generating real persistent effects of monetary shocks how much nominal rigidity do we really need abstract this paper attempts to assess whether money can generate persistent economic fluctuations in dynamic general equilibrium models of the business cycle we show that a small nominal friction in the goods market can make the response of output to monetary shocks large and persistent if it is amplified by real wage rigidity in the labor market we also argue that for plausible levels of real wage rigidity a small degree of nominal stickiness is sufficient for money to produce economic fluctuations as persistent as those observed in the data

does global inflation help forecast inflation in industrialized countries ciccarelli and mojon cm review of economics and statistics 2010 92 3 524 535 propose an inflation forecasting model incorporating a global inflation factor and show that it consistently beats several standard forecasting benchmarks we show that cm s global inflation model does not improve upon the atkeson and ohanian ao federal reserve bank of minneapolis quarterly review 2001 25 1 2 11 naive benchmark however we find that augmenting the ao model with a global inflation factor improves forecast accuracy at longer horizons supporting cm s claim about the usefulness of global inflation

a simple model of disinflation and the optimality of doing nothing abstract this paper analyses the optimal monetary policy of a government facing an election whose disinflationary abilities are uncertain under the assumption that reducing inflation is costly because of backward looking contracts it is shown that if the government likes to be in power it can choose to do nothing on the inflation front in order to avoid risking electoral defeat should disinflation prove too costly the costs of inflation reduction are worth bearing if initial inflation is sufficiently high therefore it is possible to observe quick disinflations that however stop short of low inflation

consumer search incomplete exchange rate pass through and optimal interest rate policy this paper studies utility maximizing monetary policy in a two country economy with consumer search frictions search frictions provide a microfoundation for incomplete exchange rate pass through and international deviations from the law of one price lop i show that optimal interest rate policy targets deviations from the lop and acts to mitigate the effect of search frictions in a quantitative setting with internationally correlated technology and preference shocks optimal policy generates positive cross country correlation of nominal interest rates

euler equations and money market interest rates a challenge for monetary policy models standard macroeconomic models equate the money market rate targeted by the central bank with the interest rate implied by a consumption euler equation we use u s data to calculate the interest rates implied by euler equations derived from a number of specifications of household preferences correlations between these euler equation rates and the federal funds rate are generally negative regression results and impulse response functions imply that the spreads between the euler equation rates and the federal funds rate are systematically linked to the stance of monetary policy our findings pose a fundamental challenge for models that equate the two

disinflation with imperfect credibility abstract this paper presents a theory of the real effects of disinflation as in new keynesian models price adjustment iis staggered across firms as in new classical models credibility is imperfect the monetary authority may not complete a promised disinflation the combination of imperfect credibility and staggering yields more plausible results than either of these assumptions alone in particular an announced disinflation reduces expected output if credibility is sufficiently low

avoiding some costs of inflation and crawling toward hyperinflation the case of the brazilian domestic currency substitute the pattern of a classical hyperinflation is an acute acceleration of the inflation level accompanied by rapid substitution away from domestic currency until the real plan 1 july 1994 however brazil experienced inflation levels well above 1000 a year since 1988 without entering the classical hyperinflation path two elements played key roles in differentiating the brazilian case from the classical hyperinflations indexation and the provision of a reliable domestic currency substitute i e the provision of liquidity to interest bearing assets this paper claims that the existence of this domestic currency substitute was the main source of both the inability of the brazilian central bank to fight inflation and of the unwillingness of brazilians to face the costs of such a fight the provision of the domestic currency substitute through the banking sector is modeled and the main macroeconomic consequences of this monetary regime are derived those are the lack of a nominal anchor for the price system due to the passive monetary policy and the non controllability of seigniorage unlike traditional models of hyperinflations

inflation and welfare in a monetary economy it is in everyone s private interest to try to get someone else to hold non interest bearing cash and reserves but someone has to hold it all so these efforts must simply cancel out all of us spend several hours per year in this effort and employ thousands of talented and highly trained people to help us these person hours are simply thrown away wasted on a task that should not have to be performed at all

general equilibrium with endogenously incomplete financial markets abstract the present paper studies a class of general equilibrium economies with imperfectly competitive financial intermediaries and price taking consumers intermediaries optimally choose the securities they issue and the bid ask spread they charge financial intermediation is costly and hence markets are endogenously incomplete an appropriate equilibrium concept is developed and existence is proved competitive equilibria for this class of economies display full indexation of securities payoffs and monetary neutrality even if intermediaries are restricted to issue nominal securities and financial markets turn out to be incomplete this is in sharp contrast with the indeterminacy and non neutrality results established in the literature for incomplete markets economies with exogenously given nominal securities journal of economic literaturclassification numbers d52 g20

central bank independence disinflations and the sacrifice ratio it is widely believed that independent central banks produce costless low inflation yet a few recent studies indicate that more independent central banks are associated with higher output costs during disinflations this carries the implication that there are indeed costs associated with autonomy the author develops and extends those analyses in two important ways first he shows that central bank independence cbi affects both the output and the unemployment costs of disinflation because central banks control only monetary policy they should not exert a differential effect on the two ratios and there should be a positive relationship between independence and both the unemployment and the output costs of disinflations second by including a range of potentially significant political and institutional controls the author demonstrates both the importance of political and institutional determinants of the costs of disinflation and that cbi is a robust predictor of those costs

housing dynamics over the business cycle housing construction measured by housing starts leads gdp in a number of countries measured as residential investment the lead is observed only in the united states and canada elsewhere residential investment is coincident variants of existing theory however predict housing construction lagging gdp in all countries in the sample nominal interest rates are low ahead of gdp peaks introducing long term nominal mortgages and an estimated process for nominal interest rates into a standard model aligns the theory with observations on starts as mortgages transmit nominal rates into real housing costs longer time to build makes residential investment cyclically coincident abstract from author

globalisation and inflation in this paper charles bean executive director chief economist and member of the monetary policy committee of the bank of england discusses the impact of globalisation on the industrialised countries and in particular the inflation process he explains how globalisation has affected the returns to labour and capital and the location of production in the world economy globalisation has also influenced relative prices lowering the prices of imported goods but boosting the prices of oil and other commodities and it may have changed the inflationary process flattening the trade off between domestic activity and inflation through a number of channels although globalisation has provided a benign backdrop for monetary policy it poses a number of challenges going forward the beneficial tailwind has waned and changes in product and labour markets have altered the determination of prices and wages in ways central bankers do not yet fully understand

international real business cycles among heterogeneous countries abstract business cycle statistics differ widely across countries for some aggregates especially for trade related variables part of these variations relates to the size of the economies and to their distance from each other this paper asks whether a three country model is able to display the marked diversity of business cycle statistics observed across countries the model is calibrated to two specific examples canada and switzerland our findings are that most of the diversity of the business cycles can be accounted for by size and distance and that trade is not a strong channel of diffusion of cycles

staggered price setting translog preferences and endogenous persistence abstract this paper generates persistent real effects of a monetary disturbance in the context of staggered price setters the model combines two related and reinforcing features a translog demand structure and a particular input output production structure these features offer a rationale why a firm when computing its own optimal contract price is influenced by the prices set in other overlapping contracts practically the two features interact in a positive manner and provide a way to generate significant endogenous persistence

measuring world business cycles using kalman filtering and dynamic factor analysis the authors decompose aggregate output consumption and investment for the g7 countries into factors that are 1 common across all countries and aggregates 2 common across aggregates within a country and 3 specific to each individual aggregate in quarterly data for the period 1970 through 1993 fluctuations in all aggregates contain world and country specific common components that are both statistically significant and quantitatively important the authors find that the world and country specific common components play different roles in different business cycle episodes for each of the seven countries and that either may be dominant during a particular episode copyright 1997 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

evolving international inflation dynamics world and country specific factors inflation in the most industrialized economies of the world has an important international common component that accounts for the historical decline in the national rates country specific conditions explain the rise in inflation volatility of the late 1970s and early 1980s and the subsequent fall during the last decade the world contribution to the variance of inflation has become increasingly more important than national contributions monetary policy was a relevant source of country specific fluctuations our conclusions are based on a time varying dynamic factor model applied to a large panel of inflation indicators

lessons from experiences with high inflation in economies where price control has been the rule the most serious concern may be recognition of the inflation problem beyond the initial correction of subsidies there is the broader issue of the risk of a serious inflation this article looks at the problem of high inflation in developing countries in europe and latin america and draws lessons from historical experience it analyzes the dynamics of the interaction among deficit finance institutional innovation in financial markets dollarization and the s hortening of wage contracts in high inflation situations when stabilization is undertaken there is neither immediate spontaneous resumption of longer adjustment periods for wages and prices nor instant increase of real money demand to noninflationary levels incomes policy freezing exchange rates wages and prices is advocated as an effective supplement to the inevitable budget cut to make up for institutional inertia and facilitate the start of the stabilization process

oil prices and the terms of trade abstract the combination of substantial terms of trade variability and unstable correlation patterns of trade prices with output and trade volumes has led some to suggest a break in the link between trade volumes and prices we find that oil accounts for much of the variation in the terms of trade over the last twenty five years and its quantitative role varies significantly over time and since our dynamic general equilibrium model predicts that the economy responds differently to oil supply shocks than to other shocks changes in their relative importance helps to account for the unstable correlations in the data

international evidence on the historical properties of business cycles we contrast properties of real quantities with those of price levels and stocks of money for ten countries over the last century although the magnitude of output fluctuations has varied across countries and periods relations among real quantities have been remarkably uniform properties of price levels however exhibit striking differences between periods inflation rates are more persistent after world war ii than before and price level fluctuations are typically procyclical before world war ii and countercyclical afterward fluctuations in money are less highly correlated with output in the postwar period but are no more persistent than in earlier periods jel e32 e31

international real business cycles we ask whether a two country real business cycle model can account simultaneously for domestic and international aspects of business cycles with this question in mind we document a number of discrepancies between theory and data the most striking discrepancy concerns the correlations of consumption and output across countries in the data outputs are generally more highly correlated across countries than consumptions in the model we see the opposite

inflation debt and indexation these twelve essays cover topics on the frontier of indexation and practice an often proposed and debated tool of economic policy they range from highly theoretical discussions to practical experiences in brazil and europe rudiger dombush is ford international professor of economics at mit mario henrique simonsen is director of the postgraduate school of economics getulio vargas foundation rio de janeiro and former minister of finance and planning brazil

time varying risk interest rates and exchange rates in general equilibrium under mild assumptions the data indicate that time varying risk is the primary force driving nominal interest rate differentials on currency denominated bonds this finding is an immediate implication of the fact that exchange rates are roughly random walks a general equilibrium monetary model with an endogenous source of risk variation a variable degree of asset market segmentation can produce key features of actual interest rates and exchange rates in this model the endogenous segmentation arises from a fixed cost for agents to exchange money for assets as inflation varies so does the benefit of asset market participation and that changes the fraction of agents participating these effects lead the risk premium to vary systematically with the level of inflation this model produces variation in the risk premium even though the fundamental shocks have constant conditional variances

production chains and general equilibrium aggregate dynamics abstract recent empirical studies reveal that monetary shocks can cause persistent fluctuations in aggregate output in this paper we propose a mechanism to help generate such persistence our dynamic stochastic general equilibrium model features a vertical input output structure with staggered price contracts at each stage of production working through the input output relations and the timing of firms pricing decisions the model generates persistent fluctuations in aggregate output and the observed patterns of price dynamics following a monetary shock output responses are more persistent the greater the number of stages of production and the larger the share of intermediate inputs with a sufficient number of stages the persistence is arbitrarily large if the share of intermediate inputs is one at all but finitely many stages

international business cycles the authors estimate a dynamic two country model in which economic fluctuations are driven by a worldwide supply shock country specific supply shocks and relative fiscal money and preference shocks identification is achieved using only long run restrictions based on a theoretical model the main results are 1 supply shocks particularly country specific ones are very important in generating international business cycles and 2 although the post 1973 flexible exchange rate period has been inherently more volatile there are no differences in transmission properties of economic disturbances across exchange rate regimes for the endogenous variables they focus on copyright 1993 by american economic association

international business cycles world region and country specific factors the paper investigates the common dynamic properties of business cycle fluctuations across countries regions and the world we employ a bayesian dynamic latent factor model to estimate common components in macroeconomic aggregates output consumption and investment in a 60 country sample covering seven regions of the world the results indicate that a common world factor is an important source of volatility for aggregates in most countries providing evidence for a world business cycle we find that region specific factors play only a minor role in explaining fluctuations in economic activity we also document similarities and differences across regions countries and aggregates jel f41 e32 c11 c32

explaining international comovements of output and asset returns the role of money and nominal rigidities abstract output and asset returns are highly positively correlated across the u s and the remaining major industrialized countries standard business cycle models that assume flexible prices and wages in the real business cycle rbc tradition have great difficulties explaining this fact this paper presents a dynamic optimizing stochastic general equilibrium model of a two country world with sticky nominal prices and wages the structure here generates cross country correlations of output and returns that are markedly higher and hence closer to the data than the cross country correlations that obtain when flexible prices and wages are assumed

dynamics of the trade balance and the terms of trade the j curve the authors provide a theoretical interpretation of two features of international data the countercyclical movements in net exports and the tendency for the trade balance to be negatively correlated with current and future movements in terms of trade but positively correlated with past movements they document the same properties in a two country stochastic growth model in which trade fluctuations reflect in large part the dynamics of capital formation the authors find that their general equilibrium perspective is essential the relation between the trade balance and the terms of trade depends critically on the source of fluctuations copyright 1994 by american economic association

globally correlated nominal fluctuations fluctuations in nominal variables aggregate price levels and nominal interest rates are documented to be substantially more synchronized across countries at business cycle frequencies than fluctuations in real output a transparent mechanism accounting for this striking feature of the nominal environment is described and quantitatively evaluated it is based on the interaction between small cross country spillovers of shocks taylor rules and domestic no arbitrage conditions the mechanism is robust to various parameterizations and extensions aligning the model with other important aspects of domestic and international fluctuations furthermore its key features are consistent with cross country forecasts from consensus survey

wage indexation and output stability revisited since gray 1976 and fischer 1977 the accepted view is that wage indexation stabilizes output when shocks are nominal and destabilizes output when shocks are real this paper examines this proposition s validity when wage indexation is based on lagged inflation it shows that i in a gray fischer economy with plausible parameters indexing wages to lagged inflation destabilizes output regardless of the type of shocks ii the gray fischer result may be restored if nominal shocks have a strong direct effect on prices given wages iii wage indexation to lagged inflation can be neutral for output stability if monetary policy is accommodative

cointegration and unit roots this paper provides an updated survey of a burgeoning literature on testing estimation and model specification in the presence of integrated variables integrated variables are a specific class of non stationary variables which seem to characterise faithfully the properties of many macroeconomic time series the analysis of cointegration develops out of the existence of unit roots and offers a generic route to test the validity of the equilibrium predictions of economic theories special emphasis is put on the empirical researcher s point of view

housing dynamics over the business cycle housing dynamics over the business cycle over the u s business cycle fluctuations in residential investment are well known to systematically lead gdp these dynamics are documented here to be specific to the u s and canada in other developed economies residential investment is broadly coincident with gdp nonresidential investment has the opposite dynamics being coincident with or lagging gdp these observations are in sharp contrast with the properties of nearly all business cycle models with disaggregated investment including mortgages and interest rate dynamics aligns the theory more closely with u s observations longer time to build in housing construction makes residential investment coincident with output

money prices interest rates and the business cycle the mechanisms governing the relationship of money prices and interest rates to the business cycle are the most studied and most disputed topics in macroeconomics in this paper we first document key empirical aspects of this relationship we then ask how well three benchmark rational expectations macroeconomic models a real business cycle model a sticky price model and a liquidity effect model account for these central facts while the models have diverse successses and failures none can account for the fact that real and nom inal interest rates are inverted leading indicators of real economic activity that is none of the models captures the post war u s business cycle fact that a high real or nominal interest rate in the current quarter predicts a low level of real economic activity two to four quarters in the future i introduction the positive correlation of monetary aggregates and real economic activity over the course of many business cycles is a key empirical fact about the u s economy indeed the dynamic dimension of this covariation is so strong and stable that a monetary variable has long been included in the commerce department s index of leading economic indica tors while this pattern of cyclical comovement is widely agreed upon its interpretation is not some macroeconomists view money as purely passive with a positive response to varying levels of economic activity producing the positive correlation others view changes in the quantity of money as an important perhaps dominant source of economic fluctua tions frequently the real effects of monetary changes are suggested to arise from frictions in commodity labor or financial markets in economic theories that describe the influence of these frictions the transmission mechanism from monetary changes to real activity is typically viewed as involving interest rates and the price level the primary goal of this paper is to evaluate three models that explain the link between money prices interest rates and the business cycle we do this in three steps first we docu ment the cyclical behavior of these variables in the united states over the postwar period second we construct three quantitative rational expectations models of macroeconomic activity i a real business cycle model with endogenous money ii a model of commodity market frictions with mon etary non neutralities arising from gradual adjustment of goods prices and iii a model of financial market frictions with monetary non neutralities arising from gradual adjust ments of portfolios finally we compare the models predic tion for the business cycle behavior of money prices and interest rates with the data in exploring the predictions of these models we take the stock of money to be one of several exogenous variables in the system all of our models are capable of generating a forecasting role for money relative to real economic activity similar to that found in the u s data in the real business model monetary changes can forecast real activity because productivity is related to many underlying sources of shocks and because these real shocks also affect the money stock in the models with sticky prices and liquidity effects short hand names for the models with frictions in the com modity and financial markets monetary changes have an additional direct positive effect on aggregate output the outline of the paper is as follows section ii describes the data and documents its business cycle characteristics section iii outlines the three macroeconomic models and develops the particular quantitative versions of the models used in our analysis our main empirical results are pre sented in section iv and section v summarizes our results and concludes

real exchange rates and the pattern of trade comparative dynamics for north and south abstract using a two country model of imperfect competition this paper examines cross sectional implications for the time series behavior of real exchange rates across different patterns of trade under intersectoral trade price setters display less interaction in their pricing decisions across national boundaries allowing for greater deviation and weaker mean reversion in relative prices conversely with intra industry trade greater price linkages between similar countries trading in similar goods generate lower pass through and less real exchange rate persistence the pattern of trade is shown to essentially alter the degree of domestic price stickiness which in turn affects the self correcting mechanism of an open economy

intergenerational risk sharing and fiscal policy abstract risk sharing implications of alternative fiscal policies are compared in a stochastic production economy with overlapping generations ex ante efficiency is shown to be achievable with optimal transfers regardless of distributional concerns for crra preferences stylized real world policies notably safe debt and safe pensions are found inefficient in the direction of imposing not enough productivity risk on retirees and too much on future generations safe transfers can be rationalized as efficient if preferences display age increasing risk aversion such as habit formation the ubiquity of safe transfers suggests that governments treat the young as more risk tolerant than older cohorts

the role of social security in an economy with asymmetric information and financial intermediaries abstract we study an overlapping generations model with production asymmetric information and competitive financial intermediaries social security may be beneficial even when it should not be used under full information unless credit rationing emerges with pooling contracts in this case social security could be welfare reducing even when the safe rate of return falls short of population growth we provide a full characterization of constrained pareto efficient allocations and prove that when the expected marginal product exceeds population growth and high risk firms have a low probability of default no tax transfer policy can support these allocations as competitive equilibria when equilibria are constrained inefficient optimal contracts are pooling and the optimal stock market value is zero

heterogeneity in price rigidity evidence from a case study using microlevel data we combine two data sets to study price rigidity the first consists of weekly time series of retail wholesale and spot prices for twelve products these time series contain two exogenous cost shocks we find that prices exhibit more rigidity in response to the second shock than the first the second data set consists of all publicly available information about the shocks content analysis of these information reveals that the first shock is larger and more persistent and the market has more information on it than the second we conclude therefore that prices are more flexible in response to cost shocks that are larger that are more persistent and on which market participants have more information

monetary policy and financial spillovers losing traction abstract has financial globalisation compromised central banks effectiveness in managing domestic financial conditions this paper tackles this question by studying the dynamics of bond yields encompassing 31 advanced and emerging market economies to gauge the extent to which external financial conditions complicate the conduct of monetary policy we isolate a contagion component by focusing on comovements in measures of bond return risk premia that are unrelated to domestic economic fundamentals our contagion measure is designed to more accurately capture relative to simple yield correlation spillovers driven by exogenous global shifts in risk preference or appetite in contrast to what simple comovements in bond yields suggest emerging market economies appear to be much less susceptible to global contagion than advanced economies and the overall sensitivities to contagion have not increased after the global financial crisis the extent to which financial spillovers have compromised policy traction thus appears to be lower relative to studies based on common variation in bond yields

price flexibility in channels of distribution evidence from scanner data in this study we empirically examine the extent of price rigidity using a unique store level time series data set consisting of i actual retail transaction prices ii actual wholesale transaction prices which represent both the retailers costs and the prices received by manufacturers and iii a measure of manufacturers costs for 12 goods in two widely used consumer product categories we simultaneously examine the extent of price rigidity for each of the 12 products at both final goods and intermediate goods levels we study two notions of price rigidity employed in the existing literature i the frequency of price changes and ii the response of prices to exogenous cost changes we find that retail prices exhibit remarkable flexibility in terms of both notions of price rigidity i e they change frequently and they seem to respond quickly and fully to cost changes furthermore we find that retail prices respond not just to their direct costs but also to the upstream manufacturers costs which further reinforces the extent of the retail price flexibility at the intermediate goods level of the market in contrast we find relatively more evidence of rigidity in the response of manufacturers prices to cost changes this despite the fact that wholesale prices change frequently and therefore exhibit flexibility according to the first notion of price rigidity

understanding the evolution of world business cycles abstract this paper studies the changes in world business cycles during the period 1960 2003 we employ a bayesian dynamic latent factor model to estimate common and country specific components in the main macroeconomic aggregates output consumption and investment of the g 7 countries we then quantify the relative importance of the common and country components in explaining comovement in each observable aggregate over three distinct time periods the bretton woods bw period 1960 1 1972 2 the period of common shocks 1972 3 1986 2 and the globalization period 1986 3 2003 4 the results indicate that the common g 7 factor explains on average a larger fraction of output consumption and investment volatility in the globalization period than it does in the bw period

the message in north american energy prices how similar is the price behavior of north american natural gas fuel oil and power prices using current state of the art econometric methodology we explore the degree of shared trends across north american energy markets across these markets there appear to be effective arbitraging mechanisms for the price of natural gas and fuel oil but not for the price of electricity

disinflation shocks in the eurozone a dsge perspective we investigate the effects of disinflation policies on key macroeconomic variables using euro area data and structural vector autoregressions svars we identify disinflation shocks as the only shocks that drive nominal variables to a lower long run level we find that in the immediate aftermath of a disinflation shock the euro area enters in a persistent recession we use these dynamic responses to estimate a dsge model with imperfect information about the disinflation shock we find that both nominal and real frictions and monetary policy gradualism have played a prominent role in the recessionary effect of disinflation shocks conversely allowing for imperfect credibility does not yield a better fit except when we shut key model s frictions down

sticky prices the impact of regulation abstract this paper finds that approximately one third of the items in the cpi are governed by price regulations that can slow and add noise to the response of prices to changes in cost or demand conditions consequently regulation is a possible partial explanation of sticky prices in the overall rate of inflation and delayed response to changes in the money supply a survey is used to decompose the cpi into freely determined and regulated sub components evidence is provided that prices in the regulated sector of the economy respond approximately two quarters after prices in the freely determined sector thereby contributing a source of stickiness in overall inflation and in the response of inflation to monetary policy