Research

Abstract: This paper introduces a computationally efficient method for full-information estimation of nonlinear Dynamic Stochastic General Equilibrium (DSGE) models. In contrast to the traditional approach of treating model solution and filtering as two separate and potentially computationally intensive steps, we integrate the solution into the filtering procedure. The method computes a sequence of local linear solutions at the best forecast of the current state, yielding a time-varying linear state-space system for likelihood evaluation via the Kalman filter. The method captures nonlinear dynamics with high accuracy while avoiding global solution methods and nonlinear filtering, resulting in computational gains of several orders of magnitude. We benchmark the approach on canonical labor search and New Keynesian (NK) models. Applied to an NK model with labor market frictions, the method shows that these frictions generate state-dependent monetary policy transmission consistent with empirical evidence from local projections. The framework extends to models with stochastic volatility, regime switching, and heterogeneous agents.

Abstract: This paper proposes a multiworker firm model with on-the-job search and decreasing returns-to-scale production. A coalition wage bargaining solution between a firm and its incumbent workers yields tractability, results in privately efficient recruiting decisions, and delivers an explicit expression for the wage function. I show how a calibrated version of the model can replicate untargeted empirical facts on the cross-sectional dispersion in firm growth and on measured elasticities of separation rates, quitting rates and vacancy duration with respect to wages. The model delivers net poaching rates by firm size and firm wage and can rationalize the absence of a firm size ladder and the presence of a wage ladder. In terms of business cycles, the model can replicate the cyclical properties of job flows and workers flows, and the elasticity of the wages of new hires relative to existing workers with respect to unemployment.

Abstract: This paper proposes a novel finite-state Markov chain approximation method for Markov processes with continuous support. The method can be used for both uni- and multivariate processes, as well as non-stationary processes such as those with a life-cycle component. The method is based on minimizing the information loss between a misspecified approximating model and the true data generating process. The method outperforms existing methods in several dimensions, including parsimoniousness. We compare the performance of our method to existing methods through the lens of an asset-pricing model, and a life-cycle consumption-savings model. We find the choice of the discretization method matters for the accuracy of the model solutions, the welfare costs of risk, and the amount of wealth inequality a life-cycle model can generate.

SCE Graduate Student Prize 2022, presented at NBER SI 2022 (Dynamic Equilibrium Models)

Abstract: We characterize the equilibrium of the standard sovereign default model where a risk-averse borrower issues long-term non-contigent bonds but cannot commit its future selves to repay. We show existence and uniqueness of the Markov equilibrium of the dynamic game with successive borrowers that is associated to this environment. We show that the price and policy functions exhibit jumps and kinks in various places. A suitable choice of arbitrary small noise yields price and policy functions that are differentiable almost everywhere which allows us to characterize the equilibrium using only decision rules of the agents by means of a set of functional equations. Further, we describe the equilibrium objects via an Euler equation with derivatives on future actions —i.e. a generalized Euler equation (GEE) where the effects due to default and those to dilution can be disentangled. Computational strategies using these functional equations allow for solving the model with continuous functions using policy iterations. A sufficient variance of the noise allows for concavity and hence unique solution of the GEE which eases computation.

Abstract: We study the role of lack of commitment in the canonical incomplete-markets sovereign default model of Eaton and Gersovitz (1981). We show the very different set of functional equations that appear under commitment relative to the standard ones. We document how in the standard yearly specification of Arellano (2008) with short-term debt there is no default if there is commitment to the circumstances of when to default. A bad enough disaster makes default under commitment appear. In contrast, with long-term debt, in the standard quarterly Chatterjee and Eyigungor (2012) environment commitment only to one-period-ahead default barely changes the no-commitment allocation, but commitment to both the one-period-ahead default circumstances and the one-period-ahead dilution, or commitment to a longer horizon (a year or a bit more), eliminates default completely and is equivalent to commitment in the one-period-ahead default with short-term debt.