the structure of unemployment we test for a unit root in postwar unemployment rates for sixteen oecd countries when a one time structural break is incorporated the unit root hypothesis can be rejected for most of the countries and the measured persistence of unemployment falls dramatically we then test for multiple structural changes and find evidence of one or two breaks for those countries for which the unit root hypothesis could be rejected almost all of the breaks are positive reflecting the sustained rise in european unemployment the major exception is the united states where long term unemployment rose in the 1970s and fell in the 1980s

frontiers of real time data analysis in the past ten years researchers have explored the impact of data revisions in many different contexts researchers have examined the properties of data revisions how structural modeling is affected by data revisions how data revisions affect forecasting the impact of data revisions on monetary policy analysis and the use of real time data in current analysis this paper summarizes many of the questions for which real time data analysis has provided answers in addition researchers and institutions have developed better real time data sets around the world still additional research is needed in key areas and research to date has uncovered even more fruitful areas worth exploring jel c52 c53 c80 e01

the return of the wage phillips curve the standard new keynesian model with staggered wage setting is shown to imply a simple dynamic relation between wage inflation and unemployment under some assumptions that relation takes a form similar to that found in empirical applications starting with the original phillips 1958 curve and may thus be viewed as providing some theoretical foundations to the latter the structural wage equation derived here is shown to account reasonably well for the comovement of wage inflation and the unemployment rate in the u s economy even under the strong assumption of a constant natural rate of unemployment

inflation contracts and inflation targets under uncertainty why we might need conservative central bankers this paper compares the relative effectiveness of inflation contracts and inflation targets in the presence of uncertainty regarding the central bank s preferences and the underlying output target the model explains why discretion may be superior to a delegation solution we also show that there might be the need to combine inflation targets and contracts with the appointment of a rogoff type conservative central banker if contracts and targets cannot be made state contingent and that less flexible inflation targets may be appropriate with uncertain central bank preferences

volume flexibility in services the costs and benefits of flexible labor resources organizations can create volume flexibility the ability to increase capacity up or down to meet demand for a single service through the use of flexible labor resources e g part time and temporary workers as compared to full time workers although organizations are increasingly using these resources the relationship between flexible labor resources and financial performance has not been examined empirically in the service setting we use two years of archival data from 445 stores of a large retailer to study this relationship we hypothesize and find that increasing the labor mix of temporary or part time workers shows an inverted u shaped relationship with sales and profit while temporary labor mix has a u shaped relationship with expenses thus although flexible labor resources can create volume flexibility for a firm along multiple dimensions it is possible to have too much of a good thing this paper was accepted by serguei netessine operations management

assessing nominal income rules for monetary policy with model and data uncertainty nominal income rules for monetary policy have long been debated but two issues are of particular recent interest first there are questions about the performance of such rules over a range of plausible empirical models especially models with and without explicit rational inflation expectations second there are questions about the performance of these rules in real time using the type of data that is actually available contemporaneously to policy makers rather than final revised data this paper determines optimal monetary policy rules in the presence of such model uncertainty and real time data uncertainty and finds only a limited role for nominal output growth

modelling inflation volatility this paper discusses estimation of us inflation volatility using time varying parameter models in particular whether it should be modelled as a stationary or random walk stochastic process specifying inflation volatility as an unbounded process as implied by the random walk conflicts with priors beliefs yet a stationary process cannot capture the low frequency behaviour commonly observed in estimates of volatility we therefore propose an alternative model with a change point process in the volatility that allows for switches between stationary models to capture changes in the level and dynamics over the past 40 years to accommodate the stationarity restriction we develop a new representation that is equivalent to our model but is computationally more efficient all models produce effectively identical estimates of volatility but the change point model provides more information on the level and persistence of volatility and the probabilities of changes for example we find a few well defined switches in the volatility process and interestingly these switches line up well with economic slowdowns or changes of the federal reserve chair moreover a decomposition of inflation shocks into permanent and transitory components shows that a spike in volatility in the late 2000s was entirely on the transitory side and characterized by a rise above its long run mean level during a period of higher persistence

factor models and time varying parameter framework for forecasting exchange rates and inflation a survey a survey of models used for forecasting exchange rates and inflation reveals that the factor based and time varying parameter or state space models generate superior forecasts relative to all other models this survey also finds that models based on taylor rule and portfolio balance theory have moderate predictive power for forecasting exchange rates the evidence on the use of bayesian model averaging approach in forecasting exchange rates reveals limited predictive power but strong support for forecasting inflation overall the evidence overwhelmingly points to the context of the forecasts relevance of the historical data data transformation choice of the benchmark selected time horizons sample period and forecast evaluation methods as the crucial elements in selecting forecasting models for exchange rate and inflation

time series distributional properties of financial ratios empirical evidence from finnish listed firms abstract the distributional properties of time series accounting numbers are studied first the distributional characteristics of raw financial ratio distributions are investigated second the normality of the accounting index model residuals is researched by doing this one aims to consider the firm specific and economy wide effects on the observed nonnormalities in financial ratio distributions empirical evidence indicates that a substantial part of the nonnormalities in financial ratio distributions is caused by economy wide effects

the forecasting power of real interest rate gaps an assessment for the euro area the real interest rate gap irg the gap between the short term real interest rate and its natural level is a theoretical concept that has attracted much attention in central banks in recent years this article aims at clarifying its practical relevance for monetary policy in real time for this purpose it provides an empirical assessment of the usefulness of a semi structural versus purely statistical estimates of the real irg for predicting policy relevant macroeconomic variables in the euro area however mixed the results confirm that semi structural estimates of the real irg deserve being added to the central banks toolbox

endogenous monetary policy with unobserved potential output this paper characterizes monetary policy when policymakers are uncertain about the extent to which fluctuations in output and inflation are due to changes in potential output or to cyclical demand and cost shocks our results suggest an explanation for the inflation of the 1970s and the price stability of the 1990s it is shown that 1 policy is likely to be excessively loose for some time when there is a large decrease in potential output in comparison to a full information benchmark 2 retrospective policy errors and errors in forecasting potential output and the output gap are generally serially correlated 3 the increase in the fed s conservativeness between the 1970s and the 1990s implies that the information problem had greater consequences in the former period

inflation persistence the nairu and the great recession the rate of inflation fell far less over the period 2007 2013 than in the period 1979 1985 despite similar large increases in the unemployment rate this paper asks why possible explanations include a change in the persistence of inflation changes in nairu and other shocks a change in the persistence of inflation with inflation more anchored in the period 2007 2013 than in the period 1979 1985 is found to be important the level and change in the nairu cannot be precisely estimated but the data suggest an increase of nearly 1 percentage point since 2007

fear unemployment and migration we examine the impact on the uk economy of the flow of workers from ten east european countries after their accession to the european union we find evidence that those most susceptible to competition from these workers have seen weaker wage inflation we document that the presence of these foreign workers has increased the fear of unemployment and helped to contain wage pressure we argue that this inflow of workers has increased supply by more than it has raised demand and thus had the effect of reducing both inflationary pressures and the natural rate of unemployment the recent rise in migration to the uk from eight eu accession countries the czech republic estonia hungary latvia lithuania poland slovakia and slovenia the a8 countries which started in 2004 as well as subsequently from romania and bulgaria the a2 in 2007 has generated a good deal of controversy we will refer to these countries collectively as the a10 henceforth 1 how many of these eastern europeans are there currently in the uk which countries did they come from and when what impact has their influx had on the uk economy and what likely impacts will they have in the future

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

does the barro gordon model explain the behavior of us inflation a reexamination of the empirical evidence abstract this paper tests the predictions of the barro gordon model using us data on inflation and unemployment to that end it constructs a general game theoretical model with asymmetric preferences that nests the barro gordon model and a version of cukierman s model as special cases likelihood ratio tests indicate that the restriction imposed by the barro gordon model is rejected by the data but the one imposed by the version of cukierman s model is not reduced form estimates are consistent with the view that the federal reserve weights more heavily positive than negative unemployment deviations from the expected natural rate

wages productivity and work intensity in the great depression we show that u s manufacturing wages during the great depression were importantly determined by forces on firms intensive margins short run changes in work intensity and the longer term influence of potential productivity combined to influence real wage growth by contrast the external effects of unemployment and replacement rates had much less impact empirical work is undertaken against the background of a simple efficient bargaining model that embraces earnings employment hours of work and work intensity

inflation targeting under asymmetric preferences this paper develops and estimates a game theoretical model of inflation targeting where the central banker s preferences are asymmetric around the targeted rate specifically positive deviations from the target can be weighted more or less severely than negative ones in the central banker s loss function it is shown that some of the previous results derived under the assumption of symmetry are not robust to this generalization of preferences estimates of the central banker s preference parameters for canada sweden and the uk are statistically different from the one implied by the commonly used quadratic loss function

new measures of the output gap based on the forward looking new keynesian phillips curve abstract forward looking versions of the new keynesian phillips curve imply that the output gap the deviation of the actual output from its natural level due to nominal rigidities drives the dynamics of inflation relative to expected inflation we exploit this to set up a bivariate unobserved component model for extracting new estimates of the output gap in the us the gap estimates are large and persistent even after allowing for correlated trend and cycle shock we then augment our model to use the information in the unemployment rate the estimates confirm the presence of a large and persistent cyclical component

the modern view of macroeconomics some critical reflections david romer has proposed a new basic macroeconomic framework the is mp ia model its proponents claim that it represents the modern view of macroeconomics we show that the new framework remains closely attached to the neoclassical synthesis and in addition does not take account of i the empirical evidence on the output inflation trade off ii the evidence on the interdependence of aggregate demand and supply iii the institutional limits of monetary policy and iv the implications for macroeconomic policy of i ii and iii once these aspects have been incorporated short run stabilisation policy is not neutral in the long run the notion of a natural rate of interest becomes untenable and aggregate demand turns into the crucial exogenous variable copyright 2005 oxford university press

natural rate doubts abstract we study the low frequency comovements in unemployment inflation and the federal funds rate in the u s from 1970 through 1979 all three series trended up together after 1979 they all trended down the conventional explanation for the buildup of inflation in the 1970s is that the fed reacted to an increase in the natural rate of unemployment by conducting an overly passive monetary policy we show that this explanation is difficult to reconcile with the observed comovement of the fed funds rate and inflation we argue instead that the source of the inflation buildup in the 1970s was a downward drift in the real interest rate that was translated into a simultaneous increase in unemployment and inflation by passive fed policy our explanation relies on the existence in the data of a positive long run unemployment inflation relationship this is consistent with non superneutrality of money in the long run and hence the title of our paper natural rate doubts

a note on the distribution types of financial ratios in the commercial banking industry abstract bedingfield reckers and stagliano 1985 have shown that financial ratios in the commercial banking industry are not generally normally distributed this paper uses separate systems proposed by karl pearson see elderton and johnson 1969 and johnson 1949 to determine the distributional forms for eleven financial ratios for each year 1976 1983 some potential applications to regulatory surveillance in commercial banking are discussed

disagreement and biases in inflation expectations empirical work documents substantial disagreement in inflation expectations obtained from survey data furthermore the extent of such disagreement varies systematically over time in a way that reflects the level and variance of current inflation this paper oers a simple explanation for these facts based on asymmetries in the forecasters costs of over and under predicting inflation our model implies biased forecasts with positive serial correlation in forecast errors and a cross sectional dispersion that rises with the level and the variance of the inflation rate it also implies that forecast errors at dierent horizons can be predicted through the spread between the short and long term variance of inflation we find empirically that these patterns are present in inflation forecasts from the survey of professional forecasters a constant bias component not explained by asymmetric loss and rational expectations is required to explain the shift in the sign of the bias observed for a substantial portion of forecasters around 1982

monetary policy for inattentive economies we offer a contribution to the analysis of optimal monetary policy we begin with a critical assessment of the existing literature arguing that most work is based on implausible models of inflation output dynamics we then suggest that this problem may be solved with some recent behavioral models which assume that price setters are slow to incorporate macroeconomic information into the prices they set a specific such model is developed and used to derive optimal policy in response to shocks to productivity and aggregate demand optimal policy is price level targeting base drift in the price level which is implicit in the inflation targeting regimes currently used in many central banks is not desirable in this model when shocks to desired markups are added optimal policy is flexible targeting of the price level that is the central bank should allow the price level to deviate from its target for a while in response to these supply shocks but it should eventually return the price level to its target path optimal policy can also be described as an elastic price standard the central bank allows the price level to deviate from its target when output is expected to deviate from its natural rate

the naicu and the phillips curve an approach based on micro data in this paper we propose a straightforward method to derive a non accelerating inflation capacity utilisation rate naicu based on micro data we condition the current capacity utilisation of firms on their current and planned price adjustments the non accelerating inflation capacity utilisation rate is then defined as the rate where a firm feels no price adjustment pressure one of the main advantages is that this methodology uses structural aspects and does not make it necessary to operate with often rather arbitrary statistical filters we show that our aggregate naicu performs remarkably well as an indicator of inflationary pressure in a phillips curve estimation

monetary policy under uncertainty in an estimated model with labor market frictions abstract we study the design of monetary policy in an estimated model with sticky prices search and matching frictions and staggered nominal wage bargaining we find that the estimated natural rate of unemployment is consistent with the nber description of the u s business cycle and that the inflation unemployment trade off facing monetary policymakers is quantitatively important we also show that parameter uncertainty has a limited effect on the performance or design of monetary policy while natural rate uncertainty has more sizeable effects nevertheless policy rules that respond to the output or unemployment gaps are more efficient than rules responding to output or unemployment growth rates also in the presence of uncertainty about the natural rates

are oil shocks inflationary asymmetric and nonlinear specifications versus changes in regime this paper identifies a structural break in core u s inflation phillips curves such that oil prices contributed substantially before 1981 but since that time pass through has been negligible this characterization is robust to a variety of re specifications and fits the data better than asymmetric and nonlinear oil price alternatives evidence does not support the hypotheses that declining energy intensity or deregulation of energy producing and consuming industries played an important role monetary policy did not itself become less accommodative of oil shocks but may have helped create a regime where inflation is less sensitive to price shocks more generally

testing steady state implications for the nairu estimates of the nairu are usually derived either from a phillips curve or from a wage curve this paper investigates the correspondence between the operational nairu concepts and the steady state of a dynamic wage price model we derive the parameter restrictions that secure that correspondence the full set of restrictions can be tested by econometric analysis of the wage price system and this method is demonstrated for norwegian data a set of necessary conditions can be tested from estimated wage curves alone existing international evidence from empirical wage equations are reinterpreted in light of these conditions

the phillips curve regime switching and the nairu abstract this paper explores the impact of nonlinearities in the phillips curve and its representation by means of a regime switching model on the meaning and the usefulness of the nairu by implementing a regime switching model that can endogenously generate fluctuations in inflation and in the rate of unemployment we conclude that the nairu is not necessarily a single value is not necessarily reachable and is very difficult to measure the model yields a neutral rate which is more an interval of values than a precise number furthermore by postulating dynamic interdependence between real and monetary aspects the model weakens the theoretical basis of the nairu concept itself

determining output and inflation variability are the phillips curve and the monetary policy reaction function responsible i introduction the natural rate hypothesis that no long run trade off exists between inflation and unemployment has won over most macroeconomists a new trade off between the variability of inflation and the variability of output has lately attracted considerable attention instead of minimizing a weighted sum of the levels of inflation and unemployment the central bank s objective function minimizes a weighted sum of the variances of inflation and output given this loss function for the central bank a great deal of theoretical research has been undertaken as to which type of monetary policy rule is both efficient and robust clarida et al 1999 and an edited volume by taylor 1999b investigate various monetary policy rules in this article i explore the determinants of inflation and output variability first in a theoretical study i present the theoretical studies of taylor 1994 svensson 1997 and ball 1999a and investigate how the policy parameters in a taylor monetary policy reaction function are related to the variability of output and inflation computational experiments show that first as monetary policy makers increase their degree of responsiveness to inflation the variability of inflation falls but the variability of output increases second if policy makers increase their policy response to output gaps the variances of both inflation and output decrease in addition the experiments illustrate that the changes in the variability of output and inflation can be the result of changes in the responsiveness of prices to output gaps the second part of the article provides cross country evidence regarding the relationship of inflation and output variability to both the policy parameters of the monetary policy reaction function and the slope parameter of the phillips curve by analyzing data from 20 organisation for economic cooperation and development oecd countries this study estimates the parameters of the monetary policy reaction function and the slope parameter of the phillips curve and examines the relationships between the estimated parameters and the variability of output and inflation although there have been numerous empirical investigations of monetary policy reaction functions taylor 1999a clarida et al 2000 among others there is very little empirical evidence concerning a relationship between the parameters in the policy reaction function and the variability of output and inflation for several countries furthermore there is even less empirical literature that considers the relationship between the policy parameters and output and inflation variability in a cross country framework this study attempts to extend the empirical analysis to a group of countries by using international data 1 there are two main findings first inflation will be low and stable in countries where the monetary policy rule has large reaction coefficients and second output will have large fluctuations in countries where the phillips curve is relatively flat 2 the rest of this article is divided up into four sections section ii provides an overview of the taylor svensson ball tsb model the relationship between the model s parameter values and inflation and output variability is explored through simulations section iii describes the empirical data for the 20 oecd countries and reports the estimated parameters of the tsb model section iv presents the results of the cross country regressions used to evaluate the determinants of inflation and output variability finally section v offers conclusions ii the tsb model assumptions the tsb model describes the economy in three equations 1 sub t beta i sub t 1 pi sub t 1 r sup lambda sub t 1 u sub t 2 pi sub t pi sub t 1 alpha sub t 1 e sub t 3 i sub t pi

modeling inflation dynamics a critical review of recent research in recent years a broad academic consensus has arisen around the use of rational expectations sticky price models to capture inflation dynamics these models are seen as providing an empirically reasonable characterization of observed inflation behavior once suitable measures of the output gap are chosen and moreover are perceived to be robust to the lucas critique in a way that earlier econometric models of inflation are not we review the principal conclusions of this literature concerning 1 the ability of these models to fit the data 2 the importance of rational forward looking expectations in price setting and 3 the appropriate measure of inflationary pressures we argue that existing rational expectations sticky price models fail to provide a useful empirical description of the inflation process especially relative to traditional econometric phillips curves of the sort commonly employed for policy analysis

estimating potential output as a latent variable this article proposes a new method for estimating potential output in which potential real gross domestic product gdp is modeled as an unobserved stochastic trend and deviations of gdp from potential affect inflation through an aggregate supply relationship the output and inflation equations together form a bivariate unobserved components model which is estimated via maximum likelihood through the use of the kalman filter algorithm the procedure yields a measure of potential output and its standard error and an estimate of the quantitative response of inflation to real growth and the output gap

testing the nairu model for the united states this paper tests using u s data the dynamics implied by the nairu view of the relationship between inflation and the unemployment rate the results are somewhat sensitive to the measure of inflation used but they generally reject the dynamics an alternative way of thinking about the relationship between inflation and the unemployment rate is suggested

the fed and the new economy the views expressed herein are those of the authors and not necessarily those of the national bureau ofeconomic research 2002 by laurence ball and robert tchaidze all rights reserved short sections of text not to exceed twoparagraphs may be quoted without explicit permission provided that full credit including notice is givento the source

the history of the phillips curve consensus and bifurcation while the early history of the phillips curve up to 1975 is well known less well understood is the post 1975 fork in the road the left fork developed a theory of policy responses to supply shocks in the context of price stickiness in the non shocked sector its econometric implementation interacts shocks with backward looking inertia the right fork approach emphasizes forward looking expectations that can jump in response to anticipated policy changes the left fork approach is better suited to explaining the postwar us inflation process while the right fork approach is essential for understanding behaviour in economies with unstable macroeconomic environments the history of the phillips curve pc has evolved in two phases before and after 1975 with a widespread consensus about the pre 1975 evolution which is well understood bifurcation begins in 1975 when the pc literature split down two forks of the road with little communication or interaction between the two forks the major contribution of this paper and hence the source of bifurcation in its subtitle is to examine contrast and test the contributions of the two post 1975 forks the pre 1975 history is straightforward and is covered in section i the initial discovery of the negative inflation unemployment relation by phillips popularized by samuelson and solow was followed by a brief period in which policy makers assumed that they could exploit the trade off to reduce unemployment at a small cost of additional inflation then the natural rate revolution of friedman phelps and lucas overturned the policy exploitable trade off in favour of long run monetary neutrality those who had implemented the econometric version of the trade off pc in the 1960s reeled in disbelief when sargent demonstrated the logical failure of their test of neutrality and finally were condemned to the wreckage of keynesian economics by lucas and sargent following the twist of the inflation unemployment correlation from negative in the 1960s to positive in the 1970s the architects of neutrality and the opponents of the keynesian trade off emerged triumphant with two major caveats that their own models based on information barriers were unconvincing and that their core result that business cycles were driven by monetary or price surprises floundered without supporting evidence after 1975 the evolution of the pc literature split in two directions each of which has largely failed to recognize the other s contributions section ii reviews the left fork of the road the revival of the pc trade off in a coherent and integrated dynamic aggregate supply and demand framework that emerged in the late 1970s in econometric tests in theoretical contributions and in intermediate macro textbooks this approach which i have called mainstream is resolutely keynesian because the inflation rate is dominated by persistence and inertia in the form of long lags on past inflation an important difference between the mainstream approach and other post 1975 developments is that the role of past inflation is not limited to the formation of expectations but also includes a pure persistence effect due to fixed duration wage and price contracts and lags between

searching for a will o the wisp an empirical study of the nairu in canada abstract this paper demonstrates the uncertainty surrounding estimates of the non accelerating inflation rate of unemployment nairu a reduced form phillips curve is used to develop a generic model of the nairu which nests competing hypotheses about the specific form of the inflation unemployment relationship empirical results for the canadian economy show that the range of prime age male nairu s generated by statistically satisfactory and economically reasonable estimating equations covers almost the entire range of canadian post war prime age male unemployment experience estimates of the nairu depend heavily on the form of the estimating equation the operational definition of key variables and the data sample period

a theory based state dependent phillips curve and its estimation to explain the existing empirical irregularity about the slope of a phillips curve this article provides a model of imperfect competition to short that the slope of a phillips curve is shock dependent we empirically apply a state space markov switching model to examine the impact of inflation surprise on the unemployment gap resulting in the state dependent phillips curve fitting quite well our empirical evidence indicates that an unexpected monetary expansion does produce effects in reducing unemployment rates and that supply shocks should not be ignored in estimating the phillips curve because they dominate demand shocks in several nonoil shock periods jel c51 e24 e52 i introduction it is well known that a downward sloping short run phillips curve implies a trade off between the inflation rate and unemployment rate however empirical findings point out that the slope of the phillips curve depends on the selected sample periods 1 does any theoretical model explain the changes in the slope of a short run phillips curve as displayed in the data can we find empirical support for our model that implies a slope changeable phillips curve to answer these questions this article provides a theoretical model implying that the slope of the phillips curve is shock dependent we then apply a state space markov switching model to investigate the empirical support of the theoretical model although a stable negative short run phillips curve is crucial for producing inflation forecasts in policy making institutions there is no general consensus about the negative slope of the phillips curve in empirical literature 2 one of the explanations to the previous empirical irregularity as suggested by king and watson 1994 is that the relationship between unemployment and inflation is shock dependent which means that the slope of a phillips curve relies on the dominance of the demand or supply shocks therefore the conventional single equation regression based on the state independent framework is not appropriate apart from neglecting the state dependent characteristic of the phillips curve there are several other drawbacks for conventional empirical studies when investigating the phillips curve first many articles assume that forecast errors of inflation are homoscedastic which is challenged in the literature the homoscedastic assumption is debatable because several studies such as engle 1983 jansen 1989 evans 1991 and brunner and hess 1993 point out significant heteroscedasticity in the u s inflation rate arch or garch type models provide estimates of how the conditional variance of inflation varies over time within a given structure and therefore they ignore the possibility of structural changes caused by changing regimes a markov switching heteroscedasticity model is an alternative that allows regime changes in the variance structure instead of applying arch type models to estimate the time varying conditional variance of inflation within a given structure this article takes into account the influence of regime changes on inflation s variance we apply the state dependent conditional heteroscedasticity approach provided by brunner and hess 1993 and evans and wachtel 1993 to estimate the forecasting errors of inflation the second drawback is a constant natural rate assumption the unemployment gap is the difference between the unemployment rate and the natural rate conventional literature assumes a constant natural rate which is challenged theoretically and empirically as stated by gordon 1997 the existence of unionization unemployment insurance programs and labor force demographics leads to a highly persistent unemployment rate we therefore assume that the unobservable natural rate is time varying and behaves in accordance with the hysteresis of unemployment rates 3 recent empirical works of a regime switching approach on the phillips curve have focused on whether the relationship between inflation and unemployment rates is nonlinear as in ferri et al

is the nairu more useful in forecasting inflation than the natural rate of unemployment recent studies have indicated that the terms nairu non accelerating inflation rate of unemployment and natural rate of unemployment are not interchangeable while nairu is an empirical macroeconomic relationship estimated via a phillips curve the natural rate is an equilibrium condition in the labour market reflecting the market s microeconomic features this study evaluates comparatively the inflation forecasting power of alternative time varying estimates of the natural rate of unemployment relative to the nairu the natural rate of unemployment in the usa since the second world war is estimated three alternative methods are utilized the kalman filter a structural determinants approach and the hodrick prescott filter the section that follows assesses how each estimator of the natural rate compares with the others as well as with the nairu derived from a phillips curve in forecasting inflationary changes in the usa in the second half of the twentieth century the analysis reveals that th

ownership and growth this article suggests how state enterprises can be incorporated into the theoretical and empirical growth literature specifically it shows that if state enterprises are less efficient than private firms invest less employ less skilled labor and are less eager to adopt new technology then a large state enterprise sector tends to be associated with slow economic growth all else remaining the same the empirical evidence for 1978 92 indicates that through a mixture of these channels an increase in the share of state enterprises in employment by one standard deviation could reduce per capita growth by one to two percentage points a year from one country to another

testing for time variation in an unobserved components model for the u s economy abstract this paper analyzes the amount of time variation in the parameters of a reduced form empirical macroeconomic model for the u s economy we decompose output inflation and unemployment in their stochastic trend and business cycle gap components with the latter linked through the phillips curve and okun s law a novel bayesian model selection procedure is used to test which parameters vary over time and which components exhibit stochastic volatility using data from 1959q2 to 2014q3 we find substantial time variation in okun s law while the phillips curve slope appears to be stable stochastic volatility is found to be important for cyclical shocks to the economy while the volatility of permanent shocks remains stable

discriminant characteristics of us banks acquired with or without federal assistance abstract an extensive literature review of statistical studies on merger acquisition and takeover activities in various sectors is presented it reveals a large number of efforts models and pitfalls to classify and predict acquired or bankrupt vs non acquired or healthy firms in this study we considered twenty endogenous bank variables in order to determine the most important characteristics that differentiate us bank mergers acquisitions with or without federal assistance we developed several logistic regression models with only three to five significant variables which classified correctly about 93 of the 299 actual 1987 1988 cases and 89 in the 56 case 1989 holdout sample

has greater competition restrained u s inflation this paper shows how increased goods market competition affects the behavior of inflation in a multisector economy by raising the price elasticity of demand increased goods market competition theoretically lowers inflation and makes the aggregate price level less sensitive to aggregate demand shocks we find that proxies for the aggregate degree of goods market competition are statistically and economically significant in short run phillips curve models of core inflation evidence indicates that heightened goods market competition has flattened the slope of the short run expectations augmented phillips curve and slightly lowered the nonaccelerating inflation rate of unemployment nairu

does the new economy measure up to the great inventions of the past abstract during the four years 1995 99 u s productivity growth experienced a strong revival and achieved growth rates exceeding that of the golden age of 1913 72 accordingly many observers have declared the new economy to be an industrial revolution even more important than the second industrial revolution of 1860 1900 which made the golden age of productivity growth possible this paper dissects the recent productivity revival subtracts out a cyclical component and concludes that there is no revival of the productivity growth trend in the 88 percent of the private economy lying outside of the durables manufacturing sector the paper explains this surprising finding by pointing to limitations in computers and the internet in comparison with the great inventions of the past

exploring the income distribution business cycle dynamics abstract we document the business cycle behavior of the us income distribution and explore the extent to which unemployment spells and cyclically moving factor shares account for this behavior by analyzing four heterogeneous household extensions of the neoclassical growth model we conclude i that partitioning the population into five types subject to type specific employment processes seems to be enough to account for most aspects of the us income distribution business cycle dynamics ii that the role played by cyclically moving factor shares is small and iii that the income distribution business cycle dynamics may be essentially independent from the significant part of the observed wealth concentration that these model worlds fail to account for

an alternative demand indicator the non accelerating inflation rate of capacity utilization this article examines the usefulness of the naircu the non accelerating inflation rate of capacity utilization as a demand indicator of inflation for eight european countries so far the naircu has been estimated for the usa only where it serves as a useful indicator for inflation in most european countries deviations from the equilibrium level of capacity utilization influence inflation significantly further the results not only indicate that in more recent periods the naircu has shifted upward indicating higher efficiency of the production process but also that confidence intervals have increased over time reducing the usefulness of the naircu somewhat

measuring the nairu evidence from seven economies several specifications of state space models are used to obtain estimates of the nairu for the g7 except japan plus australia over the past 28 years a phillips curve type regression is shown to deliver estimates that do not mimic low frequency movements in unemployment rates even when a drift is included in the specification of the nairu standard errors around the estimates are extremely large using information about the behavior of unemployment in addition to inflation alleviates both these shortcomings

unemployment benefits as a substitute for a conservative central banker in the many years since their introduction positive theories of inflation have rarely been tested this paper documents a negative relationship between inflation and the welfare state proxied by the parameters of the unemployment benefit program that is to be expected in such theories because unemployment benefits make the monetary authority less concerned about the plight of the unemployed building a welfare state has a similar effect to appointing a conservative central banker the relationship holds in a panel of 20 oecd countries over the period 1961 1992 a region where romer finds no evidence of commitment problems it holds controlling for country and time fixed effects country specific time trends other covariates and using a decadal panel interpreted as causal the estimated effect is economically large a 1 standard deviation decrease in benefit duration is predicted to add 1 4 percentage points onto inflation or 31 of the standard deviation in inflation

monetary policy when potential output is uncertain understanding the growth gamble of the 1990s abstract t he fed kept interest rates low and essentially unchanged during the late 1990s despite a booming economy and record low unemployment these interest rates were accommodative by historical standards nonetheless inflation remained low how did the fed succeed in sustaining rapid economic growth without fueling inflation and inflationary expectations in retrospect it is evident that the productive capacity of the economy increased yet as events unfolded there was uncertainty about the expansion of the capacity of the economy and therefore about the sustainability of the fed s policy this paper provides an explanation for the success of the fed in accommodating growth with stable inflation in the late 1990s it shows that if the central bank is committed to reverse policy errors it makes because of unwarranted optimism inflation can remain in check even if the central bank keeps interest rates low because of this optimism in particular a price level target which is a simple way to model a commitment to offset errors can serve to anchor inflation even if the public does not share the central bank s optimism about shifts in potential output the paper shows that price level targeting is superior to inflation targeting in a wide range of situations the paper also provides econometric evidence that in contrast to earlier periods the fed has recently put substantial weight on the price level in setting interest rates moreover it shows that cpi announcement surprises lead to reversion in the price level finally it provides textual evidence that alan greenspan puts relatively more weight on the price level than inflation

does the nairu have the right dynamics the nairu view of the relationship between inflation and the unemployment rate is that there is a value of the unemployment rate the nairu below which the price level forever accelerates and above which the price level forever decelerates this view imposes two important restrictions on the dynamics of the price process this can be seen by examining a simple version of the nairu equation

macroeconomic forecasting using diffusion indexes this article studies forecasting a macroeconomic time series variable using a large number of predictors the predictors are summarized using a small number of indexes constructed by principal component analysis an approximate dynamic factor model serves as the statistical framework for the estimation of the indexes and construction of the forecasts the method is used to construct 6 12 and 24 monthahead forecasts for eight monthly u s macroeconomic time series using 215 predictors in simulated real time from 1970 through 1998 during this sample period these new forecasts outperformed univariate autoregressions small vector autoregressions and leading indicator models

what is new keynesian economics this research was supported by the national science foundation i am grateful to george williams for help with the data and to steven allen laurence ball olivier j blanchard timothy bresnahan charles calomiris dennis carlton robert chirinko russell cooper stanley fischer herschel grossman r glenn hubbard david laidler john leahy assar lindbeck n gregory mankiw david romer julio rotemberg dennis snower john taylor andrew weiss and two anonymous referees for comments on one or more earlier drafts i am also indebted to michael parkin and edmund s phelps for helping to establish the etymology of the phrase new keynesian

risk management nonlinearity and aggressiveness in monetary policy the case of the us fed we contribute to the empirical literature on the risk management approach to monetary policy by estimating regime switching models where the strength of the response of monetary policy to macroeconomic conditions depends on the level of risk associated with the inflation outlook and risk in financial markets using quarterly data for the greenspan period we find that i risk in the inflation outlook and in financial markets are a more powerful driver of monetary policy regime changes than variables typically suggested in the literature such as the level of inflation and the output gap ii estimation of regime switching models shows that the response of the us fed to the inflation outlook is invariant across policy regimes iii however in periods of high economic risk monetary policy tends to respond more aggressively to the output gap and the degree of inertia tends to be lower than in normal circumstances and iv the us fed is estimated to have responded aggressively to the output gap in the late 1980s and beginning of the 1990s and in the late 1990s and early 2000s these results are consistent with mishkin 2008 s view that in periods of high economic risk monetary authorities should respond aggressively to changes in macroeconomic conditions while the degree of inertia should be lower than in normal circumstances

trade capital accumulation and structural unemployment an empirical study of the singapore economy the past three and a half decades witnessed a distinctly declining trend in singapore s unemployment rate which dropped from an average annual rate of 7 85 percent in 1966 70 to 2 74 percent in 1991 2000 the authors seek to identify and empirically examine the factors that have influenced singapore s unemployment rate in an environment of low and stable inflation they incorporate a union bargaining framework into a standard factors trade model in which an increase in the relative price or capital stock in the export sector raises the demand wage that firms can afford to pay relative to workers fall back income and consequently lowers equilibrium unemployment the magnitude of the effects depends on the fall back income the weight unions attach to employment and the elasticity of labor demand which the authors estimate using data on singapore the results show that labor unions in singapore care more about employment than wages together with a small fall back income and elastic labor demand the authors show that given the same percentage change in relative export prices and capital accumulation in the export sector the effect on unemployment is larger for the former however the empirical importance of capital accumulation in the export sector dominates increases in relative export prices in reducing unemployment since the manufacturing sector experienced a tremendous increase in capital inputs throughout the sample period whereas the relative price of exports experienced a far smaller increase and only in the early part of the sample period the authors conclude that through a very open trading regime the tremendous increase in capital stock of the exporting sector has been the main reason behind singapore s declining unemployment rate

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

a time varying natural rate of interest for the euro area abstract we estimate a time varying natural rate of interest tvnri for a synthetic euro area over the period 1979q1 2004q4 using a small macroeconomic model broadly following a methodology developed by laubach and williams 2003 measuring the natural rate of interest the review of economics and statistics 85 4 1063 1070 for the united states the kalman filter simultaneously estimates the output gap and the natural rate of interest our identifying assumptions include a close relationship between the tvnri and the low frequency fluctuations of potential output growth the difference between the real rate of interest and its estimated natural level offers valuable insights into the monetary policy stance over the last two decades and a half

asset prices exchange rates and the current account this paper analyses the role of asset prices in comparison to other factors in particular exchange rates as a driver of the us trade balance it employs a bayesian structural var model that requires imposing only a minimum of economically meaningful sign restrictions we find that equity market shocks and housing price shocks have been major determinants of the us current account in the past accounting for up to 30 of the movements of the us trade balance at a horizon of 20 quarters by contrast shocks to the real exchange rate have been less relevant explaining about 9 and exerting a more temporary effect on the us trade balance our findings suggest that large exchange rate movements may not necessarily be the key element of an adjustment of today s large current account imbalances and that in particular relative global asset price changes could be a potent source of adjustment

a bounded model of time variation in trend inflation nairu and the phillips curve joshua chan would like to acknowledge financial support bythe australian research council via a discovery early career researcher award de150100795

phillips curves and unemployment dynamics a critique and a holistic perspective the conventional wisdom that inflation and unemployment are unrelated in the long run implies that these phenomena can be analysed by separate branches of economics the macro literature tries to explain inflation dynamics and estimates the nairu the labour macro literature tries to explain unemployment dynamics and determine the real economic factors that drive the natural rate of unemployment we show that the orthodox view that the new keynesian phillips curve is vertical in the long run and that it cannot generate substantial inflation persistence relies on the implausible assumption of a zero interest rate in the light of these results we argue that a holistic framework is needed to jointly explain the evolution of inflation and unemployment

price inertia and policy ineffectiveness in the united states 1890 1980 this paper introduces a new approach to the empirical testing of the lucas sargent wallace lsw policy ineffectiveness proposition which compares the lsw hypothesis with an alternative that states that prices respond fully in the long run but only gradually in the short run to nominal aggregate demand disturbances the empirical equations estimated for a new set of quarterly data extending back to 1890 exhibit uniformly high responses of real output and low responses of price changes to anticipated changes in nominal gnp the paper compares and tests three alternative methods of introducing persistence effects into the lsw framework

the effects of monetary policy on unemployment dynamics under model uncertainty evidence from the united states and the euro area this paper explores the role that the imperfect knowledge of the structure of the economy plays in the uncertainty surrounding the effects of rule based monetary policy on unemployment dynamics in the euro area and the united states we employ a bayesian model averaging procedure on a wide range of models which differ in several dimensions to account for the uncertainty that the policymaker faces when setting the monetary policy and evaluating its effect on real economy we find evidence of a high degree of dispersion across models in both policy rule parameters and impulse response functions moreover monetary policy shocks have very similar recessionary effects on the two economies with a different role played by the participation rate in the transmission mechanism finally we show that a policymaker who does not take model uncertainty into account and selects the results on the basis of a single model may come to misleading conclusions not only about the transmission mechanism but also about the differences between the euro area and the united states which are on average essentially small

mismatch shocks and unemployment during the great recession summary we investigate the macroeconomic consequences of fluctuations in the effectiveness of the labor market matching process with a focus on the great recession we conduct our analysis in the context of an estimated medium scale dynamic stochastic general equilibrium model with sticky prices and equilibrium search unemployment that features a shock to the matching efficiency or mismatch shock we find that this shock is not important for unemployment fluctuations in normal times however it plays a somewhat larger role during the great recession when it contributes to raise the actual unemployment rate by around 1 3 percentage points and the natural rate by around 2 percentage points the mismatch shock is the dominant driver of the natural rate of unemployment and explains part of the recent shift of the beveridge curve copyright 2016 john wiley sons ltd

the nairu unemployment and monetary policy this paper examines the precision of conventional estimates of the nairu and the role of the nairu and unemployment in forecasting inflation the authors find that although there is a clear empirical phillips relation the nairu is imprecisely estimated forecasts of inflation are insensitive to the nairu and there are other leading indicators of inflation that are at least as good as unemployment this suggests deemphasizing the nairu in public discourse about monetary policy and instead drawing on a richer variety of leading indicators of inflation