Efficient Computation with Taste Shocks

Gordon, Grey

doi:10.21144/wp19-15

Cited by 14 publications

(19 citation statements)

References 19 publications

(40 reference statements)

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“…In this appendix, we first augment the original problem with taste shocks on borrowing B , following Dvorkin, Sanchez, Sapriza, and Yurdagul (2018) and Gordon (2019). We then describe our computation algorithm, which works backwards for value function and policy functions.…”

Section: A Definition Of Epidemic Equilibriummentioning

confidence: 99%

Deadly Debt Crises: COVID-19 in Emerging Markets

Arellano¹,

Bai²,

Mihalache³

2020

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The COVID-19 epidemic in emerging markets risks a combined health, economic, and debt crisis. We integrate a standard epidemiology model into a sovereign default model and study how default risk impacts the ability of these countries to respond to the epidemic. Lockdown policies are useful for alleviating the health crisis but they carry large economic costs and can generate costly and prolonged debt crises. The possibility of lockdown induced debt crises in turn results in less aggressive lockdowns and a more severe health crisis. We find that the social value of debt relief can be substantial because it can prevent the debt crisis and can save lives.

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Section: A Definition Of Epidemic Equilibriummentioning

confidence: 99%

Deadly Debt Crises: COVID-19 in Emerging Markets

Arellano¹,

Bai²,

Mihalache³

2020

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“…For the calibration and simulation of the model we abstract from monetary shocks, but we incorporate unexpected (zero probability) monetary shocks to analyze their associated impulse response functions and to construct counterfactual monetary policy for our Brazil event study. For numerical stability purposes we augment the model with taste shocks, in the discrete choice tradition, following Dvorkin et al (2018) and Gordon (2018). Appendix A details the structure of these shocks, their numerical properties, and their role in robust convergence of models with long-term debt, such as ours.…”

Section: Parameterizationmentioning

confidence: 99%

Monetary Policy and Sovereign Risk in Emerging Economies (NK-Default)

Arellano

Bai

Mihalache

2020

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This paper develops a New Keynesian model with sovereign debt and default. We focus on domestic interest rules governing monetary policy and external foreign currency government debt that is defaultable. Monetary policy and default risk interact as they both impact domestic consumption and production. We find that default risk generates monetary frictions, which amplify the monetary response to shocks. Large sovereign default risk depresses domestic consumption and production. These monetary frictions in turn discipline sovereign borrowing, resulting in slower debt accumulation and lower spreads. Our framework replicates the positive co-movements of sovereign spreads with domestic nominal rates and inflation, a salient feature of emerging markets data, and can rationalize the experience of Brazil during the 2015 downturn, with high inflation, nominal rates, and sovereign spreads. A counterfactual experiment shows that, by raising the domestic rate, the Brazilian central bank not only reduced inflation but also alleviated the debt crisis. * We thank our discussants Giancarlo Corsetti, Radek Paluszynski, and Vivian Yue for insightful comments and suggestions. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. Contact

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“…In this alternative solution technique, we modify the approach of Dvorkin, Sánchez, Sapriza, and Yurdagul (2019), who introduce a vector of i.i.d. shocks, drawn from a generalized extreme value distribution, in a way that avoids the need for an additional state variable (see also Gordon, 2019). In Table 17, we compare the resulting statistics from the two different solution methods for our benchmark model.…”

Section: A7 Numerical Solution Methodsmentioning

confidence: 99%

Misallocation and Credit Market Constraints: the Role of Long-Term

Karabarbounis¹,

Macnamara²

2019

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We analyze misallocation of capital in a model where firms face different types of financial constraints. Private firms borrow subject to a collateral constraint while public firms issue long-term bonds subject to default risk. We integrate our model with private and public firms into a life-cycle model with idiosyncratic productivity shocks, capital adjustment costs, and firm entry and exit. To estimate our model, we use employment and financial statistics reflecting the overall distribution of firms in conjunction with firm-level data on credit spreads that we target for the set of public firms. In our model, a productive private firm is unable to grow fast if its collateral is limited. But a productive public firm can overcome its financial constraints because it faces low borrowing costs in the debt market, a relationship we also verify in the data. As a result, financial frictions for private firms disrupt investment behavior to a greater degree and generate a larger misallocation of resources relative to financial frictions for public firms.

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Efficient Computation with Taste Shocks

Cited by 14 publications

References 19 publications

Deadly Debt Crises: COVID-19 in Emerging Markets

Deadly Debt Crises: COVID-19 in Emerging Markets

Monetary Policy and Sovereign Risk in Emerging Economies (NK-Default)

Misallocation and Credit Market Constraints: the Role of Long-Term

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