NBER Working Papers by Narayana R. Kocherlakota

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Working Papers

January 2016Fragility of Purely Real Macroeconomic Models
Over the past thirty years, a great deal of business cycle research has been based on purely real models that abstract from the presence of nominal rigidities, and so (at least implicitly) assume that the Phillips curve is vertical. In this paper, I show that such models are fragile, in the sense that their implications change significantly when the Phillips curve is even slightly less than vertical. I consider a wide class of purely real macroeconomic models and perturb them by introducing a non-vertical Phillips curve. I show that in the perturbed models, if there is a lower bound on the nominal interest rate, then current outcomes necessarily depend on agents' beliefs about the long-run level of economic activity. The magnitude of this dependence becomes arbitrarily large as the slope o...
February 2008Internal Debt Crises and Sovereign Defaults
with Cristina Arellano: w13794
In this paper, we use data from developing countries to argue that sovereign defaults are often caused by fiscal pressures generated by large-scale domestic defaults. We argue that these systemic domestic defaults are caused by shocks best interpreted as being non-fundamental. We construct a model that is consistent with these observations. The key ingredient of the model is that it is impossible to liquidate large amounts of entrepreneurial assets. This restriction generates the possibility of a domestic coordinated default crisis, in which domestic borrowers find it optimal to default because all other borrowers are also defaulting. We conclude that avoiding sovereign defaults requires better internal institutions, not better external ones.

Published: Arellano, Cristina & Kocherlakota, Narayana, 2014. "Internal debt crises and sovereign defaults," Journal of Monetary Economics, Elsevier, vol. 68(S), pages S68-S80. citation courtesy of

September 2007Nonseparable Preferences and Optimal Social Security Systems
with Borys Grochulski: w13362
In this paper, we consider economies in which agents are privately informed about their skills, which are evolving stochastically over time. We require agents' preferences to be weakly separable between the lifetime paths of consumption and labor. However, we allow for intertemporal nonseparabilities in preferences like habit formation. We show that such nonseparabilities imply that optimal asset income taxes are necessarily retrospective in nature. We show that under weak conditions, it is possible to implement a socially optimal allocation using a social security system in which taxes on wealth are linear, and taxes/transfers are history-dependent only at retirement. The average asset income tax in this system is zero.

Published: Grochulski, Borys & Kocherlakota, Narayana, 2010. "Nonseparable preferences and optimal social security systems," Journal of Economic Theory, Elsevier, vol. 145(6), pages 2055-2077, November. citation courtesy of

March 1989The Variability of Velocity in Cash-In-Advance Models
with Robert J. Hodrick, Deborah Lucas: w2891
Early cash-in-advance models have the feature that the cash-in-advance constraint always binds, implying that the velocity of money is constant. Lucas (1984) and Svensson (1985) propose a change in information structure that potentially allows velocity to vary. By calibrating a version of these models using a new solution algorithm, and using U.S. time series data on consumption growth and money growth, we find that in practice the cash-in-advance constraint almost always binds. This result is robust to changes in the forcing process, the inclusion of credit goods along with cash goods, various preference specifications, and changes in the precision of the agents' information. We conclude that there is little practical gain in using these more complicated informational specifications in fu...

Published: Journal of Political Economy, Vol 99, No. 2, Chicago: University of Chicago Press, April 1991, pp.358-384. citation courtesy of

Contact and additional information for this authorAll NBER papers and publicationsNBER Working Papers onlyInformation about this author at RePEc

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