Macroeconomics & International Finance Seminars

Fall 2017

Tuesday 1:403:00 p.m.
499 Engineering II

October 3
Zheng Liu, SF Fed
"The Slow Job Recovery in a Macro Model of Search and Recruiting Intensity"
Host: Grace Gu & Chenyue Hu
An estimated model with labor search frictions and endogenous variations in search intensity and recruiting intensity does well in explaining the slow job recovery after the Great Recession. The model features a sunk cost of vacancy creation, under which firms rely on adjusting both the number of vacancies and recruiting intensity to respond to aggregate shocks. This stands in contrast to the textbook model with free entry, which implies constant recruiting intensity. Our estimation suggests that fluctuations in search and recruiting intensity help substantially bridge the gap between the actual and model-predicted job filling and finding rates.

October 10
Ben Hebert, Standford GSB
"Optimal Corporate Taxation Under Financial Frictions"
Host: Chenyue Hu
We study the optimal design of corporate taxation when firms are subject to financial constraints. We find that corporate taxes should be levied on unconstrained firms, since those firms value resources inside the firm less than financially constrained firms. When the government has complete information about which firms are and are not constrained, this principle is sufficient to characterize optimal corporate tax policy. When the government (and other outsiders) do not know which firms are and are not constrained, the government can use the payout policies of firms to elicit whether or not the firm is constrained, and assess taxes accordingly. Using this insight, we discuss conditions under which a tax on dividends paid is the optimal corporate tax. We then extend this result to a dynamic setting, showing that, if the government lacks commitment, the optimal sequence of tax mechanisms can be implemented with a dividend tax. With commitment, we reach a very different conclusion– a lump sum tax on firm entry is optimal. We argue that these two models demonstrate an underlying principle, that optimal corporate taxes should avoid exacerbating financial frictions, and demonstrate that the structure of the financial frictions can drastically change the optimal policy.

October 17
Michael Weber, Chicago Booth
"Price Rigidities and the Granular Origins of Aggregate Fluctuations"
Host: Chenyue Hu

October 31
Julio Garin, Claremont McKenna
"Repatriation Taxes"
Host: Grace Gu & Carl Walsh
We present a model of a multinational firm to quantify the effects of policy changes in repatriation taxes rates - taxes that firms pay on profits remitted from abroad. Our model captures the full dynamic response of the firm from the time they expect a policy change, through the enactment of the policy change, to the lasting effects of the policy. We find that a failure to account for the full dynamics surrounding a reduction in repatriation tax rates overstates the amount of profits repatriated from abroad and underestimates tax revenue losses. Additionally, since most multinational firms have access to external credit markets, policy changes have a relatively small impact on a firm's hiring and investment decisions, as access to credit makes these decisions relatively independent from changes in the flow of assets from abroad. 

November 7
Eric Swanson, UC Irvine
"Measuring the Effects of Federal Reserve Forward Guidance and Asset Purchases on Financial Markets"
Host: Grace Gu
I extend the methods of G ̈urkaynak, Sack, and Swanson (2005) to separately identify the effects of Federal Reserve forward guidance and large-scale asset purchases (LSAPs) during the 2009–15 U.S. zero lower bound (ZLB) period. I find that both forward guidance and LSAPs had substantial and highly statistically significant effects on medium-term Treasury yields, stock prices, and exchange rates, comparable in magnitude to the effects of the federal funds rate before the ZLB. Forward guidance was more effective than LSAPs at moving short-term Treasury yields, while LSAPs were more effective than forward guidance and the federal funds rate at moving longer-term Treasury yields, corporate bond yields, and interest rate uncertainty. However, the effects of forward guidance were not very persistent, with a half-life of 1–4 months. The effects of LSAPs seem to be more persistent. I conclude that, overall in terms of these criteria, LSAPs were a more effective policy tool than forward guidance during the ZLB period.

November 14
Michael Magill, USC
"Unconventional Monetary Policy and the Safety of the Banking System"
Host: Carl Walsh & Hikaru Saijo
This paper presents a simple general equilibrium model which simultaneously incorporates the banking sector and the monetary and macro-prudential policy of the Central Bank. Banks are viewed  as intermediaries which channel  funds from  cash pools and depositors who insist on the complete safety of their funds, and investors who accept risks, to borrowers who invest in risky projects. Bank debt is  rendered safe by the explicit or implicit guarantee of the government. The presence of cash pools  which can either buy (short-term) government bills or lend to banks implies that the choice of an interest rate by the Central Bank determines the cost of funds for the banks. The government insurance of debt gives it an advantage over equity which implies that capital requirements are needed to limit bank leverage. The paper studies the possible monetary and prudential policies of the Central Bank and their effect on the banking equilibrium, for economies with a high demand for a safe asset---a notion precisely defined in the paper. We show that the conventional monetary and prudential tools, the interest rate and the capital requirements of banks, are not independent instruments, and that there is no choice of policy which can lead to a Pareto optimum. However enlarging the monetary policy toolkit by adding the payment of interest on bank reserves and QE policies can, in conjunction with appropriate capital requirements, restore the Pareto optimality of the banking equilibrium.

November 28
Toan Phan, UNC
"Self-enforcing Debt Limits and Costly Default in General Equilibrium"
Host: Grace Gu
We establish a novel determination of self-enforcing debt limits at the present value of default cost in a general competitive equilibrium. Agents can trade state-contingent debt but cannot commit to repay. If an agent defaults, she loses a fraction of her current and future endowments. Moreover, she is excluded from borrowing but is still allowed to save, as in Bulow and Rogoff (1989). Competition implies that debt limits are not-too-tight, as in Alvarez Jermann (2000). Under a mild condition that the endowment loss from default is bounded away from zero, we show that the equilibrium interest rates must be sufficiently high that the present value of aggregate endowments is finite. Not-too-tight debt limits are exactly equal to the present value of endowment loss due to default. The determination of competitive debt limits based on endowment loss is isomorphic to the determination of public debt sustainable by tax revenues. We also show that competitive equilibria with self-enforcingdebt and costly default are equivalent to Arrow-Debreu equilibria with limitedpledgeability, as defined by Gottardi and Kubler (2015).

December 5 - CANCELLED!
Saki Bigio, UCLA
"Optimal Debt-Maturity Management"
Host: Alonso Villacorta
We solve the problem of a government that wants to smooth financial expenses by choosing over a continuum of bonds of different maturity. The planner takes into account that adjusting debt too fast can affect prices. At the same time, it wants to insure against several sources of risk: (a) income risk, (b) interest rate (price) risk, (c) liquidity risk (prices can become more sensitive to issuance’s), and (d) the risks in the cost of default. We characterize this infinite dimensional control problem to aid the design of the debt-maturity profile in response to these forms of risk.


Winter 2018