Federal Reserve Bank of Minneapolis (2003)
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...
Financial Crises as Herds: Overturning the Critiques (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...
Federal Reserve Bank of Minneapolis (2002)
V. V. Chari, Patrick J. Kehoe, Ellen R. Mcgrattan
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 (2002)
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 Quarterly Review Winter 2002, Vol. 26, No. 1, pp. 3-30 (2002)
Patrick J. Kehoe, Raimundo Soto, Catolica Chile
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...
Raphael Bergoeing, Patrick J. Kehoe, Timothy J. Kehoe, Raimundo Soto, Catlica Chile
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 Research Department (2001)
V. V. Chari, Lawrence J. Christiano, Patrick J. Kehoe
This paper is preliminary and is circulated to stimulate discussion. It is not to be quoted without the authors' permission. Technical Appendix to Chari, Christiano and Kehoe, "Optimal Fiscal Policy...
Money, Interest Rates, and Exchange Rates With Endogenously Segmented Asset Markets (2001)
O Alvarez, Andrew Atkeson, Patrick J. Kehoe
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...
Reviving Reputation Models of International Debt (2001)
Harold L. Cole, Patrick J. Kehoe
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...
Taxing Capital Income: A Bad Idea (2001)
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...
Sustainable Plans and Debt (2001)
Patrick J. Kehoe, B Chari, Patrick J
This paper presents a simple general equilibrium model of optimal fiscal policy similar to that of Lucas and Stokey (1983), except that we let the government default on its debt. We consider...
Macroeconomics in a world economy /--by Patrick James Michael Kehoe. (1986)
Thesis (Ph. D.)--Harvard University, 1986.
Macroeconomics in a world economy [microform] / (1986)
Thesis (Ph. D.)--Harvard University, 1986.
Accounting for the Great Depression
V. V. Chari, Patrick J. Kehoe, Ellen R. McGrattan
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...
International policy cooperation may be undesirable
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
David K. Backus, Patrick J. Kehoe
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...
International coordination of fiscal policy in limiting economies
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...
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 mutual default
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...
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...
Reputation with multiple relationships: reviving reputation models of debt
Harold L. Cole, Patrick J. Kehoe
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 evidence on the historical properties of business cycles
David K. Backus, Patrick J. Kehoe
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...
International real business cycles
David K. Backus, Patrick J. Kehoe, Finn E. Kydland
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...
Optimal fiscal and monetary policy: some recent results
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
Andrew Atkeson, Patrick J. Kehoe
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...
The role of institutions in reputation models of sovereign debt
Harold L. Cole, Patrick J. Kehoe
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...
Industry evolution and transition: measuring investment in organization
Andrew Atkeson, Patrick J. Kehoe
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...
Social insurance and transition
Andrew Atkeson, Patrick J. Kehoe
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...
The poverty of nations: a quantitative exploration
V. V. Chari, Patrick J. Kehoe, Ellen R. McGrattan
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...
Reputation spillover across relationships: reviving reputation models of debt
Harold L. Cole, Patrick J. Kehoe
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...
V. V. Chari, Patrick J. Kehoe, Ellen R. McGrattan
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...
On the Desirability of Fiscal Constraints in a Monetary Union
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...
Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?
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...
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
Fernando Alvarez, Andrew Atkeson, Patrick J. Kehoe
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...
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...
V. V. Chari, Patrick J. Kehoe, Ellen R. 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...
Time-varying risk, interest rates, and exchange rates in general equilibrium
Fernando Alvarez, Andrew Atkeson, Patrick J. Kehoe
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...
On the desirability of fiscal constraints in a monetary union
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...
Trade and Exchange-Rate Dynamics in a Dynamic Competitive Economy
David K. Backus, Patrick J. Kehoe
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...
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...
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...
Can sticky price models generate volatile and persistent real exchange rates?
V.V. Chari, Patrick J. Kehoe, Ellen R. McGrattan
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...
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...
Models of energy use: putty-putty vs. putty-clay
Andrew Atkeson, Patrick J. Kehoe
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...
How to Advance Theory with Structural VARs: Use the Sims-Cogley-Nason Approach
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...
Modern macroeconomics in practice: how theory is shaping policy
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...
International business cycles: theory vs. evidence
David K. Backus, Patrick J. Kehoe, Finn E. Kydland
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...
A primer on static applied general equilibrium models
Patrick J. Kehoe, Timothy J. Kehoe
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...
Capturing NAFTA's impact with applied general equilibrium models
Patrick J. Kehoe, Timothy J. Kehoe
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...
Reviving reputation models of international debt
Harold L. Cole, Patrick J. Kehoe
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...
Decades lost and found: Mexico and Chile since 1980
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
V. V. Chari, Patrick J. Kehoe, Ellen R. McGrattan
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...
A Decade Lost and Found: Mexico and Chile in the 1980s
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
Patrick J. Kehoe, Virgiliu Midrigan
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...
Comparing alternative representations and alternative methodologies in business cycle accounting
V. V. Chari, Patrick J. Kehoe, Ellen R. McGrattan
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...
Modern macroeconomics in practice: how theory is shaping 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...
Are structural VARs with long-run restrictions useful in developing business cycle theory?
V. V. Chari, Patrick J. Kehoe, Ellen R. McGrattan
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...
Sticky prices and sectoral real exchange rates
Patrick J. Kehoe, Virgiliu Midrigan
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...
International Business Cycles with Endogenous Incomplete Markets
Patrick J. Kehoe, Fabrizio Perri
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...
Policy-Driven Productivity in Chile and Mexico in the 1980's and 1990's
Raphael Bergoeing, Patrick J. Kehoe, Timothy J. Kehoe, Raimundo Soto
Taxing capital income: a bad idea
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...
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
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...
If exchange rates are random walks, then almost everything we say about monetary policy is wrong
Fernando Alvarez, Andrew Atkeson, Patrick J. Kehoe
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...
Here we reply to Robert Solow’s comment (forthcoming) on our work (Chari and Kehoe (2007)).
On the optimal choice of a monetary policy instrument
Andrew Atkeson, V. V. Chari, Patrick J. Kehoe
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 heterogeneous state of modern macroeconomics: a reply to Solow
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...
The optimal degree of discretion in monetary policy.
Susan Athey, Andrew Atkeson, Patrick J. Kehoe
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...