IDEAS home Printed from https://ideas.repec.org/p/fip/fednsr/648.html
   My bibliography  Save this paper

The Effects of the saving and banking glut on the U.S. economy

Author

Listed:
  • Alejandro Justiniano
  • Giorgio E. Primiceri
  • Andrea Tambalotti

Abstract

This paper proposes a theory of the fiscal foundations of inflation based on imperfect knowledge and learning. The theory is similar in spirit to, but distinct from, unpleasant monetarist arithmetic and the fiscal theory of the price level. Because the assumption of imperfect knowledge breaks Ricardian equivalence, details of fiscal policy, such as the average scale and composition of the public debt, matter for inflation. As a result, fiscal policy constrains the efficacy of monetary policy. Heavily indebted economies with debt maturity structures observed in many countries require aggressive monetary policy to anchor inflation expectations. The model predicts that the Great Moderation period would not have been so moderate had fiscal policy been characterized by a scale and composition of public debt now witnessed in some advanced economies in the aftermath of the 2007-09 global recession.

Suggested Citation

  • Alejandro Justiniano & Giorgio E. Primiceri & Andrea Tambalotti, 2013. "The Effects of the saving and banking glut on the U.S. economy," Staff Reports 648, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:648
    as

    Download full text from publisher

    File URL: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr649.html
    Download Restriction: no

    File URL: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr649.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005. "Assessing High House Prices: Bubbles, Fundamentals and Misperceptions," Journal of Economic Perspectives, American Economic Association, pages 67-92.
    2. Galí, Jordi & Gertler, Mark (ed.), 2010. "International Dimensions of Monetary Policy," National Bureau of Economic Research Books, University of Chicago Press, edition 0, number 9780226278865.
    3. Klaus Adam & Pei Kuang & Albert Marcet, 2012. "House Price Booms and the Current Account," NBER Macroeconomics Annual, University of Chicago Press, vol. 26(1), pages 77-122.
    4. Slobodyan, Sergey & Wouters, Raf, 2012. "Learning in an estimated medium-scale DSGE model," Journal of Economic Dynamics and Control, Elsevier, pages 26-46.
    5. Vasco Curdia & Michael Woodford, 2010. "Credit Spreads and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 3-35, September.
    6. Ricardo J. Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2008. "An Equilibrium Model of "Global Imbalances" and Low Interest Rates," American Economic Review, American Economic Association, pages 358-393.
    7. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, pages 309-327.
    8. Nir Jaimovich & Sergio Rebelo, 2009. "Can News about the Future Drive the Business Cycle?," American Economic Review, American Economic Association, pages 1097-1118.
    9. Matteo Iacoviello, 2002. "House prices, borrowing constraints and monetary policy in the business cycle," Boston College Working Papers in Economics 542, Boston College Department of Economics, revised 06 Dec 2004.
    10. Alejandro Justiniano & Giorgio Primiceri & Andrea Tambalotti, 2015. "Household leveraging and deleveraging," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(1), pages 3-20, January.
    11. George W. Evans & Seppo Honkapohja & Kaushik Mitra, 2012. "Does Ricardian Equivalence Hold When Expectations Are Not Rational?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(7), pages 1259-1283, October.
    12. Alejandro Justiniano & Giorgio Primiceri & Andrea Tambalotti, 2011. "Investment Shocks and the Relative Price of Investment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 101-121, January.
    13. Javier Garcia-Cicco & Roberto Pancrazi & Martin Uribe, 2010. "Real Business Cycles in Emerging Countries?," American Economic Review, American Economic Association, pages 2510-2531.
    14. Boz, Emine & Mendoza, Enrique G., 2014. "Financial innovation, the discovery of risk, and the U.S. credit crisis," Journal of Monetary Economics, Elsevier, pages 1-22.
    15. Bruce Preston, 2003. "Learning about monetary policy rules when long-horizon expectations matter," FRB Atlanta Working Paper 2003-18, Federal Reserve Bank of Atlanta.
    16. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, pages 309-327.
    17. Jesus Fernández-Villaverde & Pablo Guerrón-Quintana & Juan F. Rubio-Ramírez, 2010. "Fortune or virtue: time-variant volatilities versus parameter drifting," Working Papers 10-14, Federal Reserve Bank of Philadelphia.
    18. Troy Davig & Eric M. Leeper, 2007. "Generalizing the Taylor Principle," American Economic Review, American Economic Association, pages 607-635.
    19. Florin O. Bilbiie & André Meier & Gernot J. Müller, 2008. "What Accounts for the Changes in U.S. Fiscal Policy Transmission?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(7), pages 1439-1470, October.
    20. Tille, Cédric & van Wincoop, Eric, 2010. "International capital flows," Journal of International Economics, Elsevier, pages 157-175.
    21. Morris A. Davis, 2010. "housing and the business cycle," The New Palgrave Dictionary of Economics, Palgrave Macmillan.
    22. Matteo Iacoviello, 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle," American Economic Review, American Economic Association, pages 739-764.
    23. Michael Woodford, 1996. "Control of the Public Debt: A Requirement for Price Stability?," NBER Working Papers 5684, National Bureau of Economic Research, Inc.
    24. Tille, Cédric & van Wincoop, Eric, 2010. "International capital flows," Journal of International Economics, Elsevier, pages 157-175.
    25. Eberly, Janice & Rebelo, Sergio & Vincent, Nicolas, 2012. "What explains the lagged-investment effect?," Journal of Monetary Economics, Elsevier, pages 370-380.
    26. Zulfiqar Hyder & Sardar Shah, 2004. "Exchange Rate Pass-Through to Domestic Prices in Pakistan," SBP Working Paper Series 05, State Bank of Pakistan, Research Department.
    27. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2012. "Endogenous Entry, Product Variety, and Business Cycles," Journal of Political Economy, University of Chicago Press, pages 304-345.
    28. Thomas A. Lubik & Frank Schorfheide, 2004. "Testing for Indeterminacy: An Application to U.S. Monetary Policy," American Economic Review, American Economic Association, pages 190-217.
    29. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Proceedings, Federal Reserve Bank of San Francisco.
    30. Troy Davig & Eric M. Leeper, 2007. "Fluctuating Macro Policies and the Fiscal Theory," NBER Chapters,in: NBER Macroeconomics Annual 2006, Volume 21, pages 247-316 National Bureau of Economic Research, Inc.
    31. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, pages 1-45.
    32. Thomas A. Lubik & Frank Schorfheide, 2004. "Testing for Indeterminacy: An Application to U.S. Monetary Policy," American Economic Review, American Economic Association, pages 190-217.
    33. John V. Duca & John Muellbauer & Anthony Murphy, 2011. "House Prices and Credit Constraints: Making Sense of the US Experience," Economic Journal, Royal Economic Society, vol. 121(552), pages 533-551, May.
    34. Feenstra, Robert C., 2003. "A homothetic utility function for monopolistic competition models, without constant price elasticity," Economics Letters, Elsevier, pages 79-86.
    35. Nobuhiro Kiyotaki & Alexander Michaelides & Kalin Nikolov, 2011. "Winners and Losers in Housing Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 255-296, March.
    36. James H. Stock & Mark W. Watson, 2003. "Has the Business Cycle Changed and Why?," NBER Chapters,in: NBER Macroeconomics Annual 2002, Volume 17, pages 159-230 National Bureau of Economic Research, Inc.
    37. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : II. New directions," Journal of Monetary Economics, Elsevier, pages 309-341.
    38. Pozsar, Zoltan & Adrian, Tobias & Ashcraft, Adam B. & Boesky, Hayley, 2013. "Shadow banking," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 1-16.
      • Zoltan Pozsar & Tobias Adrian & Adam B. Ashcraft & Hayley Boesky, 2010. "Shadow banking," Staff Reports 458, Federal Reserve Bank of New York.
    39. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, pages 129-147.
    40. Neumeyer, Pablo A. & Perri, Fabrizio, 2005. "Business cycles in emerging economies: the role of interest rates," Journal of Monetary Economics, Elsevier, pages 345-380.
    41. Obstfeld, Maurice, 2012. "Financial flows, financial crises, and global imbalances," Journal of International Money and Finance, Elsevier, pages 469-480.
    42. Ricardo J. Caballero & Emmanuel Farhi, 2013. "A Model of the Safe Asset Mechanism (SAM): Safety Traps and Economic Policy," Working Paper 70936, Harvard University OpenScholar.
    43. Glenn Rudebusch & Lars E.O. Svensson, 1999. "Policy Rules for Inflation Targeting," NBER Chapters,in: Monetary Policy Rules, pages 203-262 National Bureau of Economic Research, Inc.
    44. Stefano Eusepi & Marc Giannoni & Bruce Preston, 2012. "Long-term debt pricing and monetary policy transmission under imperfect knowledge," Staff Reports 547, Federal Reserve Bank of New York.
    45. Jonathan McCarthy & Richard Peach, 2004. "Are home prices the next "bubble"?," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 1-17.
    46. Jack Favilukis & David Kohn & Sydney C. Ludvigson & Stijn Van Nieuwerburgh, 2012. "International Capital Flows and House Prices: Theory and Evidence," NBER Chapters,in: Housing and the Financial Crisis, pages 235-299 National Bureau of Economic Research, Inc.
    47. Atif Mian & Amir Sufi, 2009. "The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis," The Quarterly Journal of Economics, Oxford University Press, pages 1449-1496.
    48. Francesco Bianchi, 2013. "Regime Switches, Agents' Beliefs, and Post-World War II U.S. Macroeconomic Dynamics," Review of Economic Studies, Oxford University Press, pages 463-490.
    49. Per Krusell & Anthony A. Smith, Jr., 1999. "On the Welfare Effects of Eliminating Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, pages 245-272.
    50. Carlos Garriga & Rodolfo E. Manuelli & Adrian Peralta-Alva, 2012. "A model of price swings in the housing market," Working Papers 2012-022, Federal Reserve Bank of St. Louis.
    51. Jeffrey R. Campbell & Zvi Hercowitz, 2006. "Welfare implications of the transition to high household debt," Working Paper Series WP-06-27, Federal Reserve Bank of Chicago.
    52. Jaimovich, Nir & Floetotto, Max, 2008. "Firm dynamics, markup variations, and the business cycle," Journal of Monetary Economics, Elsevier, pages 1238-1252.
    53. Angeloni, Ignazio & Faia, Ester & Winkler, Roland, 2014. "Exit strategies," European Economic Review, Elsevier, pages 231-257.
    54. Christopher A. Sims & Tao Zha, 2005. "Were There Regime Switches in U.S. Monetary Policy?," Working Papers 92, Princeton University, Department of Economics, Center for Economic Policy Studies..
    55. Traum, Nora & Yang, Shu-Chun S., 2011. "Monetary and fiscal policy interactions in the post-war U.S," European Economic Review, Elsevier, pages 140-164.
    56. Per Krusell & Anthony A. Smith & Jr., 1998. "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, University of Chicago Press, pages 867-896.
    57. Bruce Preston, 2005. "Learning about Monetary Policy Rules when Long-Horizon Expectations Matter," International Journal of Central Banking, International Journal of Central Banking, vol. 1(2), September.
    58. Michael B. Devereux & Alan Sutherland, 2011. "Country Portfolios In Open Economy Macro‐Models," Journal of the European Economic Association, European Economic Association, vol. 9(2), pages 337-369, April.
    59. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, pages 77-100.
    60. Campbell, Jeffrey R. & Hercowitz, Zvi, 2009. "Welfare implications of the transition to high household debt," Journal of Monetary Economics, Elsevier, pages 1-16.
    61. Milani, Fabio, 2007. "Expectations, learning and macroeconomic persistence," Journal of Monetary Economics, Elsevier, pages 2065-2082.
    62. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper Series WP-01-08, Federal Reserve Bank of Chicago.
    63. Paul Krugman, 2007. "Will there be a dollar crisis?," Economic Policy, CEPR;CES;MSH, pages 435-467.
    64. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, pages 1-45.
    65. Kaplan, Greg & Violante, Giovanni L, 2011. "A Model of the Consumption Response to Fiscal Stimulus Payments," CEPR Discussion Papers 8562, C.E.P.R. Discussion Papers.
    66. James D. Hamilton & Daniel F. Waggoner & Tao Zha, 2007. "Normalization in Econometrics," Econometric Reviews, Taylor & Francis Journals, vol. 26(2-4), pages 221-252.
    67. Andrea Gerali & Stefano Neri & Luca Sessa & Federico M. Signoretti, 2010. "Credit and Banking in a DSGE Model of the Euro Area," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 107-141, September.
    68. Christopher A. Sims & Tao Zha, 2006. "Were There Regime Switches in U.S. Monetary Policy?," American Economic Review, American Economic Association, pages 54-81.
    69. Juillard, Michel & Laxton, Douglas & McAdam, Peter & Pioro, Hope, 1998. "An algorithm competition: First-order iterations versus Newton-based techniques," Journal of Economic Dynamics and Control, Elsevier, pages 1291-1318.
    70. Slobodyan, Sergey & Wouters, Raf, 2012. "Learning in an estimated medium-scale DSGE model," Journal of Economic Dynamics and Control, Elsevier, pages 26-46.
    71. Fabio Milani, 2005. "Adaptive Learning and Inflation Persistence," Macroeconomics 0506013, EconWPA.
    72. Ashcraft, Adam B. & Schuermann, Til, 2008. "Understanding the Securitization of Subprime Mortgage Credit," Foundations and Trends(R) in Finance, now publishers, vol. 2(3), pages 191-309, June.
    73. Per Krusell & Anthony A. Smith & Jr., 1998. "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 867-896, October.
    74. Hyun Song Shin, 2012. "Global Banking Glut and Loan Risk Premium," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 60(2), pages 155-192, July.
    75. Troy Davig & Eric M. Leeper, 2007. "Fluctuating Macro Policies and the Fiscal Theory," NBER Chapters,in: NBER Macroeconomics Annual 2006, Volume 21, pages 247-316 National Bureau of Economic Research, Inc.
    76. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, pages 383-398.
    77. Sydney Ludvigson & Stijn Van Nieuwerburgh & Jack Favilukis, 2012. "Foreign Ownership of U.S. Safe Assets: Good or Bad?," 2012 Meeting Papers 297, Society for Economic Dynamics.
    78. Jordi Galí & Mark J. Gertler, 2010. "International Dimensions of Monetary Policy," NBER Books, National Bureau of Economic Research, Inc, number gert07-1.
    79. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, pages 195-232.
    80. Sydney Ludvigson & Stijn Van Nieuwerburgh & Jack Favilukis, 2012. "Foreign Ownership of U.S. Safe Assets: Good or Bad?," 2012 Meeting Papers 297, Society for Economic Dynamics.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. in 't Veld, Jan & Kollmann, Robert & Pataracchia, Beatrice & Ratto, Marco & Roeger, Werner, 2014. "International capital flows and the boom-bust cycle in Spain," Journal of International Money and Finance, Elsevier, pages 314-335.
    2. Jan in’t Veld & Robert Kollmann & Beatrice Pataracchia & Marco Ratto & Werner Roeger, 2014. "International Capital Flows and the Boom-Bust Cycle in Spain," European Economy - Economic Papers 2008 - 2015 519, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    3. in 't Veld, Jan & Kollmann, Robert & Pataracchia, Beatrice & Ratto, Marco & Roeger, Werner, 2014. "International capital flows and the boom-bust cycle in Spain," Journal of International Money and Finance, Elsevier, pages 314-335.

    More about this item

    Keywords

    Balance of trade ; Economic conditions ; Housing - Prices ; Debt ; Capital movements;

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fednsr:648. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Amy Farber). General contact details of provider: http://edirc.repec.org/data/frbnyus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.