International Cross-holdings of Bonds in a Two-good DSGE Model (Economics Letters 108 (2), 2010)
Abstract: I solve for equilibrium portfolios in a two-country, two-good dynamic stochastic general equilibrium (DSGE) model where the only traded assets are locally-denominated real bonds. Unless the elasticity of substitution between goods is exceptionally low, the model predicts that each country will hold a short position in foreign bonds.
Trend Shocks and the Countercyclical U.S. Current Account (with Eylem Ersal Kiziler; under second-round review)
Abstract: From 1960-2009, the U.S. current account balance has tended to decline during expansions and improve in recessions. We argue that shocks to the trend growth rate of productivity can help explain the countercyclical U.S. current account. Our framework is a two-country, two-good business cycle model in which international asset trade is limited to a single, noncontingent bond. We identify trend and transitory shocks to U.S. productivity using generalized method of moments (GMM) estimation. The specification that best matches the data assigns a large role to trend shocks, and a variance decomposition exercise reveals that trend shocks are the primary driver of the current-account-to-GDP ratio. The estimated model also captures key facts regarding international comovement and consumption risk-sharing.
(New) Does the Direct-response Method Induce Guilt Aversion in a Trust Game? (with Ethan Schmick; under review)
Abstract: We compare the strategy and direct-response methods in a one-shot trust game with hidden action. In our experiment, the decision elicitation method affects neither participants' behavior nor their beliefs about this behavior. We conclude that the direct-response method does not, by itself, induce guilt aversion.
(New) Who Believes in Fiscal and Monetary Stimulus?
Abstract: Does the public believe that fiscal and monetary stimulus reduce unemployment? I present survey evidence on this question from a random sample of Pennsylvania residents. Few respondents express a consistently Keynesian view of fiscal and monetary stimulus. In fact, the typical respondent believes that an increase in government spending makes unemployment worse. Views on monetary stimulus depend on how the question is framed. The typical respondent believes that Fed money creation worsens unemployment while a Fed interest rate cut improves it. I show how opinion varies by political party, educational attainment, income, and other demographic characteristics. Favorable opinions about government spending are strongly associated with support for President Obama's economic policies, even after controlling for political party and for respondents' opinions about the current state and trajectory of the economy.
A Business Cycle Model of Aggregate Debt and Equity Flows
Abstract: Why do U.S. firms issue more debt and pay more to shareholders when aggregate output is high? I develop a business cycle model that explains these cyclical patterns. A tax advantage on debt makes borrowing attractive, but lenders must pay a credit insurance premium that increases with the firm's leverage ratio. The calibrated model with total factor productivity shocks alone matches key business cycle moments in the data quite well. I compare my model with Jermann and Quadrini (2009), who emphasize the role of credit shocks in explaining the dynamics of debt and equity.
Cross-border Equity Investment and the Business Cycle
Abstract: I present new evidence that gross foreign assets and liabilities in equity investments, measured at market value, are positively correlated over the business cycle in each of the Group of Seven industrialized countries (G7). The close comovement of assets and liabilities, in turn, reflects strong cross-country correlation between equity prices and moderate comovement of gross outflows and inflows. I analyze an international real business cycle (IRBC) model to evaluate possible causes of these correlations: diminishing marginal product of capital, imperfect substitutability of goods, incomplete markets, and investment project duration. A complete markets model with diminishing returns to capital predicts positive cross-country correlation between equity prices. I show that imperfect substitutability between goods strengthens this correlation, and I show that cross-border financial costs lead to negative correlation between gross capital outflows and inflows. Finally, I develop a model that distinguishes foreign direct investment (FDI) in new projects from portfolio equity. The model suggests that assets and liabilities should be more closely correlated in portfolio equity than in FDI.