the phillips curve macroeconomic policy and the welfare of canadians a review of the two competing paradigms explaining inflation and unemployment fluctuations singles out the keynesian phillips curve as the clear empirical winner over its classic competitors reestimation of the canadian phillips curve for 1957 90 identifies a sharp structural shift toward a high degree of unemployment hysteresis after 1972 the recent attempt of macropolicy to flatten the aggregate demand curve and limit supply side shock accommodation which aims at lower and more stable inflation is then shown to make unemployment higher and more unstable on average to an extent that is an increasing function of the degree of hysteresis understanding and reducing hysteresis and developing a consensus based incomes policy that has a chance of alleviating the dismal trade off should therefore to top research and policy priorities

real sectoral spillovers a dynamic factor analysis of the great recession abstract dynamic factor methods are used to identify the impact of common and idiosyncratic shocks on sixteen u s nonfarm business sectors this paper then studies changes in the transmission of these shocks across sectors during the great recession and evaluates the cross sectoral spillovers the great recession is found to be largely a time of heightened impact of common shocks which accounts for 3 4 of aggregate volatility and large spillovers of negative finance related shocks in addition prior to the recession aggregate fluctuations are mainly driven by sector specific shocks in contrast with findings from previous studies

democracy volatility and economic development growth stability is an important objective because development requires sustained increases in income because volatility is costly for the poor and because volatility deters growth we study the determinants of average growth and its volatility as a two equation system and find that higher levels of democracy and diversification lower volatility whereas volatility itself reduces growth muslim countries instrument for democracy and measures of diversification identify volatility in contrast to the lack of consensus on the democracy growth relationship the democracy stability link is robust rather than focus on growth this paper forges an alternative link between democracy and development through the volatility channel

energy price shocks and medium term business cycles abstract energy price shocks pose sudden challenges to economies this paper examines how oil price shocks have influenced the u s economy over the last decades and especially focuses on the productivity slowdown in the years following an oil price shock we extend the existing literature by considering medium term business cycles which consist of high frequency components conventional business cycles up to 8 years and medium frequency components 8 50 years we find that the medium frequency consequences of energy price shocks are considerable and explain a significant part of the productivity slowdown

eductive stability in real business cycle models we reexamine issues of coordination in the standard rbc model is the unique rational expectations equilibrium attainable by rational agents who contemplate the possibility of small deviations from equilibrium surprisingly we nd that coordination cannot be expected even with strong common knowledge assumptions rational agents anticipating small but persistent deviations are led to take actions that eventually contradict the common knowledge assumption this impossibility theorem for eductive learning is not fully overcome when adaptive learning is incorporated into the framework

temporary income taxes and consumer spending both economic theory and casual empirical observation of the u s economy suggest that spending propensities from temporary tax changes are smaller than those from permanent ones but neither provides much guidance about the magnitude of this difference this paper offers new empirical estimates of this difference and finds it to be quite substantial the analysis is based on an amendment of the standard distributed lag version of the permanent income hypothesis that distinguishes temporary taxes from other income on the grounds that the former are more transitory this amendment which is broadly consistent with rational expectations leads to a nonlinear consumption function though the standard error is unavoidably large the point estimate suggests that a temporary tax change is treated as a 50 50 blend of a normal income tax change and a pure windfall over a 1 year planning horizon a temporary tax change is estimated to have only a little more than half the impact of a permanent tax change of equ

explaining output volatility the case of taxation this paper presents strong empirical evidence that the observed heterogeneity of output volatility across countries and over time is partly endogenous in particular based on a closed form solution we obtain a long run equilibrium relationship between taxes and output volatility in the stochastic neoclassical growth model by showing that asymptotically the variance of output growth rates is affected by the level of taxes without affecting the mean we estimate the tax semi elasticities on output volatility and provide convincing empirical evidence that taxes are important to understand differences in output volatility among oecd countries

the economic consequences of productivity changes a computable general equilibrium cge analysis cutler h and davies s the economic consequences of productivity changes a computable general equilibrium cge analysis regional studies this paper uses a data intensive cge model to examine sector specific impacts of increases in total factor productivity and labour and capital productivity it focuses on the importance of a sector s output in household consumption and firms intermediate input demand the importance of labour and capital in value added and the impact on the city s consumer price index cpi as factors influencing the transmission mechanism the general equilibrium effects result in unambiguous increases in household migration for total factor productivity and capital productivity but not for the labour case this analysis emphasizes the impact on household income and tax revenue per new household cutler h et davies s les consequences economiques des changements de productivite une analyse egc regional studies cet article utilise un modele d equilibre general calculable egc

evaluating unemployment policies what do the underlying theories tell us the paper surveys unemployment policies for advanced market economies and evaluates them by examining the predictions of the underlying macroeconomic theories the basic idea is that for the most part different unemployment policy prescriptions rest on different macroeconomic theories and our confidence in the prescriptions should depend at least in part on theories ability to predict some salient stylized facts about unemployment behavior the paper considers four types of policies laissez faire demand management policies supply side policies and structural policies copyright 1995 by oxford university press

production lags and price behaviour this paper explores the implications of the production lag for the firm s decisions the authors establish a significant relationship between price behavior and the length of the production lag they show that specific results in the literature are crucially dependent upon the assumption about the production lag by allowing the production time to exceed the decision period the basic framework of the earlier price inventory models is significantly extended the model thus incorporates finished goods inventories as well as goods in process inventories copyright 1992 by the london school of economics and political science

measuring macroeconomic instability a critical survey illustrated with exports series for at least 40 years the analysis of the causes and consequences of macroeconomic instability has greatly deepened our understanding of the handicaps faced by developing countries this concern on economic instability is evidenced by a broad spectrum of indicators based on the deviation of observed values of a given economic aggregate from its reference or trend value in general the choice of this or that indicator is not discussed advocating that the resulting instability indicators are closely correlated focusing on measurements of instability in export revenue data for 134 countries from 1970 to 2005 this paper finds that this assertion may be true for variancebased indicators measuring the average magnitude of deviations from the trend however great discrepancies may arise between different measures of the asymmetry or of the occurrence of extreme deviations around the trend when different trend computation methods are used our purpose is therefore to invite further discussions regarding the use of these indicators and to highlight the different dimensions of instability which have been so far unheeded by the economic literature

adjustment costs durables and aggregate consumption abstract previous tests of the permanent income hypothesis pih have focused on either non durables or durables expenditures in isolation this paper studies consumer purchases of non durables and durables as the outcome of a single optimization problem it is shown that with non separability in utility the presence of adjustment costs of changing durables stocks may affect the time series properties of both components of expenditure an econometric test of the pih based on the model developed in the paper is both more efficient and less prone to bias than those in some previous studies however this test confirms earlier rejections of the pih in aggregate quarterly data

money and the business cycle with one period nominal contracts a modified version of the nominal contract developed by j a gray 1976 and s fischer 1977 is introduced in a general equilibrium model with money which has been used in the real business cycle literature money is introduced in the model through cash in advance constraint two kinds of contracts are examined namely a nominal wage contract and a nominal price contract the nominal wage contract improves the fit of the model in many respects the nominal price contract increases the output volatility enormously but it has some unrealistic features

business cycles with distorting taxes and disaggregated capital markets abstract this paper studies a neoclassical growth model to examine the linkages between distorting corporate and personal taxes and cyclical movements of aggregates such as investments in equipment and structures suppose tax variables vary stochastically and annually we solve quarterly individual and aggregate decision rules by recursive methods and quantify the dynamic impacts on aggregates from unit changes in tax structures and individual and joint tax specifications the findings suggest that corporate income tax is the major factor leading to substantial tax effects on business cycles moreover the impact of investment tax credit for equipment on disaggregated investments is equally significant

the role of energy in real business cycle models abstract this paper modifies hansen s 1985 analysis of a real business cycle mode with indivisible labor by explicitly including energy as a productive input and modelling the relative price of energy as an exogenous random process one goal is to determine the extent to which the introduction of energy price shocks reduces the reliance of the real business cycle model on unobserved technology shocks the other goal following christiano and eichenbaum 1991 is to compare the correlation between real wages and hours predicted by the energy inclusive model to that predicted by hansen s model

permanent and transitory movements in labor income an explanation for excess smoothness in consumption many have argued that if labor income is difference stationary the permanent income hypothesis predicts that consumption should be relatively volatile in u s aggregate data labor income is well characterized as having a unit root however consumption turns out to be relatively smooth this anomaly is known as deaton s paradox i resolve deaton s paradox by providing decompositions of labor income into permanent and transitory components these preserve the univariate dynamic properties of labor income however when agents distinguish permanent and transitory movements in their labor income as the rational expectations hypothesis asserts they should the permanent income hypothesis correctly predicts the observed smoothness in consumption

tax disturbances and real economic activity in the postwar united states abstract this paper investigates the macroeconomic effects of cyclical fluctuations in marginal tax rates it finds that systematically including tax variables in a standard real business cycle model substantially improves the model s ability to reproduce basic facts about postwar u s business cycle fluctuations in particular modeling fluctuations in personal and corporate income tax rates increases the model s predicted relative variability of hours and decreases its predicted correlation between hours and average productivity fluctuations in tax rates produce large substitution effects that alter the leisure labor supply decision

international debt and world business fluctuations abstract the international transmission of real productivity disturbances is examined in an optimizing model with two countries each inhabited by an infinitely lived representative consumer producer we analyze the dynamics of output consumption investment interest rates and net external debt foreign productivity shocks can have positive or negative impacts on domestic output and international debt depending on the intertemporal distribution of the shocks transient foreign shocks are shown to be positively transmitted and lead to increased domestic indebtedness while permanent foreign shocks are negatively transmitted and lead to a decline in domestic indebtedness

a new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the business cycle abstract this paper introduces a general procedure for decomposition of non stationary time series into a permanent and transitory component allowing both components to be stochastic the permanent component is shown to be a random walk with drift and the transitory or cyclical component is a stationary process with mean zero the decomposition methodology which depends only on past data and therefore is computable in real time is applied to the problem of measuring and dating business cycles in the portwar u s economy we find that measured expansions and contractions are of roughly equivalent duration and that our dating of cyclical episodes tends to lead the traditional nber dating and to a lesser extent the growth cycle chronology of zarnowitz and boschan 1977

mis measurement of the productivity and sustainability of african communal rangelands a case study and some principles from botswana abstract hypotheses about the relative productivities and impacts of current and officially recommended stocking rates were tested in a case study in southern africa they support the view that biased measurements of livestock productivity and inappropriate measurements of rangeland degradation can lead to under estimates of the productivity of african communal rangelands overestimates of the urgency of de stocking and misunderstanding of the strengths of measures required to effect it by including the full range of livestock products in estimates of productivity and calculating output per unit of land area rather than per unit of livestock more accurate estimates of productivity can be made estimates of degradation based on irreversible changes enable discrimination between trivial and important impacts of grazing modelling suggests de stocking is not in general worthwhile at present in eastern botswana it may be necessary to regulate numbers of animals in the future if livestock densities increase grass cover could fall below the critical level and rates of degradation increase suddenly and rapidly adverse climatic change could reduce herbaceous productivity with the same effect the approach used here should help decision making in those circumstaces choosing an appropriate stocking rate should be an ethical decision requiring negotiations among stakeholders practitioners should recognise that it is socially not technically determined and that it is but one level among many possible densities

some consequences of temporal aggregation in empirical analysis i derive the generating mechanism of a temporally aggregated process when the disaggregated one belongs to the vector autoregressive integrated moving average class i then study the effects of temporal aggregation on a set of characteristics of usual interest such as exogeneity causality cointegration and common features an empirical example with canadian interest rates illustrates the main issues

asymmetric phase shifts in u s industrial production cycles abstract we identify cyclical turning points for 74 u s manufacturing industries and uncover new empirical regularities a industries tend to comove between expansion and contraction phases over the business cycle b clusters of industry turning points are highly asymmetric between peaks and troughs troughs are much more concentrated and sharper than peaks c the temporal pattern of phase shifts across industries supports the spillovers through input output linkages and d macroeconomic shocks such as unanticipated changes in monetary policy government spending oil prices and financial conditions are significant drivers of industrial phase shifts

economic comparisons of livestock production in communal grazing lands in zimbabwe abstract during the last decade a new rangeland science has emerged one of the tenets of the new science is that pastoralists should not adhere to a single conservative stocking rate but rather adopt an opportunistic strategy where numbers will fluctuate widely in response to good and bad seasons it is further argued that opportunistic strategies give higher economic returns compared to strategies based on conservative stocking rates in the current paper we compare the economics of four cattle management scenarios the analysis is based on a simulation model of the fluctuation over time of animal numbers outputs and prices using data from field surveys and the literature our results suggest that strategies based on conservative stocking rates would have higher net present values than strategies based on opportunistic stocking rates previous analyses have failed to account for losses due to drought and the costs of capital tied up in livestock and the analyses have tended to compare commercial with communal production rather than considering different kinds of small holder production methods to receive the full benefits of destocking however a decision to destock has to be made at the level of the community as the benefits of improved outputs can only be achieved if the stocking rates of the communal grazing lands are reduced making collective decisions about managing numbers is a process with considerable transaction costs and thus the likelihood of new institutions emerging are lessened it is surprising that a tight tracking scenario where numbers of cattle are managed by purchasing and selling so as to maintain numbers in equilibrium with the available feed resources is being recommended in the most recent literature our results suggest that such a system would come with considerable economic losses the costs of a current programme to reclaim small dams illustrate the environmental costs of the opportunistic scenario a tight tracking policy is likely to further increase environmental degradation and its associated costs we identify several serious flaws in the papers that elevate opportunistic pastoral systems as giving higher economic returns than other systems

are external shocks responsible for the instability of output in low income countries external shocks such as commodity price fluctuations natural disasters and the role of the international economy are often blamed for the poor economic performance of low income countries the author quantifies the impact of these different external shocks using a panel vector autoregression var approach and compares their relative contributions to output volatility in low income countries vis a vis internal factors he finds that external shocks can only explain a small fraction of the output variance of a typical low income country internal factors are the main source of fluctuations from a quantitative perspective the output effect of external shocks is typically small in absolute terms but significant relative to the historic performance of these countries

special section land use options in dry tropical woodland ecosystems in zimbabwe introduction overview and synthesis the articles included in this special section focus on the ecological and economic interactions of woodland use in western zimbabwe one of the aims was to investigate the use of modelling to achieve integration among disciplines the integrated model draws on the models in the different papers comprising the special section the model has five ecological sectors five sectors covering woodland use by local people and the state forestry organisation two sectors to cover agriculture one sector for population growth and land use a sector to cover carbon sequestration and a sector to calculate net present values of the various uses the state has usually attempted to keep people and their livestock out of the state forest we show that the private benefits of cropland may be greater than those related to state or local use of the woodland but further work is required to incorporate the public costs of subsidies to cropland and the public benefits of woodland services livestock production in the woodlands is compatible with woodland management both from economic and ecological perspectives expulsion of forest 1 dwellers from the state forest makes little ecological impact on the woodland and does not improve the economic value of the woodland to the state however if the forestry commission relaxes the current control on in migration it is likely that the woodland will be rapidly depleted in the face of massive in migration modelling is seen as a framework for integration of ecological and economic issues but further work is required to incorporate institutional perspectives from the sociological and anthropological disciplines 2000 elsevier science b v all rights reserved

threshold behavior and aggregate fluctuation this paper concerns a propagation mechanism in an economy where many individuals follow a threshold rule and interact with a positive feedback we derive an asymptotic distribution of the propagation size when the number of the agents tends to infinity the propagation distribution exhibits a slower convergence to a deterministic value than it would if the agents followed a smooth adjustment policy this gives rise to significant aggregate fluctuations in a finite lumpy adjusting economy even when the agents are hit by small independent shocks

saving and economic shocks in rural pakistan abstract this paper adapts the recent methodology of paxson to study saving rates in rural pakistan particular attention is paid to differences in marginal rates of financial and physical saving and how these vary across income groups and by direction of income shocks households exhibit more difficulty in smoothing consumption after successive shocks than with a single shock the study also observes marginal rates of saving out of international remittances and lump sum pensions unlike domestic remittances international remittances appear to be treated much as transitory income shocks

a reexamination of friedman s consumption puzzle the different average and marginal consumption propensities estimated from time series data constitute a classic puzzle of the theory of consumption this article argues that if consumption and income possess a common stochastic trend and thus are cointegrated both the average propensity to consume apc and the marginal propensity to consume mpc will be consistent but biased in small samples upon correcting for this small sample bias the puzzling discrepancies between the apc and the mpc estimated using annual data for the united states from 1897 to 1949 become substantially smaller this supports an alternative resolution of the puzzle based on the theory of cointegration

macroeconomic policy and output comovement the formal and informal sectors in india abstract is the informal sector different from the formal sector we present an aggregative analysis of the formal and informal sectors in india to investigate the extent to which the two can be viewed as broadly homogeneous using a macroeconometric framework the paper analyzes over past three decades the behavior of the two sectors with respect to each other and several government related policy variables it is found that the formal and informal sectors display markedly different attributes in terms of their relationship to policy variables furthermore the informal sector appears to be decoupled from the rest of the economy

an estimate of a sectoral model of labor mobility this paper develops a model of sectoral labor mobility and tests its main implications the model nests two distinct hypotheses on the origin of mobility a sectoral shocks and b worker employer mismatch we estimate the relative importance of each hypothesis and find that the bulk of labor mobility is caused by mismatch rather than by sectoral shift we then try to put a value on society s match specific information that is we ask to what extent the availability of the option to change jobs raises gnp we find that the mobility option raises expected earnings by roughly between 8 5 percent and 13 percent of labor earnings which translates to an increase in gnp of between 6 percent and 9 percent

participatory politics social cooperation and economic stability few would doubt the proposition that political institutions matter for economic development yet robust generalizations and systematic evidence on how exactly they do so are lacking in this paper attention is drawn to regularity in the cross national data that has received little attention to date participatory political regimes are associated with significantly lower levels of aggregate economic instability after presenting some of the evidence it is speculated that the reason has to do with the propensity of democracy to moderate social conflict and induce compromise three distinct arguments as to why this may be the case are presented

convergence endogenous growth and productivity disturbances abstract kelly 1992 has recently shown that evidence on convergence cannot be taken as evidence against endogenous growth in general this study uses a well known class of stochastic growth models to show other difficulties with traditional empirical studies of convergence key parameters typically cannot be estimated consistently in cross section regressions when the parameters are assumed known implications for convergence are unavailable except under restrictive and economically unmotivated assumptions those same assumptions that relate key parameters to cross country convergence render cross section regressions impossible to estimate consistently

in search of optimal stocking regimes in semi arid grazing lands one size does not fit all we discuss the search for optimal stocking regimes in semi arid grazing lands we argue that one size does not fit all and that different stocking regimes are appropriate under different conditions this paper is an attempt to move beyond polarization of the current debate towards a more integrative and flexible approach to grazing management we propose five different conditions as major influences on grazing regimes environmental variability and predictability degradation and thresholds property right regimes discount rates and market stability and prices we suggest a lack of connection between the micro economics literature and natural science and social anthropological literature it is timely to achieve greater integration around some key questions and hypotheses and recognize that policy prescriptions at national or even regional levels are likely to have limited value due to context specificity

the macroeconomic effects of fiscal rules in the us states abstract fiscal policy restrictions are often criticized for limiting the ability of governments to react to business cycle fluctuations and consequently the adoption of quantitative restrictions is viewed as inevitably leading to increased macroeconomic volatility in this paper we use data from 48 us states to investigate how budget rules affect fiscal policy outcomes our key findings are that 1 strict budgetary restrictions lead to lower policy volatility i e less aggressive use of discretion in conducting fiscal policy and 2 fiscal restrictions reduce the responsiveness of fiscal policy to output shocks these two results should have opposite effects on output volatility while less discretion should reduce volatility less responsiveness of fiscal policy might amplify business cycles we provide empirical support for the first effect restrictions by reducing discretion in fiscal policy can reduce macroeconomic volatility

opportunistic and conservative pastoral strategies some economic arguments abstract this paper revisits the debate over the relative effectiveness of conservative and opportunistic stocking strategies for african pastoral rangelands the paper is based on a reassessment of the results of an earlier paper in this journal by campbell et al 2000 campbell b m dore d luckert m mukamuri b gambiza j 2000 economic comparisons of livestock production in communal grazing areas of zimbabwe ecol econ 33 413 438 which argued that the advocacy of opportunistic strategies by the new range science was misplaced this paper questions some of the assumptions of this scenario modelling effort both in terms of causal structure and parameter estimates by developing a mimic model and using data from the same site a dryland communal area in southern zimbabwe this paper shows how the conclusions of the earlier paper were premature the need for sensitivity analysis in assessing model findings is emphasised if policy conclusions with potentially major impacts on people s livelihoods are to be drawn a brief discussion of the implications of this reassessment including more broadly the limitations and prospects of economic ecological modelling in policymaking for rangeland management concludes the paper

the aggregate effects of sectoral reallocations abstract can a one time permanent change in the fundamentals behind the sectoral composition of the economy prompt an aggregate downturn can this downturn be non negligible even if one uses us data to determine the relative size of gross vs net job flows and the importance of job creation costs can one consider the military build down of the 1990s as a plausible cause for the 1990 1991 recession do sectoral reallocations generate responses that are qualitatively similar to productivity shocks we use a variant of the mortensen pissarides 1994 review of economic studies 61 397 415 job creation destruction model calibrate it to us labor market data and run experiments that suggest one can answer yes to all these questions

are empirical measures of macroeconomic uncertainty alike there is a plethora of time series measures of uncertainty for inflation and real output growth in empirical studies but little is known whether they are comparable to the uncertainty measure reported by individual forecasters in the survey of professional forecasters are these two measures of uncertainty inherently distinct this paper shows that compared with many uncertainty proxies produced by time series models the use of real time data with fixed sample recursive estimation of an asymmetric bivariate generalized autoregressive conditional heteroskedasticity model yields inflation uncertainty estimates which resemble the survey measure there is however overwhelming evidence that many of the time series measures of growth uncertainty exceed the level of uncertainty obtained from survey measure our results highlight the relative merits of using different methods in modelling macroeconomic uncertainty which are useful for empirical researchers

costs of overstocking on cattle and wildlife ranches in zimbabwe abstract in african semi arid savannas livestock production frequently dominates human activity but it has been claimed that wildlife ranching can be more profitable than extensive beef production traditional accounting methods generally exclude the biological costs of stocking effects on rangeland productivity this paper presents a framework for evaluating overstocking effects on the financial profits based on market prices and economic profits estimated from the opportunity costs of inputs and outputs of alternative range based animal production systems the method was applied to 50 commercial cattle wildlife and mixed ranches in the zimbabwe midlands using 1989 90 data level of overstocking was estimated from positive differences between grazer stocking rate and rangeland carrying capacity which was predicted from long term mean annual rainfall since it is generally impossible to accurately quantify stocking effects on rangeland productivity and thus to confidently evaluate overstocking costs values ranging from z 0 00 to z 0 50 kg 1 ha 1 overstocking were used the resulting range of costs were subtracted from financial and economic profits cattle ranches were significantly overstocked while mixed and wildlife ranches were not thus cattle ranch profits decreased more rapidly with increasing simulated overstocking cost in other words with increasing sensitivity to overstocking wildlife and mixed ranches had a higher probability of remaining financially and economically profitable than did cattle ranches

macroeconomic volatility and welfare in developing countries an introduction macroeconomic volatility both a source and a reflection of underdevelopment is a fundamental concern for developing countries their high aggregate instability results from a combination of large external shocks volatile macroeconomic policies microeconomic rigidities and weak institutions volatility entails a direct welfare cost for risk averse individuals as well as an indirect one through its adverse effect on income growth and development this article provides a brief overview of the recent literature on macroeconomic volatility in developing countries highlighting its causes consequences and possible remedies it then introduces the contributions of a recent conference on the subject sponsored by the world bank and pompeu fabra university barcelona

sticker shocks using vat changes to estimate upper level elasticities of substitution we estimate the upper level elasticity of substitution between goods and services of a nested aggregate ces preference specification we show how this elasticity can be derived from the long run response of the relative price of a good to a change in its vat rate we estimate this elasticity using new data on changes in vat rates across 74 goods and services for 25 european union countries from 1996 through 2015 depending on the level of aggregation we find a vat pass through rate between 0 4 and 0 7 this implies an upper level elasticity of 3 at the lowest level of aggregation with 74 categories and 1 cobb douglas preferences at a high level of aggregation that distinguishes 10 categories of goods and services

can world real interest rates explain business cycles in a small open economy abstract while the world real interest rate is potentially an important mechanism for transmitting international shocks to small open economies much of the recent quantitative research that studies this mechanism concludes that it has little effect on output investment and net exports we re examine the importance of world real interest rate shocks using an approach that reverses the standard real business cycle methodology we begin with a small open economy business cycle model but rather than specifying the stochastic processes for the shocks and then solving and simulating the model to evaluate how well these shocks explain business cycles we use the model to back out the shocks that are consistent with the model s observable endogenous variables then we use variance decompositions to examine the importance of each shock we apply this methodology to canada and find that world real interest rate shocks can play an important role in explaining the cyclical variation in a small open economy in particular they can explain up to one third of the fluctuations in output and more than half of the fluctuations in net exports and net foreign assets

institutional causes macroeconomic symptoms volatility crises and growth countries that have pursued distortionary macroeconomic policies including high inflation large budget deficits and misaligned exchange rates appear to have suffered more macroeconomic volatility and also grown more slowly during the postwar period does this reflect the causal effect of these macroeconomic policies on economic outcomes one reason to suspect that the answer may be no is that countries pursuing poor macroeconomic policies also have weak institutions including political institutions that do not constrain politicians and political elites ineffective enforcement of property rights for investors widespread corruption and a high degree of political instability this paper documents that countries that inherited more extractive institutions from their colonial past were more likely to experience high volatility and economic crises during the postwar period more specifically societies where european colonists faced high mortality rates more than 100 years ago are much more volatile and prone to crises based on our previous work we interpret this relationship as due to the causal effect of institutions on economic outcomes europeans did not settle and were more likely to set up extractive institutions in areas where they faced high mortality once we control for the effect of institutions macroeconomic policies appear to have only a minor impact on volatility and crises this suggests that distortionary macroeconomic policies are more likely to be symptoms of underlying institutional problems rather than the main causes of economic

growth and risk methodology and micro evidence how exposure to risk affects economic growth is a key issue in development this article quantifies both the ex ante and ex post effects of risk using long running panel data for rural households in zimbabwe it proposes a simulation based econometric methodology to estimate the structural form of a micro model of household investment decisions under risk the key finding is that risk substantially reduces growth in this particular setting the mean capital stock in the sample is in expectation 46 percent lower than in the absence of risk about two thirds of the impact of risk is due to the ex ante effect that is the behavioral response to risk which is usually not taken into account in policy design these results suggest that policy interventions that reduce exposure to shocks or that help households manage risk could be much more effective than is commonly thought

financial development and the instability of open economies this paper introduces a framework for analyzing the role of financial factors as a source of instability in small open economies our basic model is a dynamic open economy model with a tradeable good produced with capital and a country specific factor we also assume that firms face credit constraints with the constraint being tighter at a lower level of financial development a basic implication of this model is that economies at an intermediate level of financial development are more unstable than either very developed or very underdeveloped economies this is true both in the sense that temporary shocks have large and persistent effects and also in the sense that these economies can exhibit cycles thus countries that are going through a phase of financial development may become more unstable in the short run similarly full capital account liberalization may destabilize the economy in economies at an intermediate level of financial development phases of growth with capital inflows are followed by collapse with capital outflows on the other hand foreign direct investment does not destabilize

endogenous capital depreciation and technology shocks i examine the dynamic impact of capital maintenance on key aggregates through the depreciation rate i find that two factors are crucial for the short run effects of total factor productivity and investment specific shocks i the marginal efficiency of maintenance and its connection with the rate of utilization and ii the interplay between the intertemporal effect of maintenance and the substitution effect between maintenance and utilization the latter is expressed by the relative size of the elasticity of maintenance to the hicksian elasticity of complementarity between maintenance and utilization these theoretical results suggest that to match the observed responses of the macroeconomic aggregates the sign of the cross derivative should be negative and that the relative size of the hicksian elasticity should be smaller than the maintenance elasticity of marginal depreciation finally the model suggests that the main macroeconomic aggregates react procyclically with the exception of maintenance the behavior of which depends on the type of the shock

spillovers from foreign direct investment within or between industries this paper contributes an estimation framework to measure both technological and linkage externalities from foreign direct investment fdi empirical research dealt mainly with intra industry spillovers from fdi with restrictive treatment of inter industry effects until recently however as optimal organization of the multinational corporation mnc involves minimization of profit losses due to leakage of technical information to competitors host country firms within the mnc s sector experience limited productivity gains ensuing fdi host country producers in other sectors may benefit for example mncs transfer knowledge to local downstream clients or outsource to local upstream suppliers hence fdi substitutes within sector domestic investment but complements it across sectors the net impact on aggregate capital formation by host country producers hinges on the interaction between linkages and spillovers estimations based on the colombian manufacturing census yield the sectoral pattern of fdi spillovers displaying knowledge propagation between but not within industries the findings reveal outsourcing relationships of mncs with local upstream suppliers as the channel of diffusion

a new look at the effects of export instability on investment and growth abstract this paper is concerned with the effects of export instability on investment and growth it is shown that past cross sectional empirical studies on the effects of export instability either in prices or in value terms used an incorrect measure of instability that does not properly take account of the share of exports in gdp using a new instability index and a broad set of conditioning variables it is shown that export instability was positively associated with investment but negatively associated with growth in a large sample of countries during the period from the early 1970s to the mid 1980s

has world cereal market instability increased abstract this paper argues that world cereal prices are good indicators of the state of world cereal markets it tests whether real prices for wheat rice and maize exhibit deterministic or stochastic trends concluding that the underlying trends are most likely deterministic after appropriate deterministic detrending the paper tests for increased variance of the residuals of real cereal prices finding that there does not appear to be evidence for increased year to year price instability tests for increased intra year price variability also reject the hypothesis of increased variability discussion of recent changes in the pattern of world cereal production and trade suggests that these conclusions are not contrary to observed trends

special section land use options in dry tropical woodland ecosystem in zimbabwe household resource allocations in response to risks and returns in a communal area of western zimbabwe abstract a household production model is constructed in the context of a subsistence economy influenced by fluctuating rainfall increasing populations and relationships to the natural resource base households are modelled as attempting to optimally allocate their resources among four sectors agriculture woodlands with wood and non wood sub sectors livestock and urban simulations show that although welfare decreases over the 50 year simulation period the resource base appears to be able to sustain the increased pressure data to feed the model are limited implying further research is needed on resources expended by households by sector perceptions of risk and differentiation within and among households according to gender and wealth despite data limitations results show the importance of considering that households may allocate resources between multiple sectors as these options may buffer their welfare from rainfall shocks and increasing population pressures

the structural determinants of external vulnerability the authors examine empirically how domestic structural characteristics related to openness and product and factor market flexibility influence the impact that terms of trade shocks can have on aggregate output for this purpose they apply an econometric methodology based on semi structural vector auto regressions to a panel of 90 countries with annual observations for the period 1974 2000 using this methodology the authors isolate and standardize the shocks estimate their impact on gdp and examine how this impact depends on the domestic conditions outlined above they find that larger trade openness magnifies the output impact of external shocks particularly the negative ones while improvements in labor market flexibility and financial openness reduce their impact domestic financial depth has a more nuanced role in stabilizing the economy it helps reduce the impact of external shocks particularly in environments of high exposure that is when trade and financial openness are high firm entry is unrestricted and labor markets are rigid

do all sectoral shocks lead to aggregate volatility empirics from a production network perspective abstract productive diversification has long been acknowledged as a volatility reducing strategy yet recent theoretical contributions have shown that in strongly diversified economies idiosyncratic shocks could translate into aggregate volatility via the network of inter industry linkages by exploiting exogenous cross country sector variations in demand shocks during the 2008 great recession we provide empirical evidence that the network properties of a sector affected by an individual shock determine its propensity to transmit volatility to the rest of the economy more precisely shocks to sectors that are located in denser parts of a production network fade out over a large number of alternative paths of propagation due to substitution effects whereas shocks to sectors that are more influential within the network generate aggregate fluctuations through contagion effects we also find that the impact of sectoral shocks on aggregate volatility 1 is not conditional on sector level differences in trade intensity and 2 is larger for developing countries because they tend to have more isolated influential sectors and larger structural holes in their production network our results thus help consolidate the two opposite views in the literature on the impact of productive diversification on aggregate volatility

business cycles and labor market search the quantitative implications of labor market search for economic fluctuations are evaluated in the context of a real business cycle model incorporating labor market search into the model is found to improve its empirical performance along several dimensions in particular hours now fluctuate substantially more than wages and the contemporaneous correlation between hours and productivity falls in addition the model replicates the observation that output growth displays positive autocorrelation at short horizons overall the empirical results suggest that the labor market search environment embodies a quantitatively important propagation mechanism copyright 1996 by american economic association

productivity shocks and business cycles this note uses two measures of productivity growth the solow residual and the dual residual from the cost function to test competing theories of the cycle in a number of oecd countries the empirical results indicate that both demand and supply shocks play a role in driving economic cycles and therefore refute the stronger real business cycle hypothesis

equilibrium exchange rates in transition economies taking stock of the issues in this paper we present an overview of a number of issues relating to the equilibrium exchange rates of transition economies of the former soviet bloc in particular we present a critical overview of the various methods available for calculating equilibrium exchange rates and discuss how useful they are likely to be for the transition economies amongst our findings is the result that the trend appreciation usually observed for the exchange rates of these economies is affected by factors other than the usual balassa samuelson effect such as the behaviour of the real exchange rate of the open sector and regulated prices we then consider three main sources of uncertainty relating to the implementation of an equilibrium exchange rate model namely differences in the theoretical underpinnings differences in the econometric estimation techniques and differences relating to the time series and cross sectional dimensions of the data the ensuing three dimensional space of real misalignments is probably a useful tool in determining the direction of a possible misalignment rather than its precise size copyright blackwell publishers ltd 2006

volatility and development why is gdp growth so much more volatile in poor countries than in rich ones we identify four possible reasons i poor countries specialize in more volatile sectors ii poor countries specialize in fewer sectors iii poor countries experience more frequent and more severe aggregate shocks e g from macroeconomic policy and iv poor countries macroeconomic fluctuations are more highly correlated with the shocks of the sectors they specialize in we show how to decompose volatility into these four sources quantify their contribution to aggregate volatility and study how they relate to the stage of development we document the following regularities first as countries develop their productive structure moves from more volatile to less volatile sectors second the level of specialization declines with development at early stages and slowly increases at later stages of development third the volatility of country specific macroeconomic shocks falls with development fourth the covariance between sector specific and country specific shocks does not vary systematically with the level of development we argue that many theories linking volatility and development are not consistent with these findings and suggest new directions for future theoretical work

financial innovation price smoothing and monetary policy financial innovation price smoothing and monetary policy i introduction in a monetary economy the volume of nominal transactions fluctuates with the level of economic activity empirical evidence suggests that the supply of nominal transaction assets such as currency and bank deposits also fluctuates with the level of economic activity some researchers have attributed these observations to the phenomenon of money endogeneity 1 one explanation for this endogenous supply response is a systematic monetary policy as described by black 1972 under which the central bank passively adjusts the money supply to accommodate the changes in money demand alternatively king and plosser 1984 and saving 1979 stress the role of the private banking system in producing this endogenous response they argue that exogenous changes in real activity elicit sympathetic changes in the demand for transaction services that may be partially or fully accommodated by the banking system through its supply of inside money in either case this endogenous supply response tends to mitigate the price adjustment that accompanies a real supply shock 2 in the long run however the price level is ultimately determined by the central bank in the market for the nominal quantity that it controls e g currency bank reserves when deposit accounts are subject to reserve requirements or the monetary base 3 this suggests that if the private banking system does not fully accommodate the real shock and if the shock exhibits a well defined persistence then endogenous price adjustments that are fully anticipated may be further damped by a passive supply response by the central bank in addition if price expectations affect real interest rates then current period price level smoothing via a passive monetary policy may also be possible 4 in addition to employing transaction assets currency and checkable bank deposit accounts to meet their transaction requirements agents may purchase non deposit transaction services directly for firms these services include the tools available to the modern corporate cash manager such as lockbox collection systems repurchase agreements and zero balance accounts in the household sector they take the form of atms debit and credit cards and overdraft privilages on checkable accounts among others these non deposit transaction services represent an increasingly important medium of exchange their supply by the banking system is not directly controlled by the central bank and also offers another avenue by which the economy may respond endogenously to fluctuating transaction requirements associated with real shocks thereby further mitigating the price adjustment 5 the production of non deposit transaction services is subject to technology shocks in the form of financial innovations these innovations alter the economy wide demand for currency and checkable bank deposit accounts and prices adjust as with the introduction of new technology into the production of goods financial innovations are not fully adopted immediately due to the fixed costs of adjusting individual cash management practices but are instead assimilated over time this implies that their effects on transaction asset demands persist if the rate of adoption has a forecastable component the central bank can smooth expected prices by passively accommodating these innovations as with aggregate productivity shocks this persistence may also enable the central bank to damp the disturbances to the current period price level that these innovations create through the impact of price expectations on real interest rates this paper examines a non deposit transaction services market in a model economy that is developed in section ii it has the following features transactors can meet their transaction requirements by allocating wealth to currency or to bank deposit accounts that pay a market determined interest rate or by purchasing non deposit transaction services directly at a market determined price

business cycles in developing countries are they different abstract this paper demonstrates that developing countries differ considerably from their developed counterparts when focus is on the nature and characteristics of short run macroeconomic fluctuations cycles are generally shorter and the stylized facts of business cycles across countries are more diverse than those of the rather uniform industrialized countries supply side models are generally superior in explaining changes in output but a one size fits all approach in formulating policy is inappropriate our results also illustrate the critical importance of understanding business regularities as a stepping stone in the process of designing appropriate stabilization policy and macroeconomic management in developing countries

aggregate fluctuations and the industry structure of the us economy abstract in a two sector economy changes in intermediate input trade as reflected in cost share fluctuations are key to determining the amplification properties of investment specific and neutral shocks i document that the cost shares of intermediate inputs produced by the investment sector correlate positively with gdp whereas those of inputs produced by the consumption sector correlate negatively with gdp the two sector model of greenwood et al 1988 is extended to allow for trade of intermediate goods and to show that the documented correlations discipline heterogeneous elasticities of substitution in intermediate inputs across sectors shock amplification that is the effect of a sectorial shock on aggregate value added depends on the degree of heterogeneity in these elasticities of substitution for a calibrated economy to that of the united states i find that shock amplification is stronger than in a unitary elasticity economy it is also stronger than in an economy with a common non unitary elasticity that is either inferred from data via reduced form estimates or calibrated to match the same targets as our benchmark economy

trade interdependence and the international business cycle a stochastic general equilibrium model of the world economy is developed to analyze the contribution of trade interdependence to international business cycles we test some of the implications of the model using data from ten major industrial countries and a variety of detrending techniques to calculate the cyclical component of output we find that the significance of trade in the transmission of economic disturbances across countries is not robust to the choice of the detrending method in general the role of trade interdependence is moderate and seem to have been stronger in the period before 1973

disaggregate stochastic trends in industrial production abstract several industries appear cointegrated at a highly disaggregated level but the cointegration is not sufficient to reduce the system to a single common trend instead the results indicate that ten common trends are present in the industrial production aggregate

sectoral versus aggregate shocks a structural factor analysis of industrial production using factor methods we decompose industrial production ip into components arising from aggregate and sector specific shocks an approximate factor model finds that nearly all of ip variability is associated with common factors we then use a multisector growth model to adjust for the effects of input output linkages in the factor analysis thus a structural factor analysis indicates that the great moderation was characterized by a fall in the importance of aggregate shocks while the volatility of sectoral shocks was essentially unchanged consequently the role of idiosyncratic shocks increased considerably after the mid 1980s explaining half of the quarterly variation in ip

technical progress and aggregate fluctuations abstract we compare the cyclical fluctuations exhibited by a stochastic growth model under various stochastic processes governing technical change all of which are highly autocorrelated the results obtained are quite sensitive to the precise form of this stochastic process in particular the results depend on whether growth is deterministic or stochastic and in each case are quite sensitive to the persistence of an innovation the model does a relatively poor job of accounting for features of observed business cycles when technical change is difference stationary and does a better job when technical change is trend stationary but highly autocorrelated

real business cycles in this paper we demonstrate how certain very ordinary economic principles lead maximizing individuals to choose consumption production plans that display many of the characteristics commonly associated with business cycles our explanation is entirely consistent with i rational expectations ii complete current information iii stable preferences iv no technological change v no long lived commodities vi no frictions or adjustment costs vii no government viii no money and ix no serial dependence in the stochastic elements of the environment we also provide a completely worked out example of the type of artificial economy we have in mind the time series properties of the example exhibit some major features of observed business cycles although this type of model may not be capable of explaining all of the regularities in actual business cycles we believe that it provides a useful well defined benchmark for assessing the relative importance of factors e g monetary disturbances

cross country evidence on the link between volatility and growth this paper presents empirical evidence against the standard dichotomy in macroeconomics that separates growth from the volatility of economic fluctuations in a sample of ninety two countries as well as a sample of oecd countries the authors find that countries with higher volatility have lower growth the addition of standard control variables strengthens the negative relationship the authors also find that government spending induced volatility is negatively associated with growth even after controlling for both time and country fixed effects copyright 1995 by american economic association

volatility and investment interpreting evidence from developing countries we uncover a significant negative correlation between various volatility measures and private investment in developing countries even when adding the standard control variables no such correlation is uncovered when the investment measure is the sum of private and public investment spending indeed public investment spending is positively correlated with some ineasures of volatility these findings suggest that the detrimental impact of volatility on investment may be easier to detect using disaggregated data we provide several possible interpretations for our findings nonlinearities in preferences or budget constraints can cause volatility to have first order negative effects on private investment