@workingpaper {652076,
	title = {Supply and Demand in Disaggregated Keynesian Economies with an Application to the Covid-19 crisis},
	year = {2020},
	abstract = {We study supply and demand shocks in a general disaggregated model with multiple sectors, factors, and input-output linkages, as well as downward nominal wage rigidities and a zero lower bound constraint. We use the model to understand how the Covid-19 crisis, an omnibus of supply and demand shocks, affects output, unemployment, and inflation, and how it leads to the coexistence of tight and slack labor markets. Under some conditions, the details of the production network can be summarized by simple sufficient statistics. We use these sufficient statistics to conduct global comparative statics. Negative sectoral supply shocks and sectoral demand shocks are stagflationary, whereas negative intertemporal demand shocks are deflationary. Complementarities magnify Keynesian spillovers for the former shocks but mitigate them for the latter. We illustrate the intuition using a nonlinear AS-AD representation. In a quantitative model of the US calibrated to current disaggregated data, sectoral supply and demand shocks on their own generate more than 10\% inflation, and negative intertemporal demand shocks on their own generate 7\% deflation. Both types of shocks are necessary to capture the disaggregated data, each explains about half the reduction in real GDP, and putting both together results in 0.3\% inflation and as much as 8.5\% Keynesian unemployment in April 2020. Nevertheless, aggregate demand stimulus is only about a third as effective as in a typical recession where all labor markets are slack.\&nbsp;More targeted forms of demand stimulus are more effective.},
	author = {David Baqaee and Emmanuel Farhi}
}
@workingpaper {652075,
	title = {Nonlinear Production Networks with an Application to the Covid-19 crisis},
	year = {2020},
	abstract = {We study the effects of negative supply shocks and shocks to the composition of final demand on aggregate output in a disaggregated neoclassical model with multiple sectors, factors, and input-output linkages. We show how nonlinearities associated with complementarities in consumption and production amplify the effect of negative supply shocks by creating supply bottlenecks and disrupting supply chain networks. These nonlinearities are particularly potent when the shocks are more heterogeneous as the worst-affected sectors drag down the other sectors. Nonlinearities are strengthened when changes in preferences lead households to tilt the composition of their demand towards the crippled sectors directly and indirectly through their supply chains. And nonlinearities are further intensifiedwhen factors cannot easily be reallocated across sectors to reinforce weak links. A quantitative investigation suggests that nonlinearities may amplify the impact of the Covid-19 shock by between 10\%-100\%, depending on the horizon of analysis and the exact size of the shocks.\&nbsp;},
	author = {David Baqaee and Emmanuel Farhi}
}
@workingpaper {652234,
	title = {The Darwinian Returns to Scale},
	year = {2020},
	abstract = {How does an increase in the size of the market due to fertility, immigration, or trade integration, affect welfare and GDP? We study this question using a model with heterogeneous firms, fixed costs, and monopolistic competition. We show how the shape of residual demand curves endogenously determines the variation of markups with firm size and the inefficiency of the decentralized equilibrium. We decompose changes in welfare from increased scale into changes in technical efficiency and changes in allocative efficiency due to reallocation. We non-parametrically identify residual demand curves with firm-level data and, using these estimates, quantify our theoretical results. We find that somewhere between 70\% to 90\% of the aggregate returns to scale are due to changes in allocative efficiency. In bigger markets, competition endogenously toughens and triggers Darwinian reallocations: big firms expand, small firms shrink and exit, and new firms enter. However, important as they are, the improvements in allocative efficiency are not primarily driven by oft-emphasized reductions in markups or deaths of unproductive firms. Instead, they are mostly caused by a composition effect that reallocates resources from low-markup to high-markup firms. Our analysis implies that the aggregate return to scale is an endogenous outcome shaped by frictions and market structure and likely varies with time, place, and policy. Furthermore, even mild increasing returns to scale at the micro level can give rise to large increasing returns to scale at the macro level.\&nbsp;\&nbsp;},
	author = {David Baqaee and Emmanuel Farhi}
}
@workingpaper {652077,
	title = {Entry vs. Rents},
	year = {2020},
	abstract = {We show that the tension between entry and rents lies at the core of a general theory of aggregation with scale effects. We characterize the responses of macro aggregates to micro shocks in disaggregated economies with general forms of entry, internal or external returns to scale, input-output linkages, and distortions. In particular, we decompose changes in aggregate productivity into changes in technical and allocative efficiency, and show that the latter depend on changes in rents and quasi-rents across markets. In addition, we give formulas for the social costs of distortions. Finally, we prove that while first-best industrial policy is network-independent, second-best policy supports the more {\textquoteleft}{\textquoteleft}networked{\textquoteright}{\textquoteright} parts of the economy by boosting the backward linkages of markets with high forward linkages and returns to scale. As an application, we quantify the misallocation from markups in the U.S.: accounting for entry raises the aggregate efficiency loss from 20\% to 40\%. This number depends sensitively on how entry is modeled, in ways that we make precise.\&nbsp;},
	author = {David Baqaee and Emmanuel Farhi}
}
@workingpaper {570541,
	title = {Shadow Banking and the Four Pillars of Traditional Financial Intermediation},
	year = {2020},
	note = {Revise and resubmit, Review of Economic Studies.},
	abstract = {Traditional banking is built on four pillars: SME lending, insured deposittaking, access to lender of last resort, andprudential supervision. This paper unveils the logic of the quadrilogy by showing that it emerges naturally as an equilibrium outcome in a game between banks and the government. A key insight is that regulation and public insurance services (LOLR, deposit insurance) are complementary.\&nbsp;The model also shows how prudential regulation must adjust to the emergence of shadow banking, and rationalizesstructural remedies to counter financial contagion:ring-fencing between regulated and shadow banking and the sharingof liquidity in centralized platforms.},
	author = {Emmanuel Farhi and Jean Tirole}
}
@workingpaper {647625,
	title = {Global Imbalances and Policy Wars at the Zero Lower Bound},
	year = {2019},
	author = {Ricardo Caballero and Emmanuel Farhi and Pierre-Olivier Gourinchas}
}
@workingpaper {637081,
	title = {Networks, Barriers, and Trade},
	year = {2019},
	note = {Revise and resubmit, Econometrica.},
	abstract = {We study a non-parametric class of neoclassical trade models with global production networks. We characterize their properties in terms of sufficient statistics useful for growth and welfare accounting as well as for counterfactuals. We establish a formal duality between open and closed economies and use it to analytically quantify the gains from trade. Accounting for nonlinear (non-Cobb-Douglas) production networks with realistic complementarities in production significantly raises the gains from trade relative to estimates in the literature. We use our general comparative statics results to show how models that abstract away from intermediates, no matter how well calibrated, are incapable of simultaneously predicting the costs of tariff and non-tariff barriers to trade. Given trade volumes and elasticities, accounting for intermediates doubles the losses from tariffs. Better quantitative accuracy demands the use of more complicated, oftentimes computational, models. This paper seeks to help bridge the gap between computation and theory.},
	author = {David Baqaee and Emmanuel Farhi}
}
@workingpaper {632973,
	title = {A Short Note on Aggregating Productivity},
	year = {2019},
	author = {David Baqaee and Emmanuel Farhi}
}
@workingpaper {612008,
	title = {Macroeconomics with Heterogeneous Agents and Input-Output Networks.},
	year = {2018},
	abstract = {The goal of this paper is to simultaneously unbundle two interacting reduced-form building blocks of traditional macroeconomic models: the representative agent and the aggregate production function. We introduce a broad class of disaggregated general equilibrium models with Heterogeneous Agents and Input-Output networks (HA-IO). We characterize their properties through two sets of results describing the propagation and the aggregation of shocks.\&nbsp;Our results shed light on many seemingly disparate applied questions, such as: sectoral comovement in business cycles; factor-biased technical change in task-based models; structural transformation; the effects of corporate taxation; and the dependence of fiscal multipliers on the composition of government spending.},
	author = {David Baqaee and Emmanuel Farhi}
}
@workingpaper {344401,
	title = {Global Imbalances and Currency Wars at the ZLB},
	year = {2016},
	abstract = {This paper explores the consequences of extremely low equilibrium real interest rates in a world with integrated but heterogenous capital markets, and nominal rigidities. In this context, we establish six main results: (i) Economies experiencing liquidity traps pull others into a similar situation by running current account surpluses; (ii) Reserve currencies have a tendency to bear a disproportionate share of the global liquidity trap--a phenomenon we dub the \reserve currency paradox;" (iii) Beggar-thy-neighbor exchange rate devaluations stimulate the domestic domestic economy at the expense of other economies; (iv) While more price and wage exibility exacerbates the risk of adeflationary global liquidity trap, it is the more rigid economies that bear the brunt of the recession; (v) (Safe) Public debt issuances and increases in government spending anywhere are expansionary everywhere, and more so when there is some degree of price or wage exibility. We use our model to shed light on the evolution of global imbalances,interest rates, and exchange rates since the beginning of the global financial crisis.},
	author = {Ricardo J. Caballero and Emmanuel Farhi and Pierre-Olivier Gourinchas}
}
@workingpaper {20948,
	title = {Crash Risk in Currency Markets},
	year = {2015},
	note = {Revise and resubmit, Review of Financial Studies.},
	abstract = {Since the Fall of 2008, out-of-the money puts on high interest rate currencies have become significantly more expensive than out-of-the-money calls, suggesting a large crash risk of those currencies. To evaluate crash risk precisely, we propose a parsimonious structural model that includes both Gaussian and disaster risks and can be estimated even in samples that do not contain disasters. Estimating the model for the 1996 to 2014 sample period using monthly exchange rate spot, forward, and option data, we obtain a real-time index of the compensation for global disaster risk exposure. We find that disaster risk accounts for more than a third of the carry trade riskpremium in advanced countries over the period examined. The measure of disaster risk that we uncover in currencies proves to be an important factor in the cross-sectional and time-series variation of exchange rates, interest rates, and equity tail risk.\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;\&nbsp;},
	url = { },
	author = {Emmanuel Farhi and Samuel Fraiberger and Xavier Gabaix and Romain Ranciere and Adrien Verdelhan}
}
@workingpaper {175926,
	title = {Bequest Taxation and R-G},
	year = {2014},
	abstract = {
Abstract
We analyze the role of the gap r-g between the return of return on capital r and the growth of the economy g rate in a political economy model of bequest taxation. Higher values of r-g lead to higher wealth inequality, and higher and more progressive optimal taxes on bequest. These conclusions hold only under certain specific but reasonable assumptions regarding the bequest motive, the relative magnitudes of bequest and labor income inequality, and the nature of the political economy process.
},
	author = {Emmanuel Farhi and Ivan Werning}
}
@workingpaper {165206,
	title = {Labor Mobility Within Currency Unions},
	year = {2014},
	note = {Revise and resubmit, Journal of Monetary Economics.},
	abstract = {We study the effects of labor mobility within a currency union suffering from nominal rigidities. When the demand shortfall in depressed region is mostly internal, migration may not help regional macroeconomic adjustment. When external demand is also at the root of the problem, migration out of depressed regions may produce a positive spillover for stayers. We consider a planning problem and compare its solution to the equilibrium. We find that the equilibrium is generally constrained inefficient, although the welfare losses may be small if the economy suffers mainly from internal demand imbalances.},
	author = {Emmanuel Farhi and Ivan Werning}
}
@workingpaper {70936,
	title = {A Model of the Safe Asset Mechanism (SAM): Safety Traps and Economic Policy},
	year = {2013},
	abstract = {The global economy has a chronic shortage of safe assets which lies behind many recent macroeconomic imbalances. This paper provides a simple model of the Safe Asset Mechanism (SAM), its recessionary safety traps, and its policy antidotes. Public debt plays a central role in SAM as long as the government has spare fiscal capacity to back safe asset production. We show that Quantitative Easing type policies have positive effects on spreads and output. In contrast, Operation Twist type policies, where the duration of public debt held by the public is reduced, can be counterproductive. Monetary policy commitments work if they support future bad states of nature. All these policies depend on fiscal capacity. Once the latter runs out, short term cyclical policy becomes ineffective. In contrast, credible long run fiscal consolidation relaxes the fiscal capacity constraint and enhances the effectiveness of short term policy. An economy that is near its scal limits is susceptible to runs on its public debt and to destabilizing feedback loops. },
	author = {Ricardo J. Caballero and Emmanuel Farhi}
}
@workingpaper {70966,
	title = {Dealing with the Trilemma: Optimal Capital Controls with Fixed Exchange Rates},
	year = {2012},
	abstract = {We consider a standard macroeconomic model of a small open economy with a fixed exchange rate and study optimal capital controls. We characterize their use in response to a variety of macroeconomic shocks. We show that capital controls are more effective when employed against transitory shocks and when the degree of openness (exports/GDP) is small. They are particularly effective at neutralizing risk-premium shocks that affect the interest rate differential. Although we focus on fixed exchange rates, we show that in some cases capital controls may be optimal even if the exchange rate is flexible. Finally, we compare the single country{\textquoteright}s optimum to a coordinated world solution. We find a limited need for coordination.},
	author = {Emmanuel Farhi and Ivan Werning}
}
@workingpaper {70941,
	title = {Crisis and Commitment: Inflation Credibility and the Vulnerability to Sovereign Debt Crises},
	year = {2012},
	abstract = {We explore the role of inflation credibility in self-fulfilling debt crises. In particular,
We propose a continuous time model of nominal debt with the potential for self-
fulfilling debt crises as in Calvo (1988) and Cole and Kehoe (2000). We characterize
crisis equilibria conditional on the level of commitment to low inflation. With strong
commitment, which can be interpreted as joining a monetary union or issuing foreign
currency debt, the environment is a version of the one studied by Cole and Kehoe.
The paper contrasts this framework with one in which sovereign debt is nominal and
is vulnerable to ex post devaluation. Inflation is costly, but reduces the real value of
outstanding debt without the full punishment of default. In a debt crisis, a government
may opt to inflate away a fraction of the real debt burden rather than explicitly default.
This flexibility potentially reduces the country{\textquoteright}s exposure to self-fulfilling crises.
On the other hand, the government lacks commitment not to inflate in the absence of
crisis. This latter channel raises the cost of debt in tranquil periods and makes default
more attractive in the event of a crisis, increasing the country{\textquoteright}s vulnerability. We characterize
the interaction of these two forces. We show that there is an intermediate level
of commitment that minimizes the country{\textquoteright}s exposure to rollover risk. On the other
hand, low inflation credibility brings the worst of both worlds --high inflation in tranquil
periods and increased vulnerability to a crisis. Weak inflationary commitment also
reduces the country{\textquoteright}s equilibrium borrowing limit. These latter results shed light on
the notions of original sin and debt intolerance highlighted in the empirical literature;
that is, the fact that developing economies issue debt exclusive in foreign currency to
international investors as well as encounter solvency issues at relatively low ratios of
debt-to-GDP.
 
},
	author = {Emmanuel Farhi and Mark Aguiar and Manuel Amador and Gita Gopinath}
}
@workingpaper {70986,
	title = {The Political Economy of Nonlinear Capital Taxation},
	year = {2008},
	abstract = {We study efficient nonlinear taxation of labor and capital in a dynamic Mirrleesian model incorporating political economy constraints. Policies are chosen sequentially over time, without commitment, as the outcome of democratic elections. We study
the best equilibrium for this dynamic game. Our main result is that the marginal tax on capital income is progressive, in the sense that richer agents face higher marginal tax rates.
 },
	author = {Emmanuel Farhi and Ivan Werning}
}
@workingpaper {20951,
	title = {The Real Effects of Stock Market Mispricing at the Aggregate: Theory and Empirical Evidence},
	year = {2006},
	abstract = {In this paper we investigate whether stock market overpricing leads to aggregate (real) inefficiencies. We first investigate a standard dynamic contracting model of investment subject to financing constraints. We show that stock market mispricing will have two robust effects on welfare: on the one hand it will distort investment decisions and lead to inefficiencies. On the other hand it will alleviate underinvestment problems and allow some efficient projects to be undertaken. We then turn to the data and investigate which of the two effects dominates at the aggregate. By using proxies for investor sentiment within a vector autoregression (VAR) we find that positive shocks to sentiment boost (real) investment while reducing aggregate profits over the long run, all else equal. We interpret this as evidence that mispricing causes more inefficiencies than it corrects.
},
	author = {Emmanuel Farhi and Stavros Panageas}
}
@article {580911,
	title = {Productivity and Misallocation in General Equilibrium},
	journal = {Quarterly Journal of Economics},
	year = {Forthcoming},
	abstract = {This paper develops a general theory of aggregation in inefficient economies. We provide non-parametric formulas for aggregating microeconomic shocks in economies with distortions such as taxes, markups, frictions to resource reallocation, financial frictions, and nominal rigidities. We allow for arbitrary elasticities of substitution, returns to scale, factor mobility, and input-output network linkages. We show how to separately measure changes in technical and allocative efficiency. We also show how to compute the social cost of distortions. We pursue applications focusing on firm-level markups in the U.S. We find that improvement in allocative efficiency, due to the reallocation over time of market share to high-markup firms, accounts for about half of aggregate TFP growth over the period 1997-2015.\&nbsp;We also find that eliminating the misallocation resulting from the large and dispersed markups estimated in the data would raise aggregate TFP by about 20\%, increasing the economy-wide cost of monopoly distortions by two orders of magnitude compared to the famous 0.1\% estimate by Harberger (1954). These exact numbers should be interpreted with care since the data is imperfect and requires substantial imputation.},
	author = {David Baqaee and Emmanuel Farhi}
}
@article {626200,
	title = {The Microeconomic Foundations of Aggregate Production Functions},
	journal = {Journal of the European Economic Association},
	year = {Forthcoming},
	note = {Article for the BBVA lecture of the European Economic Association and the BBVA Foundation},
	abstract = {Aggregate production functions are reduced-form relationships that emerge endogenously from input-output interactions between heterogeneous producers and factors in general equilibrium. We provide a general methodology for analyzing such aggregate production functions by deriving their first- and second-order properties. Our aggregation formulas provide non-parameteric characterizations of the macro elasticities of substitution between factors and of the macro bias of technical change in terms of micro sufficient statistics. They allow us to generalize existing aggregation theorems and to derive new ones. We relate our results to the famous Cambridge-Cambridge controversy.},
	author = {David Baqaee and Emmanuel Farhi}
}
@article {503421,
	title = {Monetary Policy, Bounded Rationality, and Incomplete Markets},
	journal = {American Economic Review},
	year = {Forthcoming},
	month = {2017},
	abstract = {\&nbsp;This paper extends the benchmark New-Keynesian model with a representative agent and rational expectations by introducing two key frictions: (1) incomplete markets with uninsurable idiosyncratic risk and occasionally-binding borrowing constraints; and (2) bounded rationality in the form of level- k thinking. Compared to the benchmark model, we show that the interaction of these two frictions leads to a powerful mitigation of the effects of monetary policy, which is much more pronounced at long horizons. This offers a potential rationalization of the {\textquotedblleft}forward guidance puzzle{\textquotedblright}. Each of these frictions, in isolation, would lead to no or much smaller departures from the benchmark model. We conclude that the interaction of bounded rationality and is important.\&nbsp;},
	author = {Emmanuel Farhi and Ivan Werning}
}
@article {305366,
	title = {Optimal Taxation with Behavioral Agents},
	journal = {American Economic Review},
	year = {Forthcoming},
	abstract = {This paper develops a theory of optimal taxation with behavioral agents. We\&nbsp;use a general behavioral framework that encompasses a wide range of behavioral\&nbsp;biases such as misperceptions, internalities and mental accounting. We revisit\&nbsp;the three pillars of optimal taxation: Ramsey (linear commodity taxation to\&nbsp;raise revenues and redistribute), Pigou (linear commodity taxation to correct\&nbsp;externalities) and Mirrlees (nonlinear income taxation). We show how the\&nbsp;canonical optimal tax formulas are modified and lead to a rich set of novel\&nbsp;economic insights. We also show how to incorporate nudges in the optimal\&nbsp;taxation frameworks, and jointly characterize optimal taxes and nudges. We\&nbsp;explore the Diamond-Mirrlees productive efficiency result and the\&nbsp;Atkinson-Stiglitz uniform commodity taxation proposition, and find that they\&nbsp;are more likely to fail with behavioral agents.},
	author = {Emmanuel Farhi and Xavier Gabaix}
}
@article {629683,
	title = {China vs. U.S.: IMS Meets IPS},
	journal = {American Economic Review, Papers and Proceedings},
	volume = {109},
	number = {May},
	year = {2019},
	pages = {476-481},
	abstract = {Currently both the International Monetary System (IMS) and the International Price Systems (IPS) are dominated by the U.S. The emergence of China, both as reserve currency and as a currency of invoicing, is likely to disrupt this status quo. We provide a framework to understand the forces that will shape this transition and identify sources of instability. We highlight the risk of an abrupt shift triggered by a run on the dollar.},
	author = {Emmanuel Farhi and Matteo Maggiori}
}
@article {482151,
	title = {The Macroeconomic Impact of Microeconomic Shocks: Beyond Hulten{\textquoteright}s Theorem},
	journal = {Econometrica},
	volume = {87},
	number = {4},
	year = {2019},
	month = {2019},
	pages = {1155-1203},
	abstract = {We provide a nonlinear characterization of the macroeconomic impact of microeconomic productivity shocks in terms of reduced-form non-parametric elasticities for efficient economies. We also show how structural microeconomic parameters are mapped to these reduced-form general equilibrium elasticities. In this sense, we extend the foundational theorem of Hulten (1978) beyond first-order terms to capture nonlinearities. Key features ignored by first-order approximations that play a crucial role are: structural elasticities of substitution, network linkages, structural returns to scale, and the extent of factor reallocation. In a business-cycle calibration with sectoral shocks, nonlinearities magnify negative shocks and attenuate positive shocks, resulting in an aggregate output distribution that is asymmetric (negative skewness), fat-tailed (excess kurtosis), and has a lower mean, even when shocks are symmetric and thin-tailed. Average output losses due to short-run sectoral shocks are an order of magnitude larger than the welfare cost of business cycles calculated by Lucas1(987). Nonlinearities can also cause shocks to critical sectors to have disproportionate macroeconomic effects, almost tripling the estimated impact of the 1970s oil shocks on world aggregate output. Finally, in a long-run growth context, nonlinearities, which underpin Baumol{\textquoteright}s cost disease, account for a 20 percentage point reduction in aggregate TFP growth over the period 1948-2017 in the US.},
	author = {David Baqaee and Emmanuel Farhi}
}
@article {625948,
	title = {Accounting for Macro-Finance Trends: Market Power, Intangibles, and Risk Premia},
	journal = {Brookings Papers on Economic Activity},
	volume = {Fall},
	year = {2018},
	pages = {147-250},
	author = {Emmanuel Farhi and Francois Gourio}
}
@article {624927,
	title = {The Macroeconomics of Border Taxes},
	journal = {NBER Macroeconomics Annual},
	volume = {33},
	year = {2018},
	pages = {395-457},
	author = {Omar Barbiero and Emmanuel Farhi and Gita Gopinath and Oleg Itskkoki}
}
@article {395971,
	title = {A Model of the International Monetary System},
	journal = {Quarterly Journal of Economics},
	volume = {133},
	number = {1},
	year = {2018},
	pages = {295-355},
	abstract = {We propose a simple model of the international monetary system. We study the world supply and demand for reserve assets denominated in different currencies under a variety of scenarios: a Hegemon vs. a multipolar world; abundant vs. scarce reserve assets; a gold exchange standard vs. a floating rate system. We rationalize the Triffin dilemma, which posits the fundamental instability of the system, as well as the common prediction regarding the natural and beneficial emergence of a multipolar world, the Nurkse warning that a multipolar world is more unstable than a Hegemon world, and the Keynesian argument that a scarcity of reserve assets under a gold standard or at the zero lower bound is recessive. Our analysis is both positive and normative.},
	author = {Emmanuel Farhi and Matteo Maggiori}
}
@article {164191,
	title = {Deadly Embrace: Sovereign and Financial Balance Sheets Doom Loops},
	journal = {Review of Economic Studies},
	volume = {85},
	number = {3},
	year = {2018},
	pages = {1781-1823},
	abstract = {\&nbsp;The recent unravelling of the Eurozone{\textquoteright}s financial integration raised concerns about feedback loops between sovereign and banking insolvency. This paper provides a theory of the feedback loop that allows for both domestic bailouts of the banking system and sovereign debt forgiveness by international creditors or solidarity by other countries. Our theory has important implications for the re-nationalization of sovereign debt and the rationale for banking unions. \&nbsp;},
	author = {Emmanuel Farhi and Jean Tirole}
}
@article {550776,
	title = {The Safe Asset Shortage Conundrum},
	journal = {Journal of Economic Perspectives},
	volume = {31},
	number = {3},
	year = {2017},
	pages = {29-46},
	abstract = {A safe asset is a simple debt instrument that is expected to preserve its value during adverse systemic events. The supply of safe assets, private and public, has historically been concentrated in a small number of advanced economies, most prominently the United States. Over the last few decades, with minor cyclical interruptions, the supply of safe assets has not kept up with global demand. The reason is straightforward: the collective growth rate of the advanced economies that produce safe assets has been lower than the world{\textquoteright}s growth rate, which has been driven disproportionately by the high growth rate of high-saving emerging economies such as China. The signature of this growing shortage is a steady increase in the price of safe assets; equivalently, global safe interest rates must decline, as has been the case since the 1980s. The early literature, brought to light by Ben Bernanke{\textquoteright}s famous "savings glut" speech of 2005, focused on a general shortage of assets without isolating its safe asset component. The distinction, however, has become increasingly important over time, particularly in the aftermath of the subprime mortgage crisis and its sequels. We begin by describing the main facts and macroeconomic implications of safe asset shortages. Faced with such a structural conundrum, what are the likely short- to medium-term escape valves? We analyze four of them, each with its own macroeconomic and financial trade-offs.},
	author = {Ricardo J. Caballero and Emmanuel Farhi and Pierre-Olivier Gourinchas}
}
@article {488731,
	title = {Rents, Technical Change, and Risk Premia: Accounting for Secular Changes in Interest Rates, Returns to Capital, Earnings Yields, and Factor Shares},
	journal = {American Economic Review, Papers and Proceedings},
	volume = {107},
	number = {5},
	year = {2017},
	pages = {614-620},
	abstract = {
	The secular decline in safe interest rates since the early 1980s has been the subject of considerable attention. In this short paper, we argue that it is important to consider the evolution of safe real rates in conjunction with three other first-order macroeconomic stylized facts: the relative constancy of the real return to productive capital, the decline in the labor share, and the decline and subsequent stabilization of the earnings yield. Through the lens of a simple accounting framework, these four facts offer insights into the economic forces that might be at work.

},
	author = {Ricardo J. Caballero and Emmanuel Farhi and Pierre-Olivier Gourinchas}
}
@article {233766,
	title = {The Safety Trap},
	journal = {Review of Economic Studies},
	volume = {85},
	number = {1},
	year = {2017},
	pages = {223-274},
	abstract = {In this paper we provide a model of the macroeconomic implications of safeasset shortages. In particular, we discuss the emergence of a deflationary\&nbsp;safety trap\&nbsp;equilibrium with endogenous risk premia. It is an acuteform of a liquidity trap, in which the shortage of a specific form ofassets, safe assets, as opposed to a general shortage of assets, is thefundamental driving force. At the ZLB, our model has a Keynesian crossrepresentation, in which net safe asset supply plays the role of anaggregate demand shifter. Essentially, safety traps correspond to liquiditytraps in which the emergence of an endogenous risk premium significantlyalters the connection between macroeconomic policy and economic activity.{\textquoteleft}{\textquoteleft}Helicopter drops{\textquoteright}{\textquoteright} of money, safe public debt issuances, swaps of privaterisky assets for safe public debt, or increases in the inflation target,stimulate aggregate demand and output, while forward guidance is lesseffective. The safety trap can be arbitrarily persistent, as in the secularstagnation hypothesis, despite the existence of infinitely lived assets.\&nbsp;},
	author = {Ricardo J Caballero and Emmanuel Farhi}
}
@article {198816,
	title = {Fiscal Unions},
	journal = {American Economic Review},
	volume = {107},
	number = {12},
	year = {2017},
	pages = {3788-3834},
	abstract = {We study cross-country risk sharing as a second-best problem for members of a currency union using an open economy model with nominal rigidities and provide two key results. First, we show that, if financial markets are incomplete, the value of gaining access to any given level of aggregate risk sharing is greater for countries that are members of a currency union. Second, we show that, even if financial markets are complete, privately optimal risk sharing is constrained inefficient. A role emerges for government intervention in risk sharing to both guarantee its existence and to influence its operation. The constrained efficient risk sharing arrangement can be implemented by contingent transfers within a fiscal union. The benefits of such a fiscal union are larger, the bigger the asymmetric shocks affecting the members of the currency union, the more persistent these shocks, and the less open the member economies.},
	author = {Emmanuel Farhi and Ivan Werning}
}
@article {78556,
	title = {Fiscal Multipliers: Liquidity Traps and Currency Unions},
	journal = {Handbook of Macroeconomics},
	volume = {2},
	year = {2017},
	pages = {2417-2492},
	abstract = {
	We provide explicit solutions for government spending multipliers during a liquidity trap and within a fixed exchange regime using standard closed and open-economy New Keynesian models. We confirm the potential for large multipliers during liquidity traps. For a currency union, we show that self-financed multipliers are small, always below unity, unless the accompanying tax adjustments involve substantial static redistribution from low to high marginal propensity to consume agents, or dynamic redistribu- tion from future to present non-Ricardian agents. But outside-financed multipliers which require no domestic tax adjustment can be large, especially when the average marginal propensity to consume on domestic goods is high or when government spending shocks are very persistent. Our solutions are relevant for local and national multipliers, providing insight into the economic mechanisms at work as well as the testable implications of these models.

},
	author = {Emmanuel Farhi and Ivan Werning}
}
@article {377061,
	title = {Safe Asset Scarcity and Aggregate Demand},
	journal = {American Economic Review, Papers and Proceedings},
	volume = {106},
	number = {5},
	year = {2016},
	pages = {513-518},
	author = {Ricardo Caballero and Emmanuel Farhi and Pierre-Olivier Gourinchas}
}
@article {95131,
	title = {A Theory of Macroprudential Policies in the Presence of Nominal Rigidities},
	journal = {Econometrica},
	volume = {84},
	number = {5},
	year = {2016},
	note = {Lead article.},
	pages = {1645-1704},
	abstract = {AbstractWe provide a unifying foundation for monetary policy and macroprudential policies in financial markets for economies with nominal rigidities in goods and labor markets and constraints on monetary policy such as the zero lower bound or fixed exchange rates. Macroprudential interventions in financial markets are beneficial because of an aggregate demand externality. Ex post, the distribution of wealth across agents affects aggregate demand and output through Keynesian channels. However, ex ante, these effects are not privately internalized in the financial decisions agents make. We obtain a simple formula that characterizes the size and direction for optimal financial market interventions as a function of a small number of empirically measurable sufficient statistics. We also characterize optimal monetary policy. We then show how to extend our framework to also incorporate financial markets frictions giving rise to pecuniary externalities. Finally, we provide a number of relevant concrete applications of our general theory.},
	author = {Emmanuel Farhi and Ivan Werning}
}
@article {71001,
	title = {Rare Disasters and Exchange Rates},
	journal = {Quarterly Journal of Economics},
	volume = {131},
	number = {1},
	year = {2016},
	note = {Lead Article.},
	pages = {1-52},
	abstract = {We propose a new model of exchange rates, based on the hypothesis that the possibility
of rare but extreme disasters is an important determinant of risk premia in asset markets. The 
probability of world disasters as well as each country{\textquoteright}s exposure to these events is time-varying. 
This creates joint fluctuations in exchange rates, interest rates, options, and stock markets. The 
model accounts for a series of major puzzles in exchange rates: excess volatility and exchange rate 
disconnect, forward premium puzzle and large excess returns of the carry trade, and comovements 
between stocks and exchange rates. It also makes empirically successful signature predictions 
regarding the link between exchange rates and telltale signs of disaster risk in currency options.
},
	author = {Emmanuel Farhi and Xavier Gabaix}
}
@article {165301,
	title = {Coordination and Crisis in Monetary Unions},
	journal = {Quarterly Journal of Economics},
	volume = {130},
	number = {4},
	year = {2015},
	pages = {1727-1779},
	abstract = {We study fiscal and monetary policy in a monetary union with the potential for rollover crises in sovereign debt markets. Member-country fiscal authorities lack commitment to repay their debt and choose fiscal policy independently. A common monetary authority chooses inflation for the union, also without commitment.\&nbsp; We first describe the existence of a fiscal externality that arises in the presence of limited commitment and leads countries to over borrow; this externality rationalizes the imposition of debt ceilings in a monetary union. We then investigate the impact of the composition of debt in a monetary union, that is the fraction of high-debt versus low-debt members, on the occurrence of self-fulfilling debt crises. We demonstrate that a high-debt country may be less vulnerable to crises and have higher welfare when it belongs to a union with an intermediate mix of high- and low-debt members, than one where all other members are low-debt. This contrasts with the conventional wisdom that all countries should prefer a union with low-debt members, as such a union can credibly deliver low inflation. These findings shed new light on the criteria for an optimal currency area in the presence of rollover crises.\&nbsp;},
	author = {Mark Aguiar and Manuel Amador and Emmanuel Farhi and Gita Gopinath}
}
@article {70971,
	title = {Liquid Bundles},
	journal = {Journal of Economic Theory},
	volume = {158},
	year = {2015},
	pages = {634-655},
	abstract = {Parties in financial markets, industries, compensation design or politics may negotiate on either a piecemeal or a bundled basis. Little is known about the desirability of bundling when values are common and/or information endogenous. The paper shows that bundling encourages information-equalizing investments, thereby facilitating trade. It accordingly revisits and qualifies existing knowledge on security design.},
	author = {Emmanuel Farhi and Jean Tirole}
}
@article {142521,
	title = {Sovereign Debt Booms in Monetary Unions},
	journal = {American Economic Review, Papers and Proceedings},
	volume = {104},
	number = {5},
	year = {2014},
	pages = {101-106},
	author = {Mark Aguiar and Manuel Amador and Emmanuel Farhi and Gita Gopinath}
}
@article {136671,
	title = {How Much Would You Pay To Resolve Long-Run Risk?},
	journal = {American Economic Review},
	volume = {104},
	number = {9},
	year = {2014},
	pages = {2680-2697},
	abstract = {Though risk aversion and the elasticity of intertemporal substitution have been the subjects of careful scrutiny when calibrating preferences, the long-run risks literature as well as the broader literature using recursive utility to address asset pricing puzzles have ignored the full implications of their parameter specifications. Recursive utility implies that the temporal resolution of risk matters and a quantitative assessment of how much it matters should be part of the calibration process. This paper gives a sense of the magnitudes of implied timing premia. Its objective is to inject temporal resolution of risk into the discussion of the quantitative properties of long-run risks and related models.},
	author = {Larry Epstein and Emmanuel Farhi and Tomasz Stralezcki}
}
@article {133566,
	title = {Dilemma not Trilemma? Capital Controls and Exchange Rates with Volatile Capital Flows},
	journal = {IMF Economic Review (Special Volume in Honor of Stanley Fischer)},
	volume = {62},
	year = {2014},
	pages = {569-605},
	abstract = {We consider a standard New Keynesian model of a small open economy with nominal rigidities and study optimal capital controls. Consistent with the Mundellian view, we find that the exchange rate regime is key. However, in contrast with the Mundellian view, we find that capital controls are desirable even when the exchange rate is flexible. Optimal capital controls lean against the wind and help smooth out capital flows.},
	author = {Emmanuel Farhi and Ivan Werning}
}
@article {70976,
	title = {Fiscal Devaluations},
	journal = {Review of Economic Studies},
	volume = {81},
	number = {2},
	year = {2014},
	pages = {725-760},
	abstract = {We show that even when the exchange rate cannot be devalued, a small set of conventional fiscal instruments can robustly replicate the real allocations attained under a nominal exchange rate devaluation in a dynamic New Keynesian open economy environment. We perform the analysis under alternative pricing assumptions{\textemdash}producer or local currency pricing, along with nominal wage stickiness; under arbitrary degrees of asset market completeness and for general stochastic sequences of devaluations. There are two types of fiscal policies equivalent to an exchange rate devaluation{\textemdash}one, a uniform increase in import tariff and export subsidy, and two, a value-added tax increase and a uniform payroll tax reduction. When the devaluations are anticipated, these policies need to be supplemented with a consumption tax reduction and an income tax increase. These policies are revenue neutral. In certain cases equivalence requires, in addition, a partial default on foreign bond holders. We discuss the issues of implementation of these policies, in particular, under the circumstances of a currency union. },
	author = {Emmanuel Farhi and Gita Gopinath and Oleg Itskhoki}
}
@article {78856,
	title = {Fear of Rejection? Tiered Certification and Transparency},
	journal = {Rand Journal of Economics},
	volume = {44},
	number = {4},
	year = {2013},
	pages = {610{\textendash}631},
	author = {Emmanuel Farhi and Josh Lerner and Jean Tirole}
}
@article {71021,
	title = {Insurance and Taxation over the Life Cycle},
	journal = {Review of Economic Studies},
	volume = {810},
	number = {2},
	year = {2013},
	pages = {596{\textendash}635},
	abstract = {We consider a dynamic Mirrlees economy in a life-cycle context and study the optimal insurance arrangement. Individual productivity evolves as a Markov process and is private information. We use a first-order approach in discrete and continuous time and obtain novel theoretical and numerical results. Our main contribution is a formula describing the dynamics for the labour-income tax rate. When productivity is an AR(1) our formula resembles an AR(1) with a trend where: (i) the auto-regressive coefficient equals that of productivity; (ii) the trend term equals the covariance productivity with consumption growth divided by the Frisch elasticity of labour; and (iii) the innovations in the tax rate are the negative of consumption growth. The last property implies a form of short-run regressivity. Our simulations illustrate these results and deliver some novel insights. The average labour tax rises from 0\% to 37\% over 40 years, whereas the average tax on savings falls from 12\% to 0\% at retirement. We compare the second best solution to simple history-independent tax systems, calibrated to mimic these average tax rates. We find that age-dependent taxes capture a sizable fraction of the welfare gains. In this way, our theoretical results provide insights into simple tax systems.},
	author = {Emmanuel Farhi and Ivan Werning}
}
@article {71016,
	title = {Estate Taxation with Altruism Heterogeneity},
	journal = {American Economic Review, Papers and Proceedings},
	volume = {103},
	number = {3},
	year = {2013},
	note = { },
	abstract = {We develop a theory of optimal estate taxation in a model where bequest inequality is driven by differences in parental altruism. We show that a wide range of results are possible, from positive taxes to subsidies, depending on redistributive objectives implicit in the cardinal specification of utility and social welfare functions. We propose a normalization that is helpful in classifying these different possibilities. We isolate cases where the optimal policy bans negative bequests and taxes positive bequests, features present in most advanced countries.},
	author = {Emmanuel Farhi and Ivan Werning}
}
@article {20945,
	title = {Unconventional Fiscal Policy at the Zero Bound},
	journal = {American Economic Review},
	volume = {103},
	number = {4},
	year = {2013},
	note = { },
	pages = {1172-1211},
	abstract = { When the zero lower bound on nominal interest rates binds, monetary policy cannot provide appropriate stimulus. We show that, in the standard New Keynesian model, tax policy can deliver such stimulus at no cost and in a time-consistent manner. There is no need to use inefficient policies such as wasteful public spending or future commitments to low interest rates.


 },
	author = {Emmanuel Farhi and Isabel Correia and Juan Pablo Nicolini and Pedro Teles}
}
@article {20311,
	title = {Collective Moral Hazard, Maturity Mismatch and Systemic Bailouts},
	journal = {American Economic Review},
	volume = {102},
	number = {1},
	year = {2012},
	pages = {60-93},
	abstract = {The paper shows that time-consistent, imperfectly targeted support to distressed institutions makes private leverage choices strategic complements. When everyone engages in maturity mismatch, authorities have little choice but intervening, creating both current and deferred (sowing the seeds of the next crisis) social costs. In turn, it is profitable to adopt a risky balance sheet. These insights have important consequences, from banks choosing to correlate their risk exposures to the need for macro-prudential supervision.},
	url = { },
	author = {Emmanuel Farhi and Jean Tirole}
}
@article {20952,
	title = {Nonlinear Capital Taxation without Commitment},
	journal = {Review of Economic Studies},
	volume = {79},
	number = {4},
	year = {2012},
	note = { },
	pages = {1469-1493},
	abstract = {We study efficient non-linear taxation of labour and capital in a dynamic Mirrleesian model incorporating political economy constraints. Policies are chosen sequentially over time, without commitment. Our main result is that the marginal tax on capital income is progressive, in the sense that richer agents face higher marginal tax rates. },
	author = {Emmanuel Farhi and Chris Sleet and Ivan Werning and Sevin Yeltekin}
}
@article {20943,
	title = {Capital Taxation: Quantitative Explorations of the Inverse Euler Equation},
	journal = {Journal of Political Economy},
	volume = {120},
	number = {3},
	year = {2012},
	note = { },
	pages = {398-445},
	abstract = {Economies with private information provide a rationale for capital taxation. In this paper we ask what the welfare gains from following this prescription are. We develop a method to answer this question in standard general equilibrium models with idiosyncratic uncertainty and incomplete markets. We find that general equilibrium forces are important and greatly reduce the welfare gains. Once these effects are taken into account, the gains are relatively small in our benchmark calibration. These results do not imply that dynamic aspects of social insurance design are unimportant, but they do suggest that capital taxation may play a modest role.},
	author = {Emmanuel Farhi and Ivan Werning}
}
@article {20309,
	title = {Bubbly Liquidity},
	journal = {Review of Economic Studies},
	volume = {79},
	number = {2},
	year = {2012},
	pages = {678-706},
	abstract = {This paper analyzes the possibility and the consequences of rational bubbles in a dynamic economy where financially constrained firms demand and supply liquidity. Bubbles are more likely to emerge, the scarcer the supply of outside liquidity and the more limited the pledgeability of corporate income; they crowd investment in (out) when liquidity is abundant (scarce). We analyze extensions with firm heterogeneity and stochastic bubbles.},
	author = {Emmanuel Farhi and Jean Tirole}
}
@article {20313,
	title = {Progressive Estate Taxation},
	journal = {Quarterly Journal of Economics},
	volume = {125},
	number = {2},
	year = {2010},
	pages = {635-673},
	abstract = {We present a model with altruistic parents and heterogeneous productivity. We derive two key properties for optimal estate taxation. First, the estate tax should be progressive, so that parents leaving a higher bequest face a lower net return on bequests. Second, marginal estate taxes should be negative, so that all parents face a marginal subsidy on bequests. Both properties can be implemented with a simple nonlinear tax on bequests, levied separately from the income tax. These results apply to other intergenerational transfers, such as educational investments, and are robust to endogenous fertility choices. Both estate or inheritance taxes can implement the optimal allocation, but we show that the inheritance tax has some advantages. Finally, when we impose an ad hoc constraint requiring marginal estate taxes to be nonnegative, the optimum features a zero tax up to an exception level, and a progressive tax thereafter.
},
	author = {Emmanuel Farhi and Ivan Werning}
}
@article {20312,
	title = {Capital Taxation and Ownership when Markets are Incomplete},
	journal = {Journal of Political Economy},
	volume = {118},
	number = {5},
	year = {2010},
	pages = {908-948},
	abstract = {This paper is a normative investigation of the theoretical and quantitative properties of optimal capital taxation in the neoclassical growth model with aggregate shocks and incomplete markets. The model features a representative-agent economy with linear taxes on labor and capital. I first allow the government to trade only a real risk-free bond. Taxes on capital are set one period in advance, reflecting inertia in tax codes and preventing replication of the complete markets allocation. Optimal policy has the following features: labor taxes fluctuate very little; capital taxes are volatile and feature a positive (negative) spike after a negative (positive) shock to the government budget; and capital taxes average to roughly zero across periods. I then consider the implications of allowing the government to trade capital. Optimality calls for a large short position.},
	url = { },
	author = {Emmanuel Farhi}
}
@article {20315,
	title = {Leverage and the Central Banker{\textquoteright}s Put},
	journal = {American Economic Review, Papers and Proceedings},
	volume = {99},
	number = {2},
	year = {2009},
	pages = {589-593 },
	author = {Emmanuel Farhi and Jean Tirole}
}
@article {20314,
	title = {A Theory of Liquidity and Regulation of Financial Intermediation},
	journal = {Review of Economic Studies},
	volume = {76},
	number = {3},
	year = {2009},
	pages = {973-992},
	abstract = {This paper studies a Diamond-Dybvig model of financial intermediation providing insurance against unobservable liquidity shocks in the presence of unobservable trades on private markets. We show that in this case competitive equilibria are inefficient. A social planner finds it beneficial to introduce a wedge between the interest rate implicit in optimal allocations and the economy{\textquoteright}s marginal rate of transformation. This improves risk-sharing by reducing the attractiveness of joint deviations where agents simultaneously misrepresent their type and engage in trades on private markets. We propose a simple implementation of the optimum that imposes a constraint on the portfolio share that financial intermediaries need to invest in short-term assets. In the case of Diamond-Dybvig preferences, the optimal allocation coincides with the unconstrained optimum. For more general preferences, the optimal allocation does not coincide with the unconstrained optimum, and the direction of the policy intervention depends on the nature of the shocks in a manner that we precisely characterize.
},
	author = {Emmanuel Farhi and Mike Golosov and Aleh Tsyvinski}
}
@article {20936,
	title = {Optimal Savings Distortions with Recursive Preferences},
	journal = {Journal of Monetary Economics, Carnegie Rochester Series},
	volume = {55},
	number = {1},
	year = {2008},
	pages = {21-42},
	abstract = {This paper derives an intertemporal optimality condition for economies with private information, focusing on a class of recursive preferences. By comparing it to the situation where agents can freely save in a risk-free asset market, we derive the optimal savings distortions necessary for constrained optimality. Our recursive preferences are homogeneous and satisfy a balanced-growth condition, while allowing us to separate the role of risk aversion and intertemporal elasticity of substitution. We perform some quantitative exercises that disentangle the respective roles played by these two parameters in optimal distortions and the implied welfare gains.
},
	author = {Emmanuel Farhi and Ivan Werning}
}
@article {20934,
	title = {An Equilibrium Model of Global Imbalances and Low Interest Rates},
	journal = {American Economic Review},
	volume = {98},
	number = {1},
	year = {2008},
	pages = {358-393},
	abstract = {The sustained rise in US current account deficits, the stubborn decline in long-run real rates, and the rise in US assets in global portfolios appear as anomalies from the perspective of conventional models. This paper rationalizes these facts as an equilibrium outcome when different regions of the world differ in their capacity to generate financial assets from real investments. Extensions of the basic model generate exchange rate and foreign direct investment excess returns broadly consistent with the recent trends in these variables. The framework is flexible enough to shed light on a range of scenarios in a global equilibrium environment.
},
	author = {Emmanuel Farhi and Ricardo Caballero and Pierre-Olivier Gourinchas}
}
@article {20933,
	title = {Financial Crash, Commodity Prices and Global Imbalances},
	journal = {Brookings Paper on Economic Activity},
	volume = {Fall},
	year = {2008},
	author = {Emmanuel Farhi and Ricardo Caballero and Pierre-Olivier Gourinchas}
}
@article {20939,
	title = {Saving and Investing for Early Retirement: A Theoretical Analysis},
	journal = {Journal of Financial Economics},
	volume = {83},
	number = {1},
	year = {2007},
	note = {Awarded the Geewax, Terker Prize in Investment Research, Rodney L. White Center for Financial Research, 2005.
},
	pages = {87-121},
	abstract = {We study optimal consumption and portfolio choice in a framework where investors adjust their labor supply through an irreversible choice of their retirement time. We show that investing for early retirement tends to increase savings and reduce an agent{\textquoteright}s effective relative risk aversion, thus increasing her stock market exposure. Contrary to common intuition, an investor might find it optimal to increase the proportion of financial wealth held in stocks as she ages and accumulates assets, even when her income and the investment opportunity set are constant. The model predicts a decrease in risk aversion following strong market gains like those observed in the nineties.
},
	author = {Emmanuel Farhi and Stavros Panageas}
}
@article {20937,
	title = {Inequality and Social Discounting},
	journal = {Journal of Political Economy},
	volume = {115},
	number = {3},
	year = {2007},
	note = {Lead article.},
	pages = {365-402},
	abstract = {We explore steady-state inequality in an intergenerational model with altruistically linked individuals who experience privately observed taste shocks. When the welfare function depends only on the initial generation, efficiency requires immiseration: inequality grows without bound and everyone{\textquoteright}s consumption converges to zero.We study other efficient allocations in which the welfare function values future generations directly, placing a positive but vanishing weight on their welfare. The social discount factor is then higher than the private one, and for any such difference we find that consumption exhibits mean reversion and that a steady-state, cross-sectional distribution for consumption and welfare exists, with no one trapped at misery.},
	author = {Emmanuel Farhi and Ivan Werning}
}
@article {20977,
	title = {Speculative Growth: Hints from the U.S. Economy},
	journal = {American Economic Review},
	volume = {96},
	number = {4},
	year = {2006},
	pages = {1159-1192},
	abstract = {We propose a framework for understanding episodes of vigorous economic expansion and extreme asset valuations. We interpret this phenomenon as a high-valuation equilibrium with a low cost of capital based on optimism about future funding. The key ingredient for such equilibrium is feedback from increased growth to a decline in the long-run cost of capital. This feedback arises when an expansion comes with technological progress in the capital sector, when fiscal rules generate procyclical fiscal surpluses, when the rest of the world has lower expansion potential or high saving needs, and when financial constraints are relaxed by the expansion itself.
},
	author = {Emmanuel Farhi and Ricardo Caballero and Mohamad Hammour}
}
@article {20941,
	title = {Certifying New Technologies},
	journal = {Journal of the European Economic Association},
	volume = {3},
	number = {2/3},
	year = {2005},
	pages = {734-744},
	abstract = { We study the role of Standard Setting Organization (SSOs) in the adoption of standards. The way the SSO balances the interests of sponsor and users is key to its ability to certify the technology. Proximity to users builds trust in the endorsement, but may be unattractive to technology sponsors. In a static context, we show that the SSO is an effective certifier if and only if it puts enough weight on users{\textquoteright} interests. We then tackle the more challenging problem of SSO certification in a dynamic setting in which new information will accrue in the futurea nd user choices are irreversible.T he SSO and the users must then both take a dynamic perspective and contemplate the possibility of a "second chance" that may arise for the standard. A key insight is the possibility of multiple self-fulfilling expectations. It is possible to have an equilibrium with no second chance, a lenient SSO endorsement policy and high stigma from early rejection. It is also possible to have an equilibrium with a second chance, a selective SSO endorsement policy and low stigma from early rejection. Finally, and in both the static and the dynamic setups, we ask whether the SSO is too inclined to turn down or to accept the standard from a social viewpoint
},
	author = {Emmanuel Farhi and Josh Lerner and Jean Tirole}
}
@book {217536,
	title = {On the role of safe asset shortages in secular stagnation},
	series = {Secular Stagnation: Facts, Causes, and Cures},
	year = {2014},
	pages = {111-122},
	publisher = {CEPR Press},
	organization = {CEPR Press},
	address = {London},
	author = {Emmanuel Farhi and Ricardo J Caballero}
}
@book {133701,
	title = {Reforming the International Monetary System},
	year = {2011},
	pages = {76},
	publisher = {Centre for Economic Policy Research},
	organization = {Centre for Economic Policy Research},
	author = {Emmanuel Farhi and Pierre-Olivier Gourinchas and Helene Rey}
}
