Martin Ellison
Professor of Economics
Nuffield College
01865 284249
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The Ends of 30 Big Depressions
July 2020|Journal article -
The Ends of 30 Big Depressions
July 2020|Journal articlegold standard, Great Depression, inflationary expectations -
Funding the Great War and the Beginning of the End for British Hegemony
July 2019|Journal articleBritish Hegemony, National Debt, World War I -
A Rational Inattention Unemployment Trap
May 2019|Journal articlemultiple equilibria, rational inattention, unemployment
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Department of Economics Discussion Paper Series
Beauty Contests and the Term Structure
February 2018|Working paper|Department of Economics Discussion Paper SeriesAbstract A novel decomposition highlights the scope for information to in uence the term structure of interest rates. Based on the law of total covariance, we show that real term premia in macroeconomic models contain a component that depends on covariances of realised stochastic discount factors and a component that depends on covariances of expectations of those stochastic discount factors. The impact of different informational assumptions can then be identified by looking at their effect on the second, expectational, component. If agents have full information about technology in a simple macro-finance model then the conditional covariance of expectations is low, which contributes to the real term premia implied by the model being at least an order of magnitude too small, a result that is unchanged if some components of technology are unobservable or observed with noise. To generate realistic term premia, we draw on the beauty contest literature by differentiating between private and public information and introducing the possibility of strategic complementarities in the formation of expectations. A quantitative version of the model is found to explain a significant proportion of observed term premia when estimated using data on expectations of productivity growth from the Survey of Professional Forecasters.Yield Curve, Term Premia, Information Friction, Beauty Contest, Asset Pricing -
Department of Economics Discussion Paper Series
Time-Consistently Undominated Policies
January 2018|Working paper|Department of Economics Discussion Paper SeriesAbstract This paper proposes and characterises a new normative solution concept for Kydland and Prescott problems, allowing for a commitment device. A policy choice is dominated if either (a) an alternative exists that is superior to it in a time-consistent subdomain of the constraint set, or (b) an alternative exists that Pareto-dominates it over time. Policies may be time-consistently undominated where time-consistent optimality is not possible. We derive necessary and sufficient conditions for this to be true, and show that these are equivalent to a straightforward but significant change to the first-order conditions that apply under Ramsey policy. Time-consistently undominated policies are an order of magnitude simpler than Ramsey choice, whilst retaining normative appeal. This is illustrated across a range of examples.Time Consistency, Undominated Policy, Ramsey Policy -
Department of Economics Discussion Paper Series
Managing the UK National Debt 1694-2017
September 2017|Working paper|Department of Economics Discussion Paper SeriesAbstract We construct a new monthly dataset for UK government debt over the period 1694 to 2017 based on price and quantity data for each individual bond issued. This enables us to examine long run fiscal sustainability using the theoretically relevant variable of the market value of debt, and investigate the historical importance of debt management. We find the general implications of the tax smoothing literature are replicated in our data, especially around financing wars, although we find major shifts over time in how fiscal sustainability is achieved. Before the 20th century, governments continued to pay bond holders a high rate of return and achieved sustainability through running fiscal surpluses but since then governments have relied on low growth adjusted real interest rates. The optimal debt management literature tends to favour the use of long bonds but we find the government would have been better off over the 20th century issuing short bonds. The contrast with the literature occurs because of an upward sloping yield curve and long bonds rarely providing fiscal insurance. This is particularly true during periods of financial crises when falling interest rates lead to sharp rises in the price of long bonds, making them an expensive form of finance. We examine the robustness of our conclusions to liquidity e¤ects, rollover risks, buyback operations and leverage. In general, these do suggest a greater role for long bonds but do not overturn an issuance strategy based mainly on short term bonds.Debt Management, Fiscal Deficits, Fiscal Policy, Government Debt, Inflation, Maturity, Yield Curve -
Department of Economics Discussion Paper Series
Unconventional government debt purchases as a supplement to conventional monetary policy
October 2013|Working paper|Department of Economics Discussion Paper SeriesIn response to the Great Financial Crisis, the Federal Reserve, the Bank of England and many other central banks have adopted unconventional monetary policy instruments. We investigate if one of these, purchases of long-term government debt, could be a valuable addition to conventional short-term interest rate policy even if the main policy rate is not constrained by the zero lower bound. To do so, we add a stylised financial sector and central bank asset purchases to an otherwise standard New Keynesian DSGE model. Asset quantities matter for interest rates through a preferred habitat channel. If conventional and unconventional monetary policy instruments are coordinated appropriately then the central bank is better able to stabilise both output and inflation.Quantitative Easing, Large-Scale Asset Purchases, Preferred Habitat, Optimal Monetary Policy -
Department of Economics Discussion Paper Series
Dynamic Rawlsian Policy
March 2012|Working paper|Department of Economics Discussion Paper SeriesA well-known time-inconsistency problem hinders optimal decision-making when policymakers are constrained in their pesent choices by expectations of future outcomes. The time-inconsistency problem is caused by differences in the preferences of policymakers who exist at different points in time. Adapting the arguments of Rawls (1971), we propose that these differences can be eliminated if policy is set from behind a 'veil of ignorance', without knowledge of when the policy will be implemented. We set up a well-defined choice problem that captures this normative perspective. The policies that it generates have a number of appealing properties.Macroeconomic policy, Rawls, Time inconsistency, Veil of ignorance