This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

  1. Home
  2. ASSA Annual Meeting
  3. 2025
  4. Program
  5. Advances in Macroeconomic Theory
« Back to Results

Advances in Macroeconomic Theory

Paper Session

Friday, Jan. 3, 2025 2:30 PM - 4:30 PM (PST)

Hilton San Francisco Union Square, Union Square 12
Hosted By: Econometric Society
  • Chair: Ryan Chahrour, Cornell University

The Financial Origins of Non Fundamental Risk

Sushant Acharya
,
Bank of Canada
Keshav Dogra
,
Federal Reserve Bank of New York
Sanjay R. Singh
,
University of California-Davis

Abstract

We formalize the idea that the financial sector can be a source of non-fundamental risk. Households’ desire to hedge against price volatility can generate price volatility in equilibrium, even absent fundamental risk. Fearing that asset prices may fall, risk- averse households demand safe assets from leveraged intermediaries, whose issuance of safe assets exposes the economy to self-fulfilling fire sales. Policy can eliminate non- fundamental risk by (i) increasing the supply of publicly backed safe assets, through issuing government debt or bailing out intermediaries, or (ii) reducing the demand for safe assets, through social insurance or by acting as a market maker of last resort.

Revisiting the Forecasts of Others

Ryan Chahrour
,
Cornell University
Kyle Jurado
,
Duke University

Abstract

In macroeconomic models with dispersed information, agents have an incentive to learn from endogenous variables, requiring them to forecast the forecasts of others. This paper revisits the model of Townsend (1983) to characterize how this mechanism affects equilibrium dynamics. The first part of the paper simplifies, revises, and extends past results about situations when prices are fully revealing. The second part explains that full revelation does not occur in the original model and proves that the equilibrium state vector is infinite- dimensional. It also provides a new numerical solution procedure for such cases, which operates entirely in the frequency domain.

Fiscal Federalism and Monetary Unions

Rafael Berriel
,
Stanford University
Eugenia Gonzalez-Aguado
,
Toulouse School of Economics
Patrick J. Kehoe
,
Stanford University
Elena Pastorino
,
Stanford University

Abstract

We apply ideas from fiscal federalism to reassess how fiscal authority should be delegated within a monetary union. In a real-economy model with no fiscal externalities, local fiscal authorities have an informational advantage about their citizens' preferences for public spending compared to a fiscal union. A generalization of Oates' (1999) decentralization result applies: a decentralized fiscal regime dominates a fiscal union, with its superiority increasing as fiscal union information quality worsens. In the presence of direct fiscal externalities across countries, a decentralized regime is optimal for small federations, while a centralized regime is optimal for large ones. We then consider a monetary-economy model. If the monetary authority can commit to its inflation policy, then a version of Oates (1999)’s decentralization result holds. By contrast, when the monetary authority lacks commitment power, the resulting time-inconsistency problem generates an indirect endogenous fiscal externality. In this case, when a country-level fiscal authority chooses a higher level of nominal debt, it induces the monetary authority to inflate more to reduce the level of distortionary taxes needed to finance the higher debt. Because country-level fiscal authorities do not take into account the costs that their fiscal policies induce, a negative fiscal externality arises. This externality naturally becomes more severe as the number of countries in the monetary union increases. Hence, as in the real-economy model, a decentralized fiscal regime is optimal for small monetary unions, whereas a fiscal union is optimal for sufficiently large ones. Our key result is that as the size of a monetary union increases, it becomes relatively more desirable to centralize fiscal authority. We conclude by discussing the implications of our results for the debate on the integration of fiscal policy within the EU and its enlargement.
JEL Classifications
  • E3 - Prices, Business Fluctuations, and Cycles