Recursive Contracts

Marcet, Albert; Marimon, Ramón

doi:10.3982/ecta9902

Cited by 111 publications

(151 citation statements)

References 42 publications

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“…Extending the argument in Marcet and Marimon (2012) the optimal solution has a recursive formulation where the optimal tax schedule may be written as:…”

Section: Optimality Conditions Under Buybackmentioning

confidence: 99%

Government Debt Management: The Long and the Short of It

Faraglia

Marcet

Oikonomou

et al. 2018

The Review of Economic Studies

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Standard optimal Debt Management (DM) models prescribe a dominant role for long bonds and advocate against issuing short bonds. They require very large positions in order to complete markets and assume each period that governments repurchase all outstanding bonds and reissue (r/r) new ones. These features of DM are inconsistent with U.S. data. We introduce incomplete markets via small transaction costs which serves to make optimal DM more closely resemble the data : r/r are negligible, short bond issuance substantial and persistent and short and long bonds positively co-vary. Intuitively, long bonds help smooth taxes over states and short bonds over time. Solving incomplete market models with multiple assets is challenging so a further contribution of this article is introducing a novel computational method to find global solutions.

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“…Extending the argument in Marcet and Marimon (2012) the optimal solution has a recursive formulation where the optimal tax schedule may be written as:…”

Section: Optimality Conditions Under Buybackmentioning

confidence: 99%

Government Debt Management: The Long and the Short of It

Faraglia

Marcet

Oikonomou

et al. 2018

The Review of Economic Studies

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“…The use of cumulative multipliers in solving macro-economic equilibrium models was pioneered byKehoe and Perri (2002), building on earlier work byMarcet and Marimon (1999) Chien, Cole, and Lustig (2011). extend the methodology to incomplete market environments.…”

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confidence: 99%

Why are exchange rates so smooth? A household finance explanation

Chien

Lustig²,

Naknoi

2020

Journal of Monetary Economics

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Empirical moments of asset prices and exchange rates imply that pricing kernels have to be almost perfectly correlated across countries. If they are not, observed real exchange rates are too smooth to be consistent with high Sharpe ratios in asset markets. However, the crosscountry correlation of macro fundamentals is far from perfect. We reconcile these empirical facts in a two-country stochastic growth model with heterogeneous trading technologies for households and a home bias in consumption. In our model, only a small fraction of households actively participate in international risk sharing by frequently trading domestic and foreign equities. These active traders, who induce high cross-country correlation to the pricing kernels, are the marginal investors in foreign exchange markets. In a calibrated version of our model, we show that this mechanism can quantitatively account for the excess smoothness of exchange rates in the presence of highly volatile pricing kernels and weakly correlated macro fundamentals.JEL codes: G15, G12, F31, F10.

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“…With incentive‐compatibility constraints dynamic optimal policies are time‐inconsistent (Messner et al ., ; Marcet & Marimon, ). To tackle this problem we need to simplify the incentive‐compatibility constraints.…”

Section: The Modelmentioning

confidence: 99%

Dependency traps in self‐targeting food aid programs

Torres¹,

Neitzel

2017

Review Development Economics

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We present an economy of farmers where food aid is warranted due to poverty traps triggered by nonconvex production sets. We model a food‐aid intervention as a dynamic game between a food‐aid manager and the farmers in a context of asymmetrical information. The food‐aid manager is motivated by a relief objective and targets farmers suffering the poverty trap. The food‐aid manager uses a self‐targeting mechanism by providing the aid through a food wage in exchange for participation in the intervention's activities. Guided by the relief objective and targeting constraint, he fixes the food wage equal to the reservation wage of the farmers not suffering the poverty trap. Dependency traps will then happen every time there is a considerable technological and nutritional gap between farmers who are in and out of the poverty trap. When there is a gap, poor farmers earn more working for the reservation wage of the well‐off farmers than by working in their own farm. Dependency can be overcome only if the food‐aid program allows farmers to upgrade their productive technologies and catch up with those farmers who are out of the poverty trap.

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Recursive Contracts

Cited by 111 publications

References 42 publications

Government Debt Management: The Long and the Short of It

Government Debt Management: The Long and the Short of It

Why are exchange rates so smooth? A household finance explanation

Dependency traps in self‐targeting food aid programs

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