Patrick Kehoe - Academia.edu (original) (raw)
Papers by Patrick Kehoe
The classic explanation for the persistence and volatility of real exchange rates is that they ar... more The classic explanation for the persistence and volatility of real exchange rates is that they are the result of nominal shocks in an economy with sticky goods prices. A key implication of this explanation is that if goods in different sectors differing degrees of price stickiness then goods in the relatively sticky sectors tend to have relatively more persistent and volatile good-level real exchange rates. Using panel data, we find only modest support for these key implications. The predictions of the theory for persistence have some modest support: in the data, the stickier is the price of a good the more persistent is its real exchange rate, but the theory predicts much more variation in persistence than is in the data. The predictions of the theory for volatiity fare less well: in the data, the stickier is the price of a good the smaller is its conditional variance while in the theory the opposite holds. An alternative explanation is that the real exchange rates are driven by real productivity shocks, so that goods with more volatile and persistent real exchange rates should be in sectors with more volatile and persistent productivity shocks. We find little evidence for this explanation as well. In sum, cross section data is puzzling for existing models of real exchange rates.
Are deflation and depression empirically linked? No, concludes a broad historical study of inflat... more Are deflation and depression empirically linked? No, concludes a broad historical study of inflation and real output growth rates. Deflation and depression do seem to have been linked during the 1930s. But in the rest of the data for 17 countries and more than 100 years, there is virtually no evidence of such a link.
The classic explanation for the persistence and volatility of real exchange rates is that they ar... more The classic explanation for the persistence and volatility of real exchange rates is that they are the result of nominal shocks in an economy with sticky goods prices. A key implication of this explanation is that if goods in di¤erent sectors di¤ering degrees of price stickiness then goods in the relatively sticky sectors tend to have relatively more persistent and volatile good-level real exchange rates. Using panel data, we …nd only modest support for these key implications. The predictions of the theory for persistence have some modest support: in the data, the stickier is the price of a good the more persistent is its real exchange rate, but the theory predicts much more variation in persistence than is in the data. The predictions of the theory for volatiity fare less well: in the data, the stickier is the price of a good the smaller is its conditional variance while in the theory the opposite holds. An alternative explanation is that the real exchange rates are driven by real productivity shocks, so that goods with more volatile and persistent real exchange rates should be in sectors with more volatile and persistent productivity shocks. We …nd little evidence for this explanation as well. In sum, cross section data is puzzling for existing models of real exchange rates.
Journal of Political Economy, 1992
We show how to decentralize constrained efficient allocations that arise from enforcement constra... more We show how to decentralize constrained efficient allocations that arise from enforcement constraints between sovereign nations. In a pure exchange economy these allocations can be decentralized with private agents acting competitively and taking as given government default decisions on foreign debt. In an economy with capital these allocations can be decentralized if the government can tax capital income as well as default on foreign debt. The tax on capital income is needed to make private agents internalize a subtle externality. The decisions of the government can arise as an equilibrium of a dynamic game between governments.
Brazil has had a long period of high inflation. It peaked around 100 percent per year in 1964, de... more Brazil has had a long period of high inflation. It peaked around 100 percent per year in 1964, decreased until the first oil shock (1973), but accelerated again afterward, reaching levels above 100 percent on average between 1980 and 1994. This last period coincided with severe balance of payments problems and economic stagnation that followed the external debt crisis in the early 1980s. We show that the high-inflation period (1960-1994) was characterized by a combination of fiscal deficits, passive monetary policy, and constraints on debt financing. The transition * This is a chapter in forthcoming book The Monetary and Fiscal History of Latin America. We would like to thank
Economic Theory, 2017
Before the advent of sophisticated international financial markets, a widely accepted belief was ... more Before the advent of sophisticated international financial markets, a widely accepted belief was that within a monetary union, a union-wide authority orchestrating fiscal transfers between countries is necessary to provide adequate insurance against country-specific economic fluctuations. A natural question is then: Do sophisticated international financial markets obviate the need for such an active union-wide authority? We argue that they do. Specifically, we show that in a benchmark economy with no international financial markets, an activist union-wide authority is necessary to achieve desirable outcomes. With sophisticated international financial markets, however, such an authority is unnecessary if its only goal is to provide crosscountry insurance. Since restricting the set of policy instruments available to member countries does not create a fiscal externality across them, this result holds in a wide variety of settings. Finally, we establish that an activist union-wide authority concerned just with providing insurance to member countries is optimal only when individual countries are either unable or unwilling to pursue desirable policies.
The Review of Economic Studies, 1989
![Research paper thumbnail of [On the Speed of Transition in Central Europe]: Comment](https://attachments.academia-assets.com/89128171/thumbnails/1.jpg)
](NBER Macroeconomics Annual, 1994
Consider the macro data. When I think about different potential stories to tell about the reform,... more Consider the macro data. When I think about different potential stories to tell about the reform, I find it crucial to have data on labor productiv
Journal of Monetary Economics, 2005
I first came into contact with Alan's work in my second year of graduate school in the early 1980... more I first came into contact with Alan's work in my second year of graduate school in the early 1980s. At that time I was taking my first international macroeconomics course. For over a month we had been studying the arcane details of the international accounting system. Many classes were devoted to such questions as, ''Suppose that a Thai businessman buys 100 bags of wheat from Japan but pays for it with shares of General Motors stock that were valued at $262 it received from a U.S. importer that it recently sent 50 bags of fish. Show all of the details of the resulting accounts.'' For the next month or so we studied papers from the 1950s on extending the ISLM model to the open economy. The third part of the course was about how to use the ISLM model to give policy advice to developing countries. At this part of the course, just when I was in the middle of deciding between either dropping out of graduate school or flinging myself into the Charles River, I came across one of Alan's papers, ''A Theory of Exchange Rate Determination,'' Stockman (1980). Reading that paper rekindled my interest in international
Journal of Monetary Economics, 1987
This paper provides a simple counterexample to the standard belief that in a world economy in whi... more This paper provides a simple counterexample to the standard belief that in a world economy in which all countries are small, strategic interactions between policymakers are trivial and thus cooperative and noncooperative government policies coincide. It is well known that this holds for tariff policies. However, this paper demonstrates the result does not apply to government policies generally. Indeed, this paper presents a simple counterexample for the case of fiscal policy. In addition, the paper analyzes how optimally coordinated fiscal policies differ from noncooperative policies. It finds that, relative to optimally coordinated levels, noncooperative government spending can be too high or too low, depending on the sign of a transmission effect which captures the overall effect countries' actions have on each other.
Frontiers of Business Cycle Research, 2020
This paper by Baxter and Kouparitsas is an ambitious attempt to explore which variables are robus... more This paper by Baxter and Kouparitsas is an ambitious attempt to explore which variables are robust in explaining the correlations of bilateral GDP between countries at business cycle frequencies. Most of the variables turned out to be fragile. The main contribution is to show that countries with large amounts of bilateral trade tend to have robustly higher business cycle correlations. Another interesting finding is that neither currency unions nor industrial structure are robustly related to business cycle correlations.
The classic explanation for the persistence and volatility of real exchange rates is that they ar... more The classic explanation for the persistence and volatility of real exchange rates is that they are the result of nominal shocks in an economy with sticky goods prices. A key implication of this explanation is that if goods in different sectors differing degrees of price stickiness then goods in the relatively sticky sectors tend to have relatively more persistent and volatile good-level real exchange rates. Using panel data, we find only modest support for these key implications. The predictions of the theory for persistence have some modest support: in the data, the stickier is the price of a good the more persistent is its real exchange rate, but the theory predicts much more variation in persistence than is in the data. The predictions of the theory for volatiity fare less well: in the data, the stickier is the price of a good the smaller is its conditional variance while in the theory the opposite holds. An alternative explanation is that the real exchange rates are driven by real productivity shocks, so that goods with more volatile and persistent real exchange rates should be in sectors with more volatile and persistent productivity shocks. We find little evidence for this explanation as well. In sum, cross section data is puzzling for existing models of real exchange rates.
Are deflation and depression empirically linked? No, concludes a broad historical study of inflat... more Are deflation and depression empirically linked? No, concludes a broad historical study of inflation and real output growth rates. Deflation and depression do seem to have been linked during the 1930s. But in the rest of the data for 17 countries and more than 100 years, there is virtually no evidence of such a link.
The classic explanation for the persistence and volatility of real exchange rates is that they ar... more The classic explanation for the persistence and volatility of real exchange rates is that they are the result of nominal shocks in an economy with sticky goods prices. A key implication of this explanation is that if goods in di¤erent sectors di¤ering degrees of price stickiness then goods in the relatively sticky sectors tend to have relatively more persistent and volatile good-level real exchange rates. Using panel data, we …nd only modest support for these key implications. The predictions of the theory for persistence have some modest support: in the data, the stickier is the price of a good the more persistent is its real exchange rate, but the theory predicts much more variation in persistence than is in the data. The predictions of the theory for volatiity fare less well: in the data, the stickier is the price of a good the smaller is its conditional variance while in the theory the opposite holds. An alternative explanation is that the real exchange rates are driven by real productivity shocks, so that goods with more volatile and persistent real exchange rates should be in sectors with more volatile and persistent productivity shocks. We …nd little evidence for this explanation as well. In sum, cross section data is puzzling for existing models of real exchange rates.
Journal of Political Economy, 1992
We show how to decentralize constrained efficient allocations that arise from enforcement constra... more We show how to decentralize constrained efficient allocations that arise from enforcement constraints between sovereign nations. In a pure exchange economy these allocations can be decentralized with private agents acting competitively and taking as given government default decisions on foreign debt. In an economy with capital these allocations can be decentralized if the government can tax capital income as well as default on foreign debt. The tax on capital income is needed to make private agents internalize a subtle externality. The decisions of the government can arise as an equilibrium of a dynamic game between governments.
Brazil has had a long period of high inflation. It peaked around 100 percent per year in 1964, de... more Brazil has had a long period of high inflation. It peaked around 100 percent per year in 1964, decreased until the first oil shock (1973), but accelerated again afterward, reaching levels above 100 percent on average between 1980 and 1994. This last period coincided with severe balance of payments problems and economic stagnation that followed the external debt crisis in the early 1980s. We show that the high-inflation period (1960-1994) was characterized by a combination of fiscal deficits, passive monetary policy, and constraints on debt financing. The transition * This is a chapter in forthcoming book The Monetary and Fiscal History of Latin America. We would like to thank
Economic Theory, 2017
Before the advent of sophisticated international financial markets, a widely accepted belief was ... more Before the advent of sophisticated international financial markets, a widely accepted belief was that within a monetary union, a union-wide authority orchestrating fiscal transfers between countries is necessary to provide adequate insurance against country-specific economic fluctuations. A natural question is then: Do sophisticated international financial markets obviate the need for such an active union-wide authority? We argue that they do. Specifically, we show that in a benchmark economy with no international financial markets, an activist union-wide authority is necessary to achieve desirable outcomes. With sophisticated international financial markets, however, such an authority is unnecessary if its only goal is to provide crosscountry insurance. Since restricting the set of policy instruments available to member countries does not create a fiscal externality across them, this result holds in a wide variety of settings. Finally, we establish that an activist union-wide authority concerned just with providing insurance to member countries is optimal only when individual countries are either unable or unwilling to pursue desirable policies.
The Review of Economic Studies, 1989
NBER Macroeconomics Annual, 1994
Consider the macro data. When I think about different potential stories to tell about the reform,... more Consider the macro data. When I think about different potential stories to tell about the reform, I find it crucial to have data on labor productiv
Journal of Monetary Economics, 2005
I first came into contact with Alan's work in my second year of graduate school in the early 1980... more I first came into contact with Alan's work in my second year of graduate school in the early 1980s. At that time I was taking my first international macroeconomics course. For over a month we had been studying the arcane details of the international accounting system. Many classes were devoted to such questions as, ''Suppose that a Thai businessman buys 100 bags of wheat from Japan but pays for it with shares of General Motors stock that were valued at $262 it received from a U.S. importer that it recently sent 50 bags of fish. Show all of the details of the resulting accounts.'' For the next month or so we studied papers from the 1950s on extending the ISLM model to the open economy. The third part of the course was about how to use the ISLM model to give policy advice to developing countries. At this part of the course, just when I was in the middle of deciding between either dropping out of graduate school or flinging myself into the Charles River, I came across one of Alan's papers, ''A Theory of Exchange Rate Determination,'' Stockman (1980). Reading that paper rekindled my interest in international
Journal of Monetary Economics, 1987
This paper provides a simple counterexample to the standard belief that in a world economy in whi... more This paper provides a simple counterexample to the standard belief that in a world economy in which all countries are small, strategic interactions between policymakers are trivial and thus cooperative and noncooperative government policies coincide. It is well known that this holds for tariff policies. However, this paper demonstrates the result does not apply to government policies generally. Indeed, this paper presents a simple counterexample for the case of fiscal policy. In addition, the paper analyzes how optimally coordinated fiscal policies differ from noncooperative policies. It finds that, relative to optimally coordinated levels, noncooperative government spending can be too high or too low, depending on the sign of a transmission effect which captures the overall effect countries' actions have on each other.
Frontiers of Business Cycle Research, 2020
This paper by Baxter and Kouparitsas is an ambitious attempt to explore which variables are robus... more This paper by Baxter and Kouparitsas is an ambitious attempt to explore which variables are robust in explaining the correlations of bilateral GDP between countries at business cycle frequencies. Most of the variables turned out to be fragile. The main contribution is to show that countries with large amounts of bilateral trade tend to have robustly higher business cycle correlations. Another interesting finding is that neither currency unions nor industrial structure are robustly related to business cycle correlations.