? A common argument is that the exchange rate has a natural advantage because it is more transparent: it is...

Policy-Driven Productivity in Chile and Mexico in the 1980s and 1990s

In the manufacturing sector of the U.S. economy, nearly 9% of output is not accounted for as payments to either physical capital or labor. The value of this output is a little larger than the value...

Raphael Bergoeing, Patrick J. Kehoe, Timothy J. Kehoe, Raimundo Soto

Both Chile and Mexico experienced severe economic crises in the early 1980s, but Chile recovered much faster than did Mexico. Using growth accounting and a calibrated dynamic general equilibrium...

Competitive Equilibria With Limited Enforcement

Time Consistency and Free-Riding in a Monetary Union

This study demonstrates how constrained efficient allocations can arise endogenously as equilibria in an economy with a limited ability to enforce contracts and with private agents behaving...

Financial Crises as Herds: Overturning the Critiques

We analyze the setting of monetary and nonmonetary policies in monetary unions. We show that in these unions a time inconsistency problem in monetary policy leads to a novel type of free- rider...

On the Optimal Choice of a Monetary Policy Instrument

Financial crises are widely argued to be due to herd behavior. Yet recently developed models of herd behavior have been subjected to two critiques which seem to make them inapplicable to financial...

The Heterogeneous State of Modern Macroeconomics: A Reply to Solow

The optimal choice of a monetary policy instrument depends on how tight and transparent the available instruments are and on whether policymakers can commit to future policies. Tightness is always...

Chari, V V, Kehoe, Patrick J

Robert Solow has criticized our 2006 Journal of Economic Perspectives essay describing "Modern Macroeconomics in Practice." Solow eloquently voices the commonly heard complaint that too much...

Sustainable Plans.

The authors propose a definition of time-consistent policy for infinite-horizon economies with competitive private agents. Allocations and policies are defined as functions of the history of past...

International Coordination of Fiscal Policy in Limiting Economies.

Chari, V V, Kehoe, Patrick J

The authors examine the limiting behavior of cooperative and noncooperative fiscal policies as countries' market power goes to zero. They show that these policies converge if countries raise revenues...

Temporary price changes and the real effects of monetary policy

Temporary Price Changes and the Real Effects of Monetary Policy

In the data, prices change both temporarily and permanently. Standard Calvo models focus on permanent price changes and take one of two shortcuts when confronted with the data: drop temporary changes...

Are Structural VARs with Long-Run Restrictions Useful in Developing Business Cycle Theory?

In the data, prices change both temporarily and permanently. Standard Calvo models focus on permanent price changes and take one of two shortcuts when confronted with the data: drop temporary changes...

Facts and myths about the financial crisis of 2008

The central finding of the recent structural vector autoregression (SVAR) literature with a differenced specification of hours is that technology shocks lead to a fall in hours. Researchers have used...

V.V. Chari, Lawrence J. Christiano, Patrick J. Kehoe

The United States is indisputably undergoing a financial crisis. Here we examine four claims about the way the financial crisis is affecting the economy as a whole and argue that all four claims are...

Are structural VARs with long-run restrictions useful in developing business cycle theory?

Chari, V.V., Kehoe, Patrick J., McGrattan, Ellen R.

No, unless technology shocks account for virtually all of the fluctuations in output.

Sophisticated monetary policies

Patrick J. Kehoe, V. V. Chari, Andrew Atkeson

The Ramsey approach to policy analysis finds the best competitive equilibrium given a set of available instruments but is silent about unique implementation, namely, designing policies so that the...

New Keynesian Models: Not Yet Useful for Policy Analysis

New Keynesian models: not yet useful for policy analysis

Macroeconomists have largely converged on method, model design, reduced-form shocks, and principles of policy advice. Our main disagreements today are about implementing the methodology. Some think...

Ellen R. McGrattan, Patrick J. Kehoe, V. V. Chari

In the 1970s macroeconomists often disagreed bitterly. Macroeconomists have now largely converged on method, model design, and macroeconomic policy advice. The disagreements that remain all stem from...

On the Need for a New Approach to Analyzing Monetary Policy