how robust are popular models of nominal frictions this paper analyzes three popular models of nominal price and wage frictions to determine which best ts post war u s data we construct a dynamic stochastic general equilibrium dsge model and use maximum likelihood to estimate each model s parameters because previous research nds that the conduct of monetary policy and the behavior of in ation changed in the early 1980s we examine two distinct sample periods using a bayesian pseudo odds measure as a means for comparison a sticky price and wage model with dynamic indexation best ts the data in the early sample period whereas either a sticky price and wage model with static indexation or a sticky information model best ts the data in the late sample period our results suggest that price and wage setting behavior may be sensitive to changes in the monetary policy regime if true the evaluation of alternative monetary policy rules may be even more complicated than previously believed

industrial conflict and its implications for productivity growth the results of a factor analysis support the proposition that there are different dimensions to labor militance and that they behave differently over time further research is needed on the extent to which they are sensitive to changes in unemployment and the extent to which they can explain the behavior of productivity growth in the post war period if economic hard times enable employers to put labor on the defensive then ceteris paribus productivity growth may accelerate the critical implication for policymakers is that any effort to restore growth which does not take into account the distributive impact of increasing productivity will have only a limited success instead of simply exacerbating existing antagonisms between workers and companies policymakers need to address the source of the conflict the effect of increasing productivity on the quality of worklife 13 references 1 figure 2 tables

mark up pricing and the business cycle the microfoundation of the variable mark up while considerable attention has been paid either to the fixity or variability of the markup and thus the profit rate the existing literature has failed to develop a serious microeconomic underpinning the purpose of this paper is to construct a microeconomic model for the optimal cyclical behavior of the mark up and to analyze its implications for mark up variability the debate over the variability of the mark up has been primarily empirical in nature the major area of contention has centered around the demand sensitivity of the mark up on one hand proponents of a cyclically fluctuating mark up consider both cost and demand determinants of the mark up and focus on the income elasticity of demand to explain mark ups that rise during the expansion phase of the business cycle and decline during the contraction on the other hand there are the cost dominated theories of the mark up which predominantly argue that the mark up is constant over the cycle 2 while this debate rages on neither side has successfully explained the stylized facts of the cyclical mark up trajectory mark ups increase from the initial trough to the midexpansion of the typical business cycle and then decline from that point until the terminal trough 3 this oversight particularly the inability to explain the midexpansion decline in the mark up stems from either the lack of or incomplete consideration of demand determinants of the mark up a major shortcoming of traditional mark up models is the independent rather than interactive treatment of the effects of a changing cost structure and a changing set of competitive pressures on price and mark up determination the interconnection between cost induced price increases and the potential intensification of competitive demand pres

testing for indeterminacy an application to u s monetary policy reply this paper considers a prototypical new keynesian model in which the equilibrium is undetermined if monetary policy is passive the likelihood based estimation of dynamic equilibrium models is extended to allow for indeterminacies and sunspot fluctuations we construct posterior weights for the determinacy and indeterminacy region of the parameter space and estimates for the propagation of fundamental and sunspot shocks according to the estimated model u s monetary policy post 1982 is consistent with determinacy whereas the pre volcker policy is not we find that before 1979 indeterminacy substantially altered the propagation of shocks

uncertainty shocks asset supply and pricing over the business cycle this article estimates a business cycle model with endogenous financial asset supply and ambiguity averse investors firms shareholders choose not only production and investment but also capital structure and payout policy subject to financial frictions an increase in uncertainty about profits lowers stock prices and leads firms to substitute away from debt as well as reduce shareholder payout this mechanism parsimoniously accounts for the postwar comovement in investment stock prices leverage and payout at both business cycle and medium term cycle frequencies ambiguity aversion permits a markov switching var representation of the model while preserving the effect of uncertainty shocks on the time variation in the equity premium

estimation of a forward looking monetary policy rule a time varying parameter model using ex post data abstract in this paper we consider estimation of a time varying parameter model for a forward looking monetary policy rule by employing ex post data a heckman type 1976 the common structure of statistical models of truncation sample selection and limited dependent variables and a simple estimator for such models annals of economic and social measurement 5 475 492 two step procedure is employed in order to deal with endogeneity in the regressors this allows us to econometrically take into account changing degrees of uncertainty associated with the fed s forecasts of future inflation and gdp gap when estimating the model even though such uncertainty does not enter the model directly we achieve efficiency in estimation by employing the standardized prediction errors for inflation and gdp gap as bias correction terms in the second step regression we note that no other empirical literature on monetary policy deals with this important issue our empirical results also reveal new aspects not found in the literature previously that is the history of the fed s conduct of monetary policy since the early 1970s can in general be divided into three subperiods the 1970s the 1980s and the 1990s the conventional division of the sample into pre volcker and volcker greenspan periods could mislead the empirical assessment of monetary policy

u s monetary regimes and optimal monetary policy in the euro area monetary policy in the united states has been documented to have switched from reacting weakly to inflation fluctuations during the 1970s to fighting inflation aggressively from the early 1980s onward in this paper i analyze the impact of the u s monetary policy regime switches on the eurozone i construct a new keynesian two country model where foreign u s monetary policy switches regimes over time i estimate the model for the u s and the euro area using quarterly data and find that the united states has switched between those two regimes in line with existing evidence i show that foreign regime switches affect home eurozone inflation and output volatility and their responses to shocks substantially as long as the home central bank commits to a time invariant interest rate rule reacting to domestic conditions only optimal policy in the home country instead requires that the home central bank reacts strongly to domestic producer price inflation and to international variables such as imported goods relative prices in fact i show that currency misalignments and relative prices play a crucial role in the transmission of foreign monetary policy regime switches internationally interestingly i show that only marginal gains arise for the euro area when the european central bank ecb adjusts its policy according to the monetary regime in the united states thus a simple time invariant monetary policy rule with a strong reaction to producer price index ppi inflation and relative prices is enough to counteract the effects of monetary policy switches in the united states

can ecolabeling schemes preserve the environment a three stage game of production technology signal and price competition is developed to study the impact of eco labeling in a duopoly model of vertical product differentiation the production technology and the subsequent pollution level are non observable by consumers the only way to inform consumers about the environmental quality of the product is to stick an ecolabel on it however a polluting firm may also usurp the ecolabel by incurring a certain cost by assuming that consumers are altruistic and willing to pay for environmental quality we show that ecolabels can reduce the pollution level finally and importantly under restrictive conditions on labeling cost ecolabeling can constitute to some extent an environmentally effective and economically efficient policy however ecolabeling cannot alone internalize the whole negative externality until the optimum point

likelihood ratio based tests for markov regime switching markov regime switching models are widely considered in economics and nance although there have been persistent interests see e g hansen 1992 garcia 1998 and cho and white 2007 the asymptotic distributions of likelihood ratio based tests have remained unknown this paper considers such tests and establishes their asymptotic distributions in the context of nonlinear models allowing for multiple switching parameters the analysis simultaneously addresses three di culties i some nuisance parameters are unidenti ed under the null hypothesis ii the null hypothesis yields a local optimum and iii the conditional regime probabilities follow stochastic processes that can only be represented recursively addressing these issues permits substantial power gains in empirically relevant situations besides obtaining the tests asymptotic distributions this paper also obtains four sets of results that can be of independent interest 1 a characterization of conditional regime probabilities and their high order derivatives with respect to the model s parameters 2 a high order approximation to the log likelihood ratio permitting multiple switching parameters 3 a re nement to the asymptotic distribution and 4 a uni ed algorithm for simulating the critical values for models that are linear under the null hypothesis the elements needed for the algorithm can all be computed analytically the above results also shed light on why some bootstrap procedures can be inconsistent and why standard information criteria such as the bayesian information criterion bic can be sensitive to the hypothesis and the model s structure when applied to the us quarterly real gdp growth rates the methods suggest fairly strong evidence favoring the regime switching speci cation consistently over a range of sample periods

the transmission mechanism in good and bad times does the transmission of economic policies and structural shocks vary with the state of the economy we answer this question using a strategy based on quantile regressions which account for endogenous regressors and state dependent parameters an application to u s real activity and interest rate reveals pervasive asymmetries in the propagation mechanism across good and bad times during periods when real activity is above its conditional average the estimates of the degree of forward lookingness and interest rate semi elasticity are significantly larger in absolute value than the estimates associated with below average periods results are robust to alternative strategies to model state dependent parameters

a time varying parameter structural model of the uk economy abstract we estimate a time varying parameter structural macroeconomic model of the uk economy using a bayesian local likelihood methodology this enables us to estimate a large open economy dsge model over a sample that comprises several different monetary policy regimes and an incomplete set of data our estimation identifies a gradual shift to a monetary policy regime characterised by an increased responsiveness of policy towards inflation alongside a decrease in the inflation trend down to the two percent target level the time varying model also performs remarkably well in forecasting and delivers statistically significant accuracy improvements for most variables and horizons for both point and density forecasts compared to the standard fixed parameter version

var analysis and the great moderation post world war ii us macroeconomic history is usually divided into two distinct subperiods the former period which extends up to the end of the volcker disinflation is characterized by a significant extent of macroeconomic turbulence with highly volatile inflation and output growth the latter period from the end of the volcker disinflation up to the present day is marked in contrast by significantly smaller volatilities for both inflation and output growth these dramatic changes in the reduced form properties of the us economy over the last several decades char acterize a phenomenon known as the great moderation see in particular chang jin kim and charles nelson 1999 margaret mcconnell and gabriel perez quiros 2000 a vast empirical literature has investigated the source s of the great moderation in an attempt to disentangle the relative contributions of two main explanations good policy and good luck based on time varying or markov switching structural var methods the good luck hypoth esis has been advocated by a number of authors including james h stock and mark w watson 2003 giorgio e primiceri 2005 christopher sims and tao zha 2006 and luca gambetti evi pappa and fabio canova 2008

markup variability and flexibility theory and empirical evidence recent empirical studies have raised serious questions about the basic propositions about the cyclical behavior of prices and markups found in the traditional markup literature the administered price hypothesis and the standard volume target return pricing svtrp and wage cost markup wcm models which provide its theoretical support posit the following 1 the markup over average variable costs avc never declines during the expansion phase of the business cycle 2 in the short run or over the cycle prices and markups are less flexible more stable in highly concentrated industries than in industries of low concentration and 3 in highly concentrated industries prices and markups are insensitive to short run fluctuations in demand conditions and thus are solely determined by cost considerations the first two propositions deal with respectively the qualitative nature of the markup trajectory over the cycle and the relative flexibility of price and markup behavior 2 this paper summarizes and empirically tests an alternative theory of markup pricing it is concluded that over the typical business cycle 1 the markup rises from initial trough until the midexpansion and then declines until the terminal trough and 2 markup flexibility is positively related to the degree of demand competition this cyclical pattern of markup variability is shown to exist in major industry groups for all postwar cycles up to 1980 regression analysis reveals that in highly concentrated industries a positive relation exists between markup flexibility and the level of import competition and a proxy for the elasticity of demand the author is grateful to james r crotty peter t gottschalk william g shepherd and an anonymous referee for helpful comments on earlier versions of this paper 1 see weintraub 1959 chs 4 5 eckstein 1964 p 280 blair 1972 p 477 and weintraub 1978 ch 3 2 these two aspects of markup behavior will be referred to throughout this paper the markup trajectory refers to its dynamic time path over the business cycle its qualitative nature is summarized by its first and second time deriv

e stability vis a vis determinacy in regime switching models abstract this paper examines e stability determinacy and indeterminacy in a general class of regime switching models with lagged endogenous variables using determinacy conditions from cho 2016 2020 our first result extends mccallum 2007 to models with time varying parameters the unique mean square stable equilibrium is e stable if agents have current information and one period ahead decision rules further we address the existence of e stable non fundamental equilibria and find that iteratively e stable equilibria of indeterminate switching models can exist finally we show that indeterminate new keynesian models with persistent recurring interest rate peg regimes admit iteratively e stable equilibria in special cases the iterative e stability condition coincides with the long run taylor principle

a model of pricing behavior an econometric case study empirical pricing studies are scarce in the modern literature in spite of their obvious importance for understanding competition the present study employs a structural model to identify deviations of individual pricing routines from the commonly assumed single period profit maximization it is applied to individual wholesale firms because wholesale pricing has a decisive influence on the price formation in the entire economic system and because hardly any research exists in this area the results show that wholesale firms operate in imperfectly competitive world markets providing a highly differentiated service package traders apply pricing rules consistent with cost mark up pricing the mark up varies among traders with the extent to which a firm s pricing strategy deviates from full profit maximization this divergent behavior is associated with firm size the type of buyers served and other aspects of the wholesale service package

on non uniqueness in rational expectations models an attempt at perspective abstract many macroeconomic models involving rational expectations give rise to an infinity of solution paths even when the models are linear in all variables some writers have suggested that this non uniqueness constitutes a serious weakness for the rational expectations hypothesis one purpose of the present paper is to argue that the non uniqueness in question is not properly attributable to the rationality hypothesis but instead is a general feature of dynamic models involving expectations it is also argued that there typically exists in a very wide class of linear rational expectations models a single solution that excludes bubble or bootstrap effects one that occur only because they are arbitrarily expected to occur a systematic procedure for obtaining solutions free from such effects is introduced and discussed in addition this procedure is used to interpret and reconsider several prominent examples with solution multiplicities including ones developed by fischer black and john b taylor

indicator variables for optimal policy the optimal weights on indicators in models with partial information about the state of the economy and forward looking variables are derived and interpreted both for equilibria under discretion and under commitment an example of optimal monetary policy with a partially observable potential output and a forward looking indicator is examined the optimal response to the optimal estimate of potential output displays certainty equivalence whereas the optimal response to the imperfect observation of output depends on the noise in this observation

controlling inflation with timid monetary fiscal regime changes can monetary policy control inflation when both monetary and fiscal policies change over time when monetary policy is active a long run fiscal principle entails flexibility in fiscal policy that preserves determinacy even when deviating from passive fiscal substantially for brief periods or timidly for prolonged periods in order to guarantee a unique equilibrium monetary and fiscal policies must coordinate not only within but also across regimes and not simply on being active or passive but also on their extent the amplitude of deviations from the active monetary passive fiscal benchmark determines whether a regime is ricardian timid deviations do not imply wealth effects

macroeconomic forecasting performance under alternative specifications of time varying volatility summary this paper compares alternative models of time varying volatility on the basis of the accuracy of real time point and density forecasts of key macroeconomic time series for the usa we consider bayesian autoregressive and vector autoregressive models that incorporate some form of time varying volatility precisely random walk stochastic volatility stochastic volatility following a stationary ar process stochastic volatility coupled with fat tails garch and mixture of innovation models the results show that the ar and var specifications with conventional stochastic volatility dominate other volatility specifications in terms of point forecasting to some degree and density forecasting to a greater degree copyright 2014 john wiley sons ltd

changes in federal reserve preferences abstract using a model of optimizing central bank behavior i estimate the dynamic behavior of preferences which are captured by the relative weight put on stabilizing inflation versus minimizing the output gap unlike previous work i let this parameter vary continuously over time there is a drastic but steady rise in the weight on inflation around the appointment of paul volcker however i find variation in preferences throughout the sample period the results suggest that preference changes have been more complex than typically assumed in the literature the estimated preference series is used to perform counterfactual experiments and to construct a new measure of monetary shocks

indeterminacy and learning an analysis of monetary policy in the great inflation abstract the great inflation of the 1970s can be understood as the result of equilibrium indeterminacy in which loose monetary policy engendered excess volatility in macroeconomic aggregates and prices the federal reserve inadvertently pursued policies that were not anti inflationary enough because it did not fully understand the economic environment it was operating in specifically it had imperfect knowledge about the structure of the economy and was subject to data misperceptions the combination of learning about the economy and the use of mis measured data resulted in policies which the federal reserve believed to be optimal but when implemented led to equilibrium indeterminacy

a rehabilitation of monetary policy in the 1950 s monetary policy in the united states in the 1950s was remarkably modern analysis of federal reserve records shows that policymakers had an overarching aversion to inflation and were willing to accept significant costs to prevent it from rising to even moderate levels this aversion to inflation was the result of policymakers beliefs that higher inflation could not raise output in the long run that the level of output that would trigger increases in inflation was only moderate and that inflation had large real costs in the medium and long runs furthermore both narrative and empirical analysis indicates that policymakers were not wedded to free reserves or other faulty indicators in their implementation of policy empirical estimates of a forward looking taylor rule show that policymakers in the 1950s raised nominal interest rates more than one for one with increases in expected inflation and suggests that monetary policy in the 1950s was more similar to policy in the 1980s and 1990s than to that in the late 1960s and 1970s one implication of these findings is that the inflation of the late 1960s and 1970s must have been the result of a change in the conduct of policy this abstract was borrowed from another version of this item

imperfect product testing and market size we consider an imperfect test of product quality and ask how it interacts with adverse selection to affect market size although one might expect adverse selection to be mitigated there are scenarios where it is exacerbated also two counter intuitive comparative static results emerge first a small increase in the test cost can increase the equilibrium expected profits earned by sellers of higher quality units and so expand the market second the equilibrium expected profits earned by sellers with lower quality units can be increased by a small improvement in the accuracy of an imperfect test

bad luck bad policy and learning a markov switching approach to understanding postwar u s macroeconomic dynamics abstract this paper evaluates the role of monetary policy in understanding the u s post war macroeconomic fluctuations we construct a medium size dsge model in which the central bank through a real time learning process can make mistakes in estimating key elasticities between macroeconomic aggregates and the central banks objectives may change over time the model also features time varying volatilities of non policy shocks we find that misperceptions of the persistence of inflation and the slope of the phillips curve could affect optimal monetary policy decision making therefore their accurate prediction is key for achieving successful monetary policy outcomes in addition we argue that the monetary policy shift geared toward inflation stabilization in the late 1970s changed the composition of output making the marginal efficiency of investment shock that proxies for the functioning of the financial sector the most important contributor to the business cycle

imperfect certification in a bertrand duopoly abstract a label that imperfectly signals product quality is analyzed in a bertrand duopoly with differentiated products considering strategic firms when certification is imperfect has some important implications a separating equilibrium can be sustained with a free test due to price strategic complementarity when the certifier s objective is welfare and the test cost is sufficiently small the most appropriate test is that which is subject to a low rate of false negatives

realized and optimal monetary policy rules in an estimated markov switching dsge model of the united kingdom this paper investigates underlying changes in the u k economy over the past thirty five years using a small open economy dsge model using bayesian analysis we find uk monetary policy nominal price rigidity and exogenous shocks are all subject to regime shifting a model incorporating these cha nges is used to estimate the realised monetary policy and derive the optimal mon etary policy for the uk this allows us to assess the effectiveness of the realis ed policy in terms of stabilising economic fluctuations and in turn provide an ind ication of whether there is room for monetary authorities to further improve their polic ies

inferring monetary policy objectives with a partially observed state accounting for the uncertainty inherent in real time perceptions of the state of the economy is believed to be critical for the analysis of historical monetary policy we investigate this claim through the lens of a small scale new keynesian model with optimal discretionary policy and partial information about the state the model is estimated using maximum likelihood on us data over the volcker greenspan bernanke regime a comparison of our estimates to those from a version of the model with complete information reveals that under partial information i the federal reserve demonstrates a significant concern for stabilizing fluctuations in the output gap and ii the discrepancy between optimal and observed policy behavior is smaller

monetary and fiscal policy switching a growing body of evidence finds that policy reaction functions vary substantially over different periods in the united states this paper explores how moving to an environment in which monetary and fiscal regimes evolve according to a markov process can change the impacts of policy shocks in one regime monetary policy follows the taylor principle and taxes rise strongly with debt in another regime the taylor principle fails to hold and taxes are exogenous an example shows that a unique bounded non ricardian equilibrium exists in this environment a computational model illustrates that because agents decision rules embed the probability that policies will change in the future monetary and tax shocks always produce wealth effects when it is possible that fiscal policy will be unresponsive to debt at times active monetary policy like a taylor rule in one regime is not sufficient to insulate the economy against tax shocks in that regime and it can have the unintended consequence of amplifying and propagating the aggregate demand effects of tax shocks the paper also considers the implications of policy switching for two empirical issues

the time varying volatility of macroeconomic fluctuations we investigate the sources of the important shifts in the volatility of us mac roeconomic variables in the postwar period to this end we propose the esti mation of dsge models allowing for time variation in the volatility of the structural innovations we apply our estimation strategy to a large scale model of the business cycle and find that shocks specific to the equilibrium condition of investment account for most of the sharp decline in volatility of the last two decades jel c51 e32

regime switches agents beliefs and post world war ii u s macroeconomic dynamics the evolution of inflation and output over the last 50 years is examined through the lens of a micro founded model that allows for changes in the behavior of the federal reserve and in the volatility of structural shocks agents are aware of the possibility of regime changes and their beliefs have an impact on the law of motion underlying the macroeconomy the results support the view that there were regime switches in the conduct of monetary policy however the behavior of the federal reserve is identified by repeated fluctuations between a hawk and a dove regime instead of by the traditional pre and post volcker structure counterfactual simulations show that if agents had anticipated the appointment of an extremely conservative chairman inflation would not have reached the peaks of the late 70s and the inflation output trade off would have been less severe these beliefs counterfactuals are new in the literature finally the paper provides a bayesian algorithm to handle the technical difficulties that arise in a rational expectations model with markov switching regimes

figuring out the fed beliefs about policymakers and gains from transparency in this paper i use a markov chain monte carlo algorithm to estimate a model of private sector behavior that does not feature private sector knowledge of the monetary policymaking process and instead leaves firms and households uncertain about how monetary policy is set the private sector entertains two competing views of monetary policymaking which i estimate firms and households use bayes law on a rolling data sample to distinguish between those two models i use this setup to study the evolution of beliefs about the federal reserve and the possible gains from transparency

bounded rationality monetary policy and macroeconomic stability abstract this paper estimates a behavioral new keynesian model to revisit the evidence that passive us monetary policy in the pre 1979 sample led to indeterminate equilibria and sunspot driven fluctuations while active policy after 1982 by satisfying the taylor principle was instrumental in restoring macroeconomic stability the model assumes cognitive discounting i e consumers and firms pay less attention to variables further into the future we estimate the model allowing for both determinacy and indeterminacy the empirical results show that determinacy is preferred both before and after 1979 even if monetary policy is found to react only mildly to inflation pre volcker the substantial degrees of bounded rationality that we estimate prevent the economy from falling into indeterminacy

monetary policy regime shifts and inflation persistence abstract using bayesian methods we estimate a markov switching new keynesian msnk model that allows shifts in the monetary policy reaction coefficients and shock volatilities with u s data we find that a more aggressive monetary policy regime was in place after the volcker disinflation and before 1970 than during the great inflation of the 1970s our estimates also indicate that a low volatility regime has been in place during most of the sample period after 1984 we connect the timing of the different regimes to a measure of inflation persistence

monetary policy and asset prices a markov switching dsge approach summary this paper estimates a markov switching dynamic stochastic general equilibrium model by incorporating stock prices in monetary policy rules in order to identify the federal reserve s stance toward them based on the data from 1984 q1 to 2009 q2 i find that historical evidence of the policy reaction toward stock prices is weak except for the stock market bubble of the 1990s a counterfactual exercise shows that the rapid growth in stock prices during that period would have been significantly higher if monetary policy had been independent of the stock market however unconditional macroeconomic volatility increases with the degree of policy responsiveness toward stock prices copyright 2017 john wiley sons ltd

has monetary policy become more effective we investigate the implications of changes in the structure of the u s economy for monetary policy effectiveness estimating a vector autoregression over the pre and post 1980 periods we provide evidence of a reduced effect of monetary policy shocks in the latter period we estimate a structural model that replicates well the economy s response in both periods and perform counterfactual experiments to determine the source of the change in the monetary transmission mechanism and in the economy s volatility we find that by responding more strongly to inflation expectations monetary policy has stabilized the economy more effectively in the post 1980 period

equilibrium in a production economy with an income tax this paper develops a method to study an infinite horizon production economy distorted by a state dependent income tax this setting permits taxes to depend on the capital stock an endogenous state variable and thus captures situations where the evolution for capital and taxes is jointly determined to solve this model the consumption function is represented as a fixed point of a nonlinear monotone operator that is defined such that its nth iteration computes the consumption function n steps away from the horizon for a corresponding finite horizon economy the oparator s monotonicity is exploited in proving the existence of and constructing an equilibrium copyright 1991 by the econometric society

signalling effects of monetary policy we develop a dynamic general equilibrium model in which the policy rate signals the central bank s view about macroeconomic developments to price setters the model is estimated with likelihood methods on a u s data set that includes the survey of professional forecasters as a measure of price setters inflation expectations this model improves upon existing perfect information models in explaining why in the data inflation expectations respond with delays to monetary impulses and remain disanchored for years in the 1970s u s monetary policy is found to signal persistent inflationary shocks explaining why inflation and inflation expectations were so persistently heightened the signalling effects of monetary policy also explain why inflation expectations adjusted more sluggishly than inflation after the robust monetary tightening of the 1980s

the swings of u s inflation and the gibson paradox in recent business cycles u s inflation has experienced a reduction of volatility and a severe weakening in the correlation to the nominal interest rate gibson paradox we examine these facts in an estimated dynamic stochastic general equilibrium model with money our findings point at a flatter new keynesian phillips curve higher price stickiness and a lower persistence of markup shocks as the main explanatory factors in addition a higher interest rate elasticity of money demand an increasing role of demand side shocks and a less systematic behavior of fed s monetary policy also account for the recent patterns of u s inflation dynamics jel e32 e47

eco labeling and market equilibria with noisy certification tests an intriguing alternative to traditional methods for regulating externalities is the provision of information about firms environmental attributes an increasingly important example of this approach is eco labeling where a third party certifies firms products such schemes are currently used in a variety of countries this paper investigates the equilibria that may occur with eco labeling and the attendant welfare effects i model certification as a noisy test subject to both type i and type ii errors but where green firms more likely to pass than brown firms while it commonly leads to an increase in the fraction of green units in the market the introduction of an eco label can either increase or decrease welfare

policy regimes policy shifts and u s business cycles abstract using an estimated dsge model with monetary and fiscal policy interactions and allowing for equilibrium indeterminacy we find that a passive monetary and passive fiscal policy regime prevailed in the pre volcker period this gave rise to self fulfilling beliefs and unconventional transmission mechanisms of policy shifts unanticipated increases in interest rates increased inflation and output while unanticipated increases in lump sum taxes decreased inflation and output we show that had the monetary policy regime of the post volcker era been in place pre volcker inflation volatility would have been lower by 25 and the rise of inflation in the 1970s would not have occurred

monetary regime switches and central bank preferences monetary policy objectives and targets are not necessarily constant over time the regime switching literature has typically analyzed and interpreted changes in policymakers behavior through simple interest rate rules this paper analyzes policy regime switches by explicitly modeling policymakers behavior and objectives we show that changes in the parameters of simple rules do not necessarily correspond to changes in policymakers preferences in fact capturing and interpreting regime changes in preferences through interest rate rules can lead to misleading results

parameter drifts misspecification and the real exchange rate in emerging countries abstract this paper reviews the baseline framework for the analysis of emerging economies using argentinean data i estimate a small open economy model with stochastic trend working capital constraint and augmented with time varying parameters i find that structural technological and financial parameters of one sector model are time varying during 1936 2006 time varying parameters correlate with the real exchange rate suggesting potential misspecification of the one sector model therefore i propose a two sector model that endogenously accounts for the real exchange rate in this model stationary productivity shocks and the country premium together explain a large share of the variability observed in the data

an empirical assessment of optimal monetary policy in the euro area we estimate a new keynesian dsge model for the euro area under alternative descriptions of monetary policy discretion commitment or a simple rule after allowing for markov switching in policy maker preferences and shock volatilities this reveals that there have been several changes in euro area policy making with a strengthening of the anti inflation stance in the early years of the erm which was then lost around the time of german reunification and only recovered following the turmoil in the erm in 1992 the ecb does not appear to have been any more conservative as aggregate euro area policy was under bundesbank leadership the estimates also suggest that the most appropriate description of policy is that of discretion with no evidence of commitment in the euro area as a result although both good luck and good policy played a role in the moderation of inflation and output volatility in the euro area the welfare gains would have been substantially higher had policy makers been able to commit adopting a flexible price level target would lead to outcomes close to commitment

changing macroeconomic dynamics at the zero lower bound this article develops a change point var model that isolates four major macroeconomic regimes in the us since the 1960s the model identifies shocks to demand supply monetary policy and spread yield using restrictions from a general equilibrium model the analysis discloses important changes to the statistical properties of key macroeconomic variables and their responses to the identified shocks during the crisis period spread shocks became more important for movements in unemployment and inflation a counterfactual exercise evaluates the importance of lower bond yield spread during the crises and suggests that the fed s large scale asset purchases helped lower the unemployment rate by about 0 6 percentage points while boosting inflation by about 1 percentage point

long run implications of investment specific technological change an attempt is made to disentangle its effects from the more traditional hicksneutral form of technological progress the balanced growth path for the model is characterized and calibrated to u s national income and product account nipa data the quantitative analysis suggests that investment specific technological change accounts for the major part of growth jel e13 030 041 047

were there regime switches in u s monetary policy working paper 2004 14 june 2004 abstract a multivariate model identifying monetary policy and allowing for simultaneity and regime switching in coefficients and variances is confronted with u s data since 1959 the best fit is with a model that allows time variation in structural disturbance variances only among models that also allow for changes in equation coefficients the best fit is for a model that allows coefficients to change only in the monetary policy rule that model allows switching among three main regimes and one rarely and briefly occurring regime the three main regimes correspond roughly to periods when most observers believe that monetary policy actually differed and the differences in policy behavior are substantively interesting though statistically ill determined the estimates imply monetary targeting was central in the early 80s but was also important sporadically in the 70s the changes in regime were essential neither to the rise in inflation in the 70s nor to its decline in the 80s jel classification e52 e47 c53 key words counterfactuals lucas critique policy rule monetary targeting simultaneity volatility model comparison i the debate over monetary policy change in an influential paper clarida gali and gertler 2000 cgg presented evidence that us monetary policy changed between the 1970 s and the 1980 s indeed that in the 70 s it was drastically worse they found that the policy rule apparently followed in the 70 s was one that when embedded in most stochastic general equilibrium models would imply non uniqueness of the equilibrium and hence vulnerability of the economy to sunspot fluctuations of arbitrarily large size their estimated policy rule for the later period on the other hand eliminated this indeterminacy these results are a possible explanation of the volatile and rising inflation of the 70 s and of its subsequent decline the cgg analysis has two important weaknesses one is that it fails to account for stochastic volatility us macroeconomic variables and particularly the federal funds rate have gone through periods of tranquility and of agitation with forecast error variances varying greatly from period to period ignoring such variation does not lead to inconsistent estimates of model parameters when the forecasting equations themselves are constant but it strongly biases toward a finding of changed parameters tests of the stability of the forecasting equations the other weakness is that the cgg analysis rests on powerful and implausible identifying assumptions they require that we accept that the response of the monetary authority to expected future inflation and output does not depend on the recent history of inflation money growth or output it is hard to understand why this should be so especially in the 70 s when monetarism was a prominent theme in policy debates congress was requiring reports from the fed of projected time paths of monetary aggregates and financial markets were reacting sensitively to weekly money supply numbers the requirement for existence and uniqueness of equilibrium in dynamic models is that the monetary policy rule show a more than unit response of interest rates to the sum of the logs of all nominal variables that appear on the right hand side of the reaction function if we force a particular measure of expected future inflation to proxy for all the nominal variables that actually appear independently in the reaction function we are bound to get distorted conclusions on the one hand because expected future inflation will be a noisy measure of the full set of nominal influences on policy we might get downward bias in our estimates from the usual errorsin variables effect on the other hand to the extent that expected future inflation like most expected future values shows less variation than current nominal variables we could find a mistaken scaling up of coefficients

monetary policy regime switches and macroeconomic dynamics this article considers the determinacy and distributional consequences of regime switching in monetary policy although switching in the inflation target does not affect determinacy switches in the inflation response can cause indeterminacy satisfying the taylor principle period by period is neither necessary nor sufficient for determinacy when inflation responses switch indeterminacy can arise if monetary policy responds too aggressively to inflation in the active regime inflation target switches primarily impact the level of inflation whereas inflation response switches primarily impact the volatility expecting an inflation target switch has minor effects on volatility whereas expecting an inflation response switch raises volatility more substantially

why inflation rose and fell policy makers beliefs and u s postwar stabilization policy this paper provides an explanation for the run up of u s inflation in the 1960s and 1970s and the sharp disinflation in the early 1980s which standard macroeconomic models have difficulties in addressing i present a model in which rational policymakers learn about the behavior of the economy in real time and set stabilization policy optimally conditional on their current beliefs the steady state associated with the self confirming equilibrium of the model is characterized by low inflation however prolonged episodes of high inflation ending with rapid disinflations can occur when policymakers underestimate both the natural rate of unemployment and the persistence of inflation in the phillips curve i estimate the model using likelihood methods the estimation results show that the model accounts remarkably well for the evolution of policymakers beliefs stabilization policy and the postwar behavior of inflation and unemployment in the united states

fiscal policy and asset prices with incomplete markets we study the simultaneous impact of fiscal policy decisions on macroeconomic activity wealth distribution and asset prices we consider a general equilibrium overlapping generations model with incomplete markets and heterogeneous agents where government debt and capital are imperfect substitutes increases in public debt lead to significant increases in the riskless rate and to a reduction in the equity premium while higher capital income tax rates lead to a higher equity premium the crowding out effects on capital and output are much higher than in models where government debt and capital are perfect substitutes which thus ignore households portfolio reallocation decisions the author 2012 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

solving endogenous regime switching models abstract this paper solves rational expectations models in which structural parameters switch across multiple regimes according to state dependent endogenous transition probabilities assuming small shocks and smooth transition probabilities we apply a perturbation approach we first provide for conditions under which a unique bounded equilibrium exists we then compute first and second order approximations in a new keynesian model with monetary policy switching we document new effects of monetary policy switching when transition probabilities depend on inflation

monetary policy and indeterminacy after the 2001 slump abstract this paper estimates a simple new keynesian model of the u s economy allowing for indeterminacy over the period following the 2001 slump an episode for which the adequacy of monetary policy is intensely debated we find that only when measuring inflation with core pce does monetary policy appear to have been sufficiently active to rule out indeterminacy we then relax the assumption that inflation in the model is measured by a single indicator and re formulate the artificial economy as a factor model where the theory s concept of inflation is the common factor to the empirical inflation series cpi and pce provide better indicators of the latent concept while core pce is less informative finally we estimate an extended economy that distinguishes between core and headline inflation rates this model comfortably rules out indeterminacy and confirms the view that the federal reserve put more weight on core pce inflation when setting the policy rate during this period

the incredible volcker disinflation abstract the reduction in inflation that occurred in the early 1980s when the federal reserve was headed by paul volcker is arguably the most widely discussed and visible macroeconomic event of the last 50 years of u s history inflation had been dramatically rising but under volcker the fed first contained and then reversed this process using a simple modern macroeconomic model we argue that the real effects of the volcker disinflation were mainly due to its imperfect credibility in our view the observed upward volatility and subsequent stubborn elevation of long term interest rates during the disinflation are key indicators of that imperfect credibility studying transcripts of the federal open market committee recently released to the public we find to our surprise that volcker and other fomc members likewise regarded the long term interest rates as indicative of inflation expectations and of the credibility of their disinflationary policy drawing from the transcripts and other contemporary sources we consider the interplay of monetary targets operating procedures and credibility during the volcker disinflation

the dynamic effects of neutral and investment specific technology shocks the neoclassical growth model is used to identify the short run effects of neutral technology shocks which affect the production of all goods homogeneously and investment specific shocks which affect only investment goods the real equipment price crucial for identifying the investment shocks experiences an abrupt increase in its average rate of decline in 1982 so the analysis is based on a split sample on the basis of the preferred specification the two technology shocks account for 73 percent of hours and 44 percent of output s business cycle variation before 1982 and 38 percent and 80 percent afterward the shocks also account for more than 40 percent of hours and 58 percent of output s forecast errors over a three to eight year horizon in both samples the majority of these effects are driven by the investment shocks

identifying the sources of instabilities in macroeconomic fluctuations abstract this paper investigates the sources of the substantial decrease in output growth volatility in the mid 1980s by identifying which of the structural parameters in a representative new keynesian and structural var models changed overturning conventional wisdom we show that the great moderation was due not only to changes in shock volatilities but also to changes in monetary policy parameters as well as in the private sector s parameters the great moderation was previously attributed to good luck because the alternative sources of instabilities appear to have offsetting effects on output volatility and therefore were impossible to detect using existing techniques

shocks and government beliefs the rise and fall of american inflation working paper 2004 22 september 2004 abstract the authors use a bayesian markov chain monte carlo algorithm to estimate a model that allows temporary gaps between a true expectational phillips curve and the monetary authority s approximating nonexpectational phillips curve a dynamic programming problem implies that the monetary authority s inflation target evolves as its estimated phillips curve moves the authors estimates attribute the rise and fall of post world war ii inflation in the united states to an intricate interaction between the monetary authority s beliefs and economic shocks shocks in the 1970s altered the monetary authority s estimates and made it misperceive the tradeoff between inflation and unemployment that misperception caused sharp rise in inflation in the 1970s the authors estimates indicate that policy makers updated their beliefs continuously by the 1980s policy makers beliefs about the phillips curve had changed enough to account for fed chairman paul volcker s conquest of u s inflation in the early 1980s jel classification e3 e5 key words updating beliefs policy evaluation self confirming equilibrium nash inflation ramsey outcomes i introduction today many statesmen and macroeconomists believe that inflation can largely be determined by a government monetary authority then why did the federal reserve board preside over high us inflation during the late 1960s and the 1970s and why under paul volcker did it rapidly bring inflation down during the early 1980s this paper answers these questions by estimating a model that features a particular process that makes a procession of economic shocks induce the monetary authority to alter its model of inflation unemployment dynamics the phillips curve at each date t the monetary authority updates its beliefs about the phillips curve and then recomputes a first period action recommended by a phelps problem a discounted dynamic programming problem that minimizes the expected value of a discounted quadratic loss function of inflation and unemployment 1 the monetary authority pursues the same objectives at each date using the same structural model with only its estimates of that model changing over time 2 this model of the systematic part of inflation puts the monetary authority s beliefs about the phillips curve front and center 3 we assume that the monetary authority s model of the phillips curve deviates in two subtle but important ways from what it would be in a rational expectations model e g kydland and prescott 1977 the first deviation is that while the true phillips curve is like kydland and prescott s we assume that the monetary authority omits the public s expected rate of inflation from its phillips curve by itself this omission need not prevent the outcomes of our model from coinciding with those of kydland and prescott s nor need it imply that the government s model is wrong in a way that could be detected from even an infinite sample whether the monetary authority s model is wrong in a statistically detectable way depends on how we allow the monetary authority to reestimate the parameters of its model in particular if the monetary authority were to believe that the coefficients of its phillips curve are constant over time then its estimates would converge to ones that support a self confirming equilibrium sce after convergence its estimated phillips curve would correctly describe occurrences along the sce path for inflation and unemployment such an after convergence version of our model has little hope of explaining the rise and fall of us inflation that model would have inflation fluctuating randomly around a constant sce level that coincides with kydland and prescott s time consistent suboptimal i e excessive level 4 this outcome motivates our second subtle deviation from a rational expectations equilibrium

disagreement about inflation expectations and monetary policy transmission abstract time variation in disagreement about future inflation is a stylized fact in survey data but little is known on how disagreement interacts with the efficacy of monetary policy we show that a contractionary 100 bps u s monetary policy shock leads to a statistically significant increase in inflation and inflation expectations of up to 0 7 percentage points in times of high disagreement whereas in times of low disagreement it leads to a significant decline in these variables of around 0 8 percentage points we reconcile these state dependent effects with a regime switching dispersed information new keynesian model where we calibrate the information structure to match disagreement about inflation expectations in u s data