Jacek Suda

Abstract:
We study a DSGE model with “massive” heterogeneity, enough to approach Gini coefficients for income, wealth, and consumption in the U.S. data. The economy features three aggregate shocks as well as both permanent and temporary idiosyncratic risk. We introduce policymakers that can mitigate these risks for households, and a welfare theorem outlines how the proposed policies imply an optimal allocation of resources. The proposed policies include achieving the Wicksellian natural real rate of interest, social insurance, and a set of taxes and transfers designed to reduce consumption inequality. We calibrate the model to U.S. data from 1995 to 2023 assuming the optimal set of policies and argue that the model fit is promising. This suggests that, broadly speaking, U.S. macroeconomic policy has in recent decades been close to optimal. Improvements beyond this set of policies requires design of responses to very large shocks, and we suggest some directions in which such a design may proceed.

Abstract:
We study the effects of monetary policy shocks on the labor market across firms in different sectors. Using the local projections method we find that the response of employment and hiring growth to monetary policy shocks is stronger for firms in the manufacturing and construction sectors relative to those in the service sector. Those sectoral differences are also present within firms of the same size. Moreover, we find that within a sector, employment and hiring growth in large firms respond more to contractionary monetary policy shocks compared to small firms; the response to expansionary monetary policy shocks is less compared to small firms. Finally, we find that the differences in the employment and hiring growth between small and large firms are greater for firms in the manufacturing and construction sectors, compared to those between small and large firms in the service sector.

Abstract:
We study the effects of monetary policy shocks on the labor market across firms in different sectors. Using the local projections method we find that the response of employment and hiring growth to monetary policy shocks is stronger for firms in the manufacturing and construction sectors relative to those in the service sector. Those sectoral differences are also present within firms of the same size. Moreover, we find that within a sector, employment and hiring growth in large firms respond more to contractionary monetary policy shocks compared to small firms; the response to expansionary monetary policy shocks is less compared to small firms. Finally, we find that the differences in the employment and hiring growth between small and large firms are greater for firms in the manufacturing and construction sectors, compared to those between small and large firms in the service sector.

Abstract:
In this paper we respond to the recent critique of Dynamic Stochastic General Equilibrium (DSGE) models. We present the most recent developments in the DSGE literature and show that it has gone a long way to accommodate many sources of criticism.

Abstract:
We study monetary policy when private credit markets are incomplete. The macroeconomy we study has a large private credit market, in which participant households use non-state contingent nominal contracts (NSCNC). A second, small group of households only uses cash, supplied by the monetary authority, and cannot participate in the credit market. There is an aggregate shock. We find that, despite the substantial heterogeneity, the monetary authority can provide for optimal risk-sharing in the private credit market and thus overcome the NSCNC friction via a counter-cyclical price level rule. The counter-cyclical price level rule is not unique. To pin down a unique monetary policy rule, we consider two secondary goals for the monetary authority, (i) expected inflation targeting and, (ii) nominal GDP targeting. We examine the impact of each of these approaches on the price level rule and other nominal variables in the economy.

Abstract:
This paper develops a simple business-cycle model in which financial shocks have large macroeconomic effects when private agents are gradually learning the uncertain environment. Agents update their beliefs about the reduced-form structure of the economy. Because the persistence of leverage is overestimated by adaptive learners, the responses of output, investment, and other aggregates under adaptive learning are significantly larger than under rational expectations. In our benchmark case calibrated using US data on leverage, debt-to-GDP and land value-to-GDP ratios for 1996Q1-2008Q4, learning amplifies leverage shocks by a factor of about three, relative to rational expectations. When fed with actual leverage innovations observed over that period, the learning model predicts that the persistence of leverage shocks is increasingly overestimated after 2002 and that a sizeable recession occurs in 2008-10, while its rational expectations counterpart predicts a counter-factual expansion. In addition, we show that procyclical leverage reinforces the amplification due to learning and, accordingly, that macro-prudential policies that enforce countercyclical leverage dampen the effects of leverage shocks.

Abstract:
I study the role of shocks to beliefs combined with Bayesian learning in a standard equilibrium business cycle framework. In particular, I examine how a prior belief arising from the Great Depression may have influenced the macroeconomy during the last 75 years. In the model, households hold twisted beliefs concerning the likelihood and persistence of recession and boom states that are affected by the Great Depression. These initial beliefs are substantially different from the true data generating process and are only gradually unwound during subsequent years. Even though the driving stochastic process for technology is unchanged over the entire period, the nature of macroeconomic performance is altered considerably for many decades before eventually converging to the rational expectations equilibrium. This provides some evidence of the lingering effects of beliefs-twisting events on the behavior of macroeconomic variables. Keywords: Bayesian learning, business cycles, non-linear dynamics

Abstract:
We study whether monetary authorities in the G7 countries were changing their responses to inflation in a similar manner during and following the Great Inflation era. We find that the common to the G7 countries inflation pattern during the Great Inflation period could be associated with a common pattern in the monetary policy response to inflation: we find that until the early 1980s monetary authorities in the G7 countries responded mildly to inflation, systematically fought it throughout the 1980s and lessened again their response during the 2000s. The estimated Taylor rule coefficients on inflation are cointegrated, implying the existence of a long run relationship in the responses to inflation during and after the Great Inflation period. At the same time, principal component analysis of the residuals of the estimated Taylor rules indicates that the shocks' structure cannot account enough for the monetary policies' comovements. We interpret these findings as suggestive of common monetary policy patterns.

Abstract:
We study abstract macroeconomic systems in which expectations play an important role. Consistent with the recent literature on recursive learning and expectations, we replace the agents in the economy with econometricians. Unlike the recursive learning literature, however, the econometricians in the analysis here are Bayesian learners. We are interested in the extent to which expectational stability remains the key concept in the Bayesian environment. We isolate conditions under which versions of expectational stability conditions govern the stability of these systems just as in the standard case of recursive learning. We conclude that Bayesian learning schemes, while they are more sophisticated, do not alter the essential expectational stability findings in the literature.

Abstract:
In this paper we study whether central banks should react to financial sector variables in their policy rules. We find that responding to asset prices does not affect the determinacy conditions. However, responding to entrepreneurial net worth increases the likelihood of determinacy.