#2009-026A "An Analytical Approach to Buffer-Stock Saving under Borrowing Constraints"
by Yi Wen
June 2009
Revised July 2009

The profession has been longing for closed-form solutions to consumption functions under uncertainty and borrowing constraints. This paper proposes an analytical approach to solving general-equilibrium buffer-stock saving models with both idiosyncratic and aggregate uncertainties as well as liquidity constraints. More...

#2009-025A "Dynamics in Systematic Liquidity"
by Björn Hagströmer, Richard G. Anderson, Jane M. Binner, and Birger Nilsson
May 2009

We develop the principal component analysis (PCA) approach to systematic liquidity measurement by introducing moving and expanding estimation windows. We evaluate these methods along with traditional estimation techniques (full sample PCA and market average) in terms of ability to explain (1) cross-sectional stock liquidity and (2) cross-sectional stock returns. More...

#2009-024A "When does Heterogeneity Matter?"
by Yi Wen
May 2009

How do movements in the distribution of income affect the macroeconomy? Krusell and Smith (1998) analyzed this question in a neoclassical growth model, and their results show that the representative-agent assumption provides a good approximation for aggregate behaviors of heterogeneous agents. More...

#2009-022C "Financial Development and Economic Volatility: A Unified Explanation"
by Pengfei Wang, and Yi Wen
April 2009
Revised May 2009

Empirical studies showed that firm-level volatility has been increasing but the aggregate volatility has been decreasing in the US for the post-war period. This paper proposes a unified explanation for these diverging trends. More...

#2009-020A "A Simple Model of Trading and Pricing Risky Assets Under Ambiguity: Any Lessons for Policy-Makers?"
by Massimo Guidolin, and Francesca Rinaldi
April 2009

The 2007-2008 financial crises has made it painfully obvious that markets may quickly turn illiquid. Moreover, recent experience has taught us that distress and lack of active trading can jump “around” between seemingly unconnected parts of the financial system contributing to transforming isolated shocks into systemic panic attacks. More...

#2009-019B "Liquidity and Welfare in a Heterogeneous-Agent Economy"
by Yi Wen
April 2009
Revised May 2009

This paper reconsiders the welfare costs of inflation and the welfare gains from financial intermediation in a heterogeneous-agent economy where money is held as a store of value (as in Bewley, 1980). More...

#2009-018A "Numerical Simulation of Nonoptimal Dynamic Equilibrium Models"
by Zhigang Feng, Jianjun Miao, Adrian Peralta-Alva, and Manuel S. Santos
April 2009

In this paper we present a recursive method for the computation of dynamic competitive equilibria in models with heterogeneous agents and market frictions. More...

#2009-017A "Milton Friedman and U.K. Economic Policy: 1938−1979"
by Edward Nelson
April 2009

This paper analyzes the interaction of Milton Friedman and U.K. economic policy from 1938 to 1979. More...

PUBLISHED: Federal Reserve Bank of St. Louis Review, September/October 2009, 91(5, Part 2), pp. 465-506

#2009-015A "The Great Inflation in the United States and the United Kingdom: Reconciling Policy Decisions and Data Outcomes"
by Riccardo DiCecio, and Edward Nelson
April 2009

We argue that the Great Inflation experienced by both the United Kingdom and the United States in the 1970s has an explanation valid for both countries. More...

#2009-013A "The Propagation of Regional Recessions"
by James D. Hamilton, and Michael T. Owyang
April 2009

This paper develops a framework for inferring common Markov-switching components in a panel data set with large cross-section and time-series dimensions. We apply the framework to studying similarities and differences across U.S. states in the timing of business cycles. More...