Papers by David Andolfatto
This paper presents a dynamic general equilibrium model where asymmetric information about asset ... more This paper presents a dynamic general equilibrium model where asymmetric information about asset quality leads to asset illiquidity. Banking arises endogenously in this environment as banks can pool illiquid assets to average out their idiosyncratic qualities and issue liquid liabilities backed by pooled assets whose total quality is public information. Moreover, the liquidity mismatch in banks' balance sheets leads to endogenous bank capital (outside equity) requirements for preventing bank runs. The model indicates that banking has both positive and negative effects on long-run economic growth and that business-cycle dynamics of asset prices, asset illiquidity and bank capital requirements are interconnected.
ERN: Comparative or Joint Analysis of Fiscal & Monetary Policy; Stabilization (Topic), 2021
Sargent and Wallace (1981) published "Some Unpleasant Monetarist Arithmetic" 40 years a... more Sargent and Wallace (1981) published "Some Unpleasant Monetarist Arithmetic" 40 years ago. Their central message was that a central bank may not have the power to determine the long-run rate of inflation without fiscal support. In a policy regime where the fiscal authority is non-Ricardian, an attempt on the part of the central bank to lower inflation may end up backfiring. I develop a structural model to illustrate this result through the use of a diagram. In addition, I use the model to explain how low inflation, low interest rates, and high primary budget deficits can coexist. I also use the model to explain why it is easier for a central bank to lower inflation than to raise it. I conclude with some recommendations for state-contingent monetary policy.
Working paper (Federal Reserve Bank of Cleveland), 2006
or 216-579-2021. The authors thank Ricardo Cavalcanti, Narayana Kocherlakota and the participants... more or 216-579-2021. The authors thank Ricardo Cavalcanti, Narayana Kocherlakota and the participants at the conference in honor of Neil Wallace. In addition, they received several useful comments from seminar participants at various schools. They would especially like to thank Neil Wallace for many enjoyable hours of conversation regarding money and banking-conversations that greatly influenced the content of this paper. David Andolfatto acknowledges the financial support of SSHRC.
Economic Synopses, 2012
short essays and reports on the economic issues of the day 2012 ■ Number 5 I t is well known that... more short essays and reports on the economic issues of the day 2012 ■ Number 5 I t is well known that unemployment and job vacancy rates tend to move in opposite directions over the business cycle. This famous statistical relationship is called the Beveridge curve. The mechanism generating this relationship is intuitive enough: During a cyclical upturn, businesses are motivated to create and/or reopen job positions. An increase in the job vacancy rate makes it easier for unemployed workers to find jobs. The unemployment rate falls. The statistical relationship between vacancies and unemployment, however, is not always a stable one. The first chart shows that the same level of recruiting intensity before the financial crisis, as measured by the job vacancy rate, is now associated with a higher unemployment rate. Some economists have speculated that this shift is possibly due to a structural shock that now makes it more difficult for employers to find the right kind of worker for a different kind of job (in contrast to a cyclical shock that simply makes it less profitable to find the same kind of worker for the same kind of job). Jobs can differ along many dimensions, including occupation, skill level, industry, and location. This essay reports how (i) job availability varies across major U.S. metropolitan statistical areas (MSAs) and (ii) job vacancy rates correlate with regional unemployment rates before and after the peak of the most recent recession. Specifically, this exercise is performed as follows. Consider a major U.S. metropolitan area. Compute the average job vacancy rate and unemployment rate for this area over the May 2005-November 2007 period that preceded the December 2007 National Bureau of Economic Research (NBER) business cycle peak marking the beginning of the Great Recession and the period thereafter (December 2007-It is not clear how monetary policy might be used to reduce local unemployment rates where recruiting intensity is high but the right kind of worker is hard to find.
Review, 2019
Inflation has remained stubbornly below target in many countries since the Financial Crisis of 20... more Inflation has remained stubbornly below target in many countries since the Financial Crisis of 2008, a phenomenon that the International Monetary Fund has aptly labeled "lowflation." 1 In the United States, this is especially evident since 2012-ironically, the year the Federal Reserve adopted an official 2 percent personal consumption expenditures (PCE) inflation target. 2 As shown in Figure 1, both core and headline measures of PCE inflation have remained persistently and significantly below a supposedly symmetric target. A puzzling aspect of this recent lowflation episode is that by many measures, Federal Reserve policy has been perceived to be unusually "accommodative." The effective federal funds rate, for example, averaged roughly 10 basis points over the period 2009-15.
Centre de recherche sur l'emploi et les uctuations economiques CREF E Center for Research on Econ... more Centre de recherche sur l'emploi et les uctuations economiques CREF E Center for Research on Economic Fluctuations and Employment CREFE Universit e d u Q u ebec a Montr eal Cahier de recherche Working Paper No. 66
Life-cycle patterns of income, earnings, consumption, labor supply, and wealth vary systematicall... more Life-cycle patterns of income, earnings, consumption, labor supply, and wealth vary systematically across educational groups. Human capital theory explains different educational choices in terms of parameters describing tastes and technology. We ask whether differences in these parameters are also consistent with other patterns of behavior. Our preliminary findings suggest that no single form of parameter heterogeneity will be able to account for the joint behavior of life-cycle choices.
Review, 2015
lars-about 7 percent of gross domestic product (GDP). Fed security holdings and liabilities are p... more lars-about 7 percent of gross domestic product (GDP). Fed security holdings and liabilities are presently near $4.5 trillion dollars-about 25 percent of GDP. Most of these liabilities exist as excess reserves in the banking system. Prior to 2008, excess reserves were essentially zero. The situation is so unusual that commentators frequently describe the Fed as sailing in uncharted waters. The U.S. economy has recovered steadily, if somewhat slowly, since the end of the Great Recession. After peaking at over 10 percent in 2009, the civilian unemployment rate at the time this article was written was close to 5.5 percent. Despite the more than fourfold increase in the supply of base money, personal consumption expenditures (PCE) inflation undershot the Fed's 2 percent target throughout much of the recovery. With inflation varying between The author studies a simple dynamic general equilibrium monetary model to interpret key macroeconomic developments in the U.S. economy both before and after the Great Recession. In normal times, when the Federal Reserve's policy rate is above the interest paid on reserves, countercyclical monetary policy works in a textbook manner. When a shock drives the policy rate to the zero lower bound, the economy enters a liquidity-trap scenario in which open market purchases of government securities have no real or nominal effects, apart from expanding the supply of excess reserves in the banking sector. In a liquidity trap, the Fed loses all control of inflation, which is now determined entirely by the fiscal authority. In normal times, raising the interest paid on reserves stimulates economic activity, but in a liquidity trap, raising the interest paid on reserves retards economic activity. (JEL E4, E5)
Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch ge... more Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence.
We develop a variant of the Lagos and Wright (2005) model to study the role of real assets as med... more We develop a variant of the Lagos and Wright (2005) model to study the role of real assets as media of exchange (private money). There is productive capital in the model that is controlled by an asset fund that finances itself by issuing claims against the capital stock. Although the claims are freely traded in a competitive secondary market, asset fund manager controls 1) the number of claims outstanding, 2) the dividends paid out to claim holders and 3) the fee charged for participating in the asset fund. Our main results are as follows. The first-best allocation can always be replicated by the fund manager. Doing so requires that the private money supply grows in equilibrium and the fee must be positive. In this case, introducing fiat money does not improve the allocation hence it is not essential. We show that the fee charged by the asset fund plays the same role as lump-sum taxation by a government running the Friedman rule. However, if the fee is constrained to be zero, then the first best allocation cannot be obtained while the second best policy still requires a positive growth rate in the number of claims. In this case, a fiat object controlled by the government may be essential.
SSRN Electronic Journal, 2005
We assume that people have beliefs about their abilities, that these generate self-esteem, and th... more We assume that people have beliefs about their abilities, that these generate self-esteem, and that self-esteem is valued intrinsically. We consider the implications for an individual's incentive to manage their self-esteem in the labour market. Employing a model of labour market search with Bayesian updating, we show that a self-esteem sensitive individual has an incentive to avoid the situation (in avoiding the truth), self-handicap (in avoiding the truth without avoiding search), to employ downward comparison (in manipulating the truth), and engage in defensive pessimism (in avoiding materially damaging strategies like selfhandicapping). We then consider some policy implications in regard to discouraged workers, minimum wages, and unemployment insurance.
SSRN Electronic Journal, 2006
or 216-579-2021. The authors thank Ricardo Cavalcanti, Narayana Kocherlakota and the participants... more or 216-579-2021. The authors thank Ricardo Cavalcanti, Narayana Kocherlakota and the participants at the conference in honor of Neil Wallace. In addition, they received several useful comments from seminar participants at various schools. They would especially like to thank Neil Wallace for many enjoyable hours of conversation regarding money and banking-conversations that greatly influenced the content of this paper. David Andolfatto acknowledges the financial support of SSHRC.
Review of Economic Dynamics, 1998
Journal of Economic Theory, 2008
We would like to thank Régis Breton, Ricardo Cavalcanti, Narayana Kocherlakota and the participan... more We would like to thank Régis Breton, Ricardo Cavalcanti, Narayana Kocherlakota and the participants at the conference in honor of Neil Wallace. In addition, we received several useful comments from seminar participants at various schools and conferences. We would especially like to thank Neil Wallace for many enjoyable hours of conversation regarding money and banking; conversations that greatly in ‡uenced the content of this paper. Andolfatto acknowledges the …nancial support of SSHRC. This article does not necessarily re ‡ect the views of the Federal Reserve Bank of Cleveland or the Board of Governors.
The Canadian Journal of Economics, 1997
In this paper we evaluate certain challenges put forth by Eswaran and Kotwal (1984) and Rasmusen ... more In this paper we evaluate certain challenges put forth by Eswaran and Kotwal (1984) and Rasmusen (1987) concerning the legitimacy of Holmström's (1982) proposed solution for the problem of moral hazard in teams. We demonstrate that the argument put forth by ...
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Papers by David Andolfatto