Collateral Shocks

We estimate a macroeconomic model on US data where banks lend to households and businesses and simultaneously adjust lending requirements on the two types of loans. We find that the collateral shock, a change in the ability of the financial sector to redeploy collateral, is the most important force driving the business cycle. Hit by this unique disturbance, our model quantitatively replicates the joint dynamics of output, consumption, investment, employment, and both household and business credit quantities and spreads. The estimated collateral shock generates accurate movements in lending standards and tracks measures of market sentiment. (JEL E21, E23, E24, E32, E44, G21)

Debt to GDP Ratio from the Perspective of MMT

In this note we examine the debt to GDP ratio from the perspective of MMT (Modern Monetary Theory) by a simple macroeconomic model with savings by government bonds instead of money. Mainly we will show the following results. 1) In order to maintain full employment under economic growth, the budget deficit, including interest payments on government bonds, must be positive; and if the budget deficit is smaller than this value, there will be recession with involuntary unemployment. 2) Under full employment the debt to GDP ratio approaches to a finite value over time. 3) In the underemployment case the national income is determined by the budget deficit. 4) The excessive budget deficit causes inflation. 6) In order to recover full employment from recession we need budget deficit larger than that when full employment is maintained. 5) The budget deficit, including interest payments on government bonds, equals the increase of the savings of consumers between periods (generations); and this result holds whether we have full employment or not, whether we have inflation or not. Then, the ratio of the national debt to GDP in a period is smaller than one, and even if one period constitutes of several years, the debt to GDP ratio in a year is finite.

A Brief Rationale for MMT Arguments

In this note we examine MMT (Modern Monetary Theory) arguments by a simple macroeconomic model without microeconomic foundation. Mainly we will show the following results. 1) In the underemployment case the national income is determined by the budget deficit. 2) In the full employment case we can define the budget deficit which is necessary and sufficient to achieve full employment. 3) The excessive budget deficit causes inflation. 4) We need budget deficit to achieve and maintain full employment under economic growth. 5) We can recover recession by the budget deficit which is larger than that when full employment is maintained. Also, we show that the budget deficit equals the increase in the savings between generations.

Lending standards, productivity, and credit crunches

We propose a macroeconomic model in which adverse selection in investment amplifies macroeconomic fluctuations, in line with the prominent role played by the credit crunch during the financial crisis. Endogenous lending standards emerge due to an informational asymmetry between borrowers and lenders about the riskiness of borrowers. By using loan approval probability as a screening device, banks ration credit following increases in lending risk, generating large endogenous movements in TFP, explaining why productivity often falls during crises. Furthermore, the mechanism implies that financial instability is heightened when interest rates are low.

Asymmetric Attention

We document that the expectations of households, firms, and professional forecasters in standard surveys simultaneously extrapolate from recent events and underreact to new information. Existing models of expectation formation, whether behavioral or rational, cannot account for these observations. We develop a rational theory of extrapolation based on limited attention, which is consistent with this evidence. In particular, we show that limited, asymmetric attention to procyclical variables can explain the coexistence of extrapolation and underreactions. We illustrate these mechanisms in a microfounded macroeconomic model, which generates expectations consistent with the survey data, and show that asymmetric attention increases business cycle fluctuations. (JEL C53, D83, D84, E23, E27, E32)

Emergent inequality and business cycles in a simple behavioral macroeconomic model

Standard macroeconomic models assume that households are rational in the sense that they are perfect utility maximizers and explain economic dynamics in terms of shocks that drive the economy away from the steady state. Here we build on a standard macroeconomic model in which a single rational representative household makes a savings decision of how much to consume or invest. In our model, households are myopic boundedly rational heterogeneous agents embedded in a social network. From time to time each household updates its savings rate by copying the savings rate of its neighbor with the highest consumption. If the updating time is short, the economy is stuck in a poverty trap, but for longer updating times economic output approaches its optimal value, and we observe a critical transition to an economy with irregular endogenous oscillations in economic output, resembling a business cycle. In this regime households divide into two groups: poor households with low savings rates and rich households with high savings rates. Thus, inequality and economic dynamics both occur spontaneously as a consequence of imperfect household decision-making. Adding a few “rational” agents with a fixed savings rate equal to the long-term optimum allows us to match business cycle timescales. Our work here supports an alternative program of research that substitutes utility maximization for behaviorally grounded decision-making.

Care and Carelessness in the Anthropocene

This article proposes dividing Bernard Stiegler's work into three phases, and that a notion of care develops and deepens as these phases progress. To each of these phases there corresponds a particular relationship to Heidegger's thought: 1) the Heidegger of Being and Time who denies the role of technics in the opening of the possibility of authentic time; 2) as a thinker of the “they” who corrects Simondon's inability to think collective disindividuation while being himself unable to think a genuine collective individuation process; 3) the later Heidegger who indeed approaches the most mysterious and unsettling aspect of tekhnē and who foresees the most threatening aspect of Gestell as a world in which Dasein loses its privilege as the questioning being. Yet this third Heidegger also failed to reflect on what Stiegler puts at the heart of the thought of his third phase: the question of entropy, understood as describing fundamental but diverse thermodynamic, biological, and informational tendencies. For Stiegler, taking care in the Anthropocene necessarily entails reinscribing philosophical concepts, including that of Ereignis, in relation to entropy, anthropy, and the struggle against them. Beyond Heidegger, this also entails addressing the obsolescence and self-destructiveness of the current macroeconomic model.