the international transmission of real business cycles the authors present a stochastic model of two barter economies with production linked by free trade in goods and securities which generates pareto efficient international transmissions of business cycle disturbances each country is inhabi ted by an infinitely lived representative firm and consumer worker and is subject to country specific production shocks the internation al capital market effects perfect pooling of country specific risk c onsumption and output volatility may be higher in trade than under au tarchy as agents can be induced to undertake additional risk in exchange for a higher expected utility copyright 1988 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

the dynamic behavior of the real exchange rate in sticky price models comment in an article published in the american economic review j n steinsson 2008 argues that two sticky price models driven by real shocks can explain the observed persistence volatility and hump shaped impulse response function of the real exchange rate this comment shows first that correcting an error in one of steinsson s models leads to substantially lower persistence and volatility of the real exchange rate second that steinsson s models cannot match real exchange rate volatility relative to output and third that reasonable variations of the model calibration or specification all lead to lower real exchange rate persistence and volatility or both

the consumption real exchange rate anomaly with extensive margins abstract this paper investigates a consumption real exchange rate anomaly from the open macroeconomics literature known as the backus smith puzzle we both analytically and quantitatively examine how an expansion of trade along extensive margins can contribute to the puzzle s resolution our argument is based on 1 a wealth effect due to changes in the number of product varieties 2 statistical inefficiency in measuring the number of product varieties and 3 market incompleteness contrary to complete asset markets which in general feature overly strong risk sharing properties changes in the number of product varieties under incomplete markets may produce a wealth effect under high trade elasticity since statistical agencies systematically fail to capture the welfare impact arising from that changes data consistent terms of trade and real exchange rates tend to appreciate due to this positive wealth effect this provides a realistic correlation between data consistent real exchange rates and consumption

international business cycles and risk sharing with uncertainty shocks and recursive preferences this paper analyzes the effects of output volatility shocks on the dynamics of consumption trade flows and the real exchange rate in a two country two good world with consumption home bias recursive preferences and complete financial markets when the risk aversion coefficient exceeds the inverse of the intertemporal substitution elasticity then an exogenous rise in a country s output volatility triggers a wealth transfer to that country to compensate for the greater riskiness of the country s output stream this risk sharing transfer raises the country s consumption lowers its trade balance and appreciates its real exchange rate in the recursive preferences framework here volatility shocks account for a non negligible share of the fluctuations of net exports net foreign assets and the real exchange rate these shocks help to explain the high empirical volatility of the real exchange rate and the disconnect between relative consumption and the real exchange rate

credit constraints house prices and the impact of life cycle dynamics abstract how does the life cycle impact house price dynamics this paper investigates how equilibrium house prices respond to a tightening in credit constraints under two different but similarly calibrated models one an infinite horizon setting and the other a life cycle environment the main conclusion is that house price dynamics are magnified by the presence of life cycle features two primary explanations stand out the distinction between stocks and flows of mortgage debt in the cross section and the importance of gross housing tenure flows i e churn

planning under incomplete information and the ratchet effect abstract central planning of production is usually performed under asymmetric information the firm in general has more information about its productive possibilities than the central planner from now on for short cp this justifies the use of incentives schemes in which the cp does not directly fix activity levels casual observation of such existing schemes suggests that the time dimensions is crucial for their working typically the cp revises the incentive scheme over time to take into account the information provided by the firm s performance managers of centrally planned economies as well as economists have long recognized that this revision induces firms to underproduce in order to avoid demanding schemes in the future this is the ratchet effect it is purpose of the present paper to study the ratchet effect under the non commitment assumption which we believe to be more realistic the inadequacy of conceptual tools made if difficult in the past to consider such an assumption now basic research on dynamic games with incomplete information recently resulted in new ideas which look particularly relevant for a theoretical analysis of the problem

an equilibrium model of the business cycle with household production and fiscal policy the authors estimate a dynamic general equilibrium model of the u s economy that includes an explicit household production sector and stochastic fiscal variables they use their estimates to investigate two issues first the authors analyze how well the model accounts for aggregate fluctuations they find that household production has a significant impact and reject a nested specification in which changes in the home production technology do not matter for market variables second the authors study the effects of some simple fiscal policy experiments and show that the model generates different predictions for the effects of tax changes than similar models without home production copyright 1997 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

limit theorems for markets with sequential bargaining this paper models trade as a non coopertative strategic game played at an inlinite sequence of dates a single indivisible commodity is traded buyers and sellers have transferable utility and are characterized by their reservation utilities they meet at random and bargain over the price at which a single unit of the good will be exchanged under a variety of circumstances it is shown that as the costs of search and bargaining become negligible the outcome of the game converges to the competitve flow equilibrium even when there is complete information journal of economic literature classification numbers 022 19x7

tastes and technology in a two country model of the business cycle explaining international trade on international financial markets allows people to insure country specific risk and smooth consumption intertemporally equilibrium models of business cycles with trade on global financial markets typically yield international consumption correlations near one and excessive volatility of investment the authors incorporate nontraded goods in the model and find that the implications for aggregate consumption investment and the trade balance are consistent with business cycle properties of industrialized countries however the model driven by technology shocks alone yields counterfactual implications for comovements between consumption and prices at the sectoral level taste shocks produce price quantity relationships more consistent with the data copyright 1995 by american economic association

decentralized trading strategic behaviour and the walrasian outcome for a market with a finite number of agents pairwise matching and bargaining it is shown that even when the market is frictionless the equilibrium is not necessarily competitive it depends on the amount of information agents use if their behaviour is conditioned only on the sets of agents present and the time the competitive solution is the unique subgame perfect equilibrium if agents have full information and condition their behaviour on some of it there are also noncompetitive equilibria in which behaviour depends on specific information such as the identity of the trading partner and past events

a time series analysis of representative agent models of consumption andleisure choice under uncertainty this paper investigates empirically a model of aggregate consumption and leisure decisions in which utility from goods and leisure is nontime separable the nonseparability of preferences accommodates intertemporal substitution or complementarity of leisure and thereby affects the comovements in aggregate compensation and hours worked these cross relations are examined empirically using postwar monthly u s data on quantities real wages and the real return on the one month treasury bill the estimated values of the parameters governing preferences differ significantly from the values assumed in several studies of real business models several possible explanations of these discrepancies are discussed

understanding the cross country effects of u s technology shocks abstract business cycles are substantially correlated across countries yet most existing models are not able to generate substantial transmission through international trade we show that the nature of such transmission depends fundamentally on the features determining the responsiveness of labor supply and labor demand to international relative prices we augment a standard international macroeconomic model to incorporate three key features a weak short run wealth effect on labor supply variable capital utilization and imported intermediate inputs for production this model can generate large and significant endogenous transmission of technology shocks through international trade we demonstrate this by estimating the model using data for canada and the united states with limited information bayesian methods we find that this model can account for the substantial transmission of permanent u s technology shocks to canadian aggregate variables such as output and hours documented in a structural vector autoregression transmission through international trade is found to explain the majority of the business cycle comovement between the united states and canada

trade wedges inventories and international business cycles abstract the large persistent fluctuations in international trade that cannot be explained in standard models by changes in expenditures and relative prices are often attributed to trade wedges we show that these trade wedges can reflect the decisions of importers to change their inventory holdings we find that a two country model of international business cycles with an inventory management decision can generate trade flows and wedges consistent with the data moreover matching trade flows alters the international transmission of business cycles specifically real net exports become countercyclical and consumption is less correlated across countries than in standard models we also show that ignoring inventories as a source of trade wedges substantially overstates the role of trade wedges in business cycle fluctuations

distortions in the neoclassical growth model a cross country analysis abstract this paper investigates the properties of distortions that manifest themselves as wedges in the equilibrium conditions of the neoclassical growth model across a sample of 22 oecd countries for the 1970 2011 period the quantitative relevance of each wedge and its robustness in generating fluctuations in macroeconomic aggregates is assessed the efficiency wedge proves to be determinant in enabling models to replicate movements in output and investment while the labor wedge is important to predict fluctuations in hours worked modeling distortions to the savings decision holds little quantitative or qualitative relevance also investment seems to be the hardest aggregate to replicate as prediction errors concerning output and hours worked are typically one order of magnitude smaller these conclusions are statistically significant across the countries in the sample and are not limited to output drops finally the geographical distance between countries and their degree of openness to trade are shown to contain information with regard to the wedges stressing the importance of international mechanisms of transmission between distortions to the equilibrium conditions of the neoclassical growth model

commodity trade and international risk sharing how much do financial markets matter abstract this paper evaluates the social gains from international risk sharing in some simple general equilibrium models with output uncertainty a simulation model calibrated to selected moments of u s and japanese data estimates the incremental loss from a ban on international portfolio diversification to be on the order of 0 20 percent of output per year even the theoretical gains from asset trade may disappear under alternative sets of assumptions on preferences and technology the paper argues that the small magnitude of potential trade gains may help explain the apparently inconsistent findings of empirical studies on the degree of international capital mobility

investment shocks and consumption abstract several influential papers have argued that preferences featuring a weak wealth effect on labour supply are key to generate macroeconomic co movement across real variables in response to shocks using a fully general specification for the instantaneous utility function we show that the size of the wealth effect on labour supply is largely inconsequential for macroeconomic dynamics instead we find that edgeworth complementarity between consumption and hours worked is crucial in order to obtain co movement of key macroeconomic variables we consider investment shocks and we show that co movement can easily be achieved with non separable preferences in combination with a reasonable degree of nominal rigidity this holds even in the presence of sizeable wealth effects

by force of demand explaining cyclical fluctuations of international trade and government spending abstract this paper explores the role of demand shocks as an alternative to productivity shocks in driving both domestic and international business cycles within the international real business cycle irbc framework in addition to those well documented domestic business cycle fluctuations e g the volatility and cyclicality of output consumption investment labor hours and labor productivity and international business cycle properties e g the countercyclical net export and the comovement puzzle this paper focuses on two additional stylized facts in the industrialized countries the procyclical trade openness the gdp fraction of trade volume and the countercyclical government size the gdp fraction of government spending using a parsimonious dynamic stochastic general equilibrium model we show that the model s predictions under productivity shocks are not consistent with these facts instead a demand shock driven model replicates the above facts while matching other domestic and international business cycle properties an estimated version of the model confirms the quantitatively important impacts of demand shocks

modelling the sectoral allocation of labour in open economy models indivisible labour is not the only type of nonconvexity affecting labour supply decisions another type of nonconvexity arises in economies with sectors whenever individuals can work in only one sector at a time i introduce this restriction into an open economy model with a tradeable and a nontradeable sector and i use lotteries to convexify the consumption possibilities set this approach implies that the aggregate elasticity of labour supply becomes infinite i compare the performance of the model with an analogous model in which the labour supply elasticity is finite i find that the infinite labour supply elasticity helps explain the persistence of net exports however all the other consequences of the labour supply elasticity for the model implied second order moments depend on whether the pricing assumption is producer currency pricing pcp or local currency pricing lcp

asset pledgeability and international transmission of financial shocks abstract this paper studies the international transmission of pledgeability shocks as the recent crisis involved a negative shock to the pledgeability of assets the paper develops a two country portfolio model with leveraged investors that incorporates this type of shock and a solution approach for the corresponding portfolio choice problem this approach captures the effect of pledgeability on asset risk premiums the paper finds that the equilibrium portfolios play a heightened role as transmission channels moreover by complementing the effect of productivity shocks under borrowing constraints the pledgeability shocks improve the fit of an otherwise standard international macroeconomic model for the g7 countries especially during crises

household production and the excess sensitivity of consumption to current income empirical research on the permanent income hypothesis pih has found that consumption growth is excessively sensitive to predictable changes in income this finding is interpreted as strong evidence against the pih we propose an explanation for apparent excess sensitivity that is based on a quantitative equilibrium model of household production in which permanent income consumers respond to shifts in sectoral wages and prices by substituting work effort and consumption across home and market sectors although the pih is true this mechanism generates apparent excess sensitivity because market consumption responds to predictable income growth

current real business cycle theories and aggregate labor market fluctuations hours worked and the return to working are weakly correlated traditionally the ability to account for this fact has been a litmus test for macroeconomic models existing real business cycle models fail this test dramatically we modify prototypical real business cycle models by allowing government consumption shocks to influence labor market dynamics this modification can in principle bring the models into closer conformity with the data our empirical results indicate that it does

labor market frictions investment and capital flows the standard neoclassical model predicts that countries with higher productivity growth rates experience sharp increases in investment that are followed by rapid declines this monotonic investment response contrasts with the empirical evidence that suggests a rather hump shaped investment behavior in this paper i present a two country general equilibrium model that generates hump shaped investment responses from labor market frictions in the model i decompose investment into tradable and non tradable components and show that an increase in the growth rate of a country results in scarcities of the non tradable components which raise the relative price of investment goods these scarcities occur because labor is unable to reallocate quickly between sectors within economies this mechanism has two main implications first the induced movement in relative prices equates cross country returns to capital and thus greatly reduces initial investment second domestic saving now plays a more important role in financing investment inducing a co movement between these variables

nontraded goods market segmentation and exchange rates abstract empirical evidence suggests that movements in international relative prices are large and persistent nontraded goods both in the form of final consumption goods and as an input into the production of final tradable goods are an important aspect driving international relative price movements in this paper we show that nontraded goods play an important role in the context of an otherwise standard open economy macromodel our quantitative study with nontraded goods generates implications along several dimensions that are more closely in line with the data relative to the model that abstracts from nontraded goods

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

a real model of the world business cycle abstract in this paper a stochastic two country log linear infinite horizon model is used to analyze the generation and transmission of economic fluctuations across countries it is argued that following a country specific supply disturbance production interdependence and unitary elasticities in consumption and production are sufficient to generate comovements in aggregate economic activity investment and trade that are persistent over time and positively correlated across countries however the empirical analysis carried out for the usa japan germany and uk for the 1960 82 period suggests that common shocks rather than trade links are responsible for this pattern of comovements

income effects on the trade balance this paper investigates the income effects on the trade balance with particular attention to the distinction between permanent and transitory disturbances for the united states japan germany and the united kingdom in all four countries movements in the trade balance have mostly been associated with transitory changes in income the latter also are negatively associated with the trade balance in marked contrast permanent changes in income have little to do with the trade balance these results are examined in light of intertemporal models and real business cycle models copyright 1996 by mit press

correlated equilibrium as an expression of bayesian rationality if it is common knowledge that the players in a game are bayesian utility maximizers who treat uncertainty about other players actions like any other uncertainty then the outcome is necessarily a correlated equilibrium random strategies appear as an expression of each player s uncertainty about what the others will do not as the result of willful randomization use is made of the common prior assumption according to which differences in probability assessments by different individuals are due to the different information that they have where information may be interpreted broadly to include experience upbringing and genetic makeup copyright 1987 by the econometric society

the international effects of global financial uncertainty shocks abstract in this paper we study the impact of sudden rises in global financial uncertainty on small open economies to this end we extract a global factor from the realised volatilities of about 1000 risky asset returns from around the world we then analyse how shocks to this factor affect economic activity in 44 advanced and emerging small open economies by estimating local projections in a panel regression framework we find that shocks increasing global financial uncertainty have adverse consequences on output trade and unemployment while their impact on nominal variables is more heterogeneous across countries furthermore the effects are more severe in countries with a higher degree of trade or financial openness higher levels of vulnerabilities weaker institutions or during economic downturns

indivisible labor and the business cycle abstract a growth model with shocks to technology is studied labor is indivisible so all variability in hours worked is due to fluctuations in the number employed we find that unlike previous equilibrium models of the business cycle this economy displays large fluctuations in hours worked and relatively small fluctuations in productivity this finding is independent of individuals willingness to substitute leisure across time this and other findings are the result of studying and comparing summary statistics describing this economy an economy with divisible labor and post war u s time series

does trade integration cause convergence abstract using a business cycle model we analyse the conditions for trade integration to produce economic convergence we find large stable economies with integrated structures are likely to diverge but smaller more volatile or less well integrated economies will converge the symmetry of shocks is unimportant

dissecting the dynamics of the us trade balance in an estimated equilibrium model in an estimated two country dsge model we find that efficiency shocks specific to investment account for more than half of the forecast variance of cyclical fluctuations in the us trade balance both domestic and foreign investment specific shocks have a substantial impact on the variability of the imbalance total factor productivity shocks do not matter for the variance and even lead to procyclicality in the trade balance

international business cycles with endogenous incomplete markets backus kehoe and kydland 1992 baxter and crucini 1995 and stockman and tesar 1995 find two major discrepancies between standard international business cycle models with complete markets and the data in the models cross country correlations are much higher for consumption than for output while in the data the opposite is true and cross country correlations of employment and investment are negative while in the data they are positive this paper introduces a friction into a standard model that helps resolve these anomalies the friction is that international loans are imperfectly enforceable any country can renege on its debts and suffer the consequences for future borrowing to solve for equilibrium in this economy with endogenous incomplete markets the methods of marcet and marimon 1999 are extended incorporating the friction helps resolve the anomalies more than does exogenously restricting the assets that can be traded

long run growth and volatility which source really matters the aim of the article is to analyse the relationship between long run growth and business cycle volatility in particular the main purpose of this article is to identify which source of volatility is most detrimental to growth using cross country data from 1970 to 2000 and several indicators of volatility such as inflation exchange rate government expenditure output and investment volatility this article shows that although all these measures of volatility are remarkably harmful for growth business cycle investment volatility is the main source that hampers long run growth this relation is robust to different measures of business cycle and to different sub samples of countries

international capital mobility in the long run and the short run can we still learn from saving investment data the idea to learn about international capital mobility from saving and investment data remains appealing our approach is based on var methods and overcomes some of the problems associated with saving investment regressions when the data are non stationary we propose a new measure of long run capital mobility that can be easily calculated as a by product of the estimation procedure of a cointegrated var in an application to historical us and british data we find long run capital mobility to have been remarkably stable over the century whereas variations in the mobility of capital primarily seem to have affected short run capital flows

foreign direct investment and debt financing in emerging economies the rich dynamics of capital flows is an important characteristic of business cycles in emerging market economies in the data external debt is always procyclical while fdi is procyclical only in normal times we provide a microfounded rationale for this pattern by linking financial shocks to capital flows for this purpose we build a small open economy model in which firms are subject to borrowing constraints and are either owned domestically or by foreign investors who purchase firms through fdi during a financial crisis the valuation gap per unit net worth between foreign and domestic investors widens which triggers more fdi inflow our model produces business cycle moments consistent with empirical observations

on the connections between intra temporal and intertemporal trades abstract this paper develops a new theory of international economics by introducing heckscher ohlin features of intra temporal trade into an intertemporal trade approach of current account to do so we consider a dynamic general equilibrium model with tradable sectors of different factor intensities which allows for substitution between intertemporal trade current account adjustment and intra temporal trade goods trade an economy s response to a shock generally involves a combination of a change in the composition of goods trade and a change in the current account flexible factor markets reduce the need for the current account to adjust on the other hand the more rigid the factor markets the larger the size of current account adjustment relative to the volume of goods trade and the slower the speed of adjustment of the current account towards its long run equilibrium we present empirical evidence consistent with the theory

housing over time and over the life cycle a structural estimation we estimate a structural model of optimal life cycle housing and nonhousing con sumption in the presence of labor income and house price uncertainties the model postulates constant elasticity of substitution between housing service and nonhousing consumption and explicitly incorporates a housing adjustment cost our estimationts the cross sectional and time series household wealth and housing proles from the panel study of income dynamics 1984 to 2005 reasonably well and suggests an intratemporal elasticity of substitution between housing and nonhousing consumption of 0 487 the low elasticity estimate is largely driven by moments conditional on state house prices and moments in the latter half of the sample period and is robust to different assumptions of housing adjustment cost we then conduct policy analyses in which we let house price and income take values as those observed between 2006 and 2011 we show that the responses depend importantly on the housing adjustment cost and the elasticity of sub stitution between housing and nonhousing consumption in particular compared with the benchmark the impact of the shocks on homeownership rates is reduced but the impact on nonhousing consumption is magnied when the house selling cost is sizable or when housing service and nonhousing consumption are highly substitutable

a dynamic model of housing demand estimation and policy implications in the u s macroeconomic policy makers are concerned about how consumers will respond to falling incomes nominal home prices falling income rising mortgage interest rates and tightening credit standards in order to address these questions we estimate and simulate a dynamic structural model of housing demand in the model consumers maximize expected discounted lifetime utility from housing services and a composite consumption good the model allows for realistic features of the housing market including non convex adjustment costs from buying and selling a home and credit constraints from minimum downpayment requirements we use the forward simulation procedure of bajari benkard and levin 2007 to estimate the structural parameters especially the elasticity of substitution between consumption and housing services using data from the panel study of income dynamics given the estimated model parameters we simulate the partial equilibrium consumption and housing and

risk matters the real effects of volatility shocks comment we show that the risk shock business cycle model of fernandez villaverde et al 2011 must be recalibrated because it underpredicts the targeted business cycle moments by a factor of three once a time aggregation error is corrected recalibrating the corrected model for the benchmark case of argentina the peak response and the contribution of interest rate risk shocks to business cycle volatility increase however the recalibrated model does worse in capturing the business cycle properties of net exports once an additional error in the computation of net exports is corrected

international business cycles with complete markets abstract kehoe and perri 2002 show that a two country business cycle model with endogenously incomplete markets helps to resolve the international comovement puzzle baxter 1995 and the quantity anomaly backus et al 1992 backus et al 1995 we claim that a similar performance can be achieved without resorting to market incompleteness we show that a model with complete markets driven by productivity shocks alone can account for the international comovement puzzle our model features time nonseparable preferences that allow arbitrarily small wealth effects on labor supply it matches the data by predicting i positive cross country correlations of investment and hours worked ii realistic cross country correlations of consumption it reduces the gap between international correlations of output and consumption but fails to change their order unlike models with restricted international markets ours show little sensitivity to the parameterization of the forcing process

trade in nominal assets and net international capital flows abstract nominal assets play a major role in international financial markets while trade in indexed bonds is limited as a result agents are exposed to both price and exchange rate uncertainty nonetheless previous research on net capital flows has assumed the presence of a risk free vehicle to intertemporal asset trade in this paper we develop a general equilibrium intertemporal model with trade limited to nominal bonds and equity we find that exposure to nominal risk dampens net capital flows thus making economies effectively more closed

government spending and the international business cycle in this paper the author develops a stochastic general equilibrium model of the world economy it differs from previous multicountry models in the introduction of the government sector the author assumes that countries produce a nonspecialized traded good and that households derive utility from the consumption of private and public goods and services this simple modification has a potential explanation for the low cross country correlations in private consumption and output and the countercyclical trade balances that are observed empirically

growth and risk sharing with private information abstract we examine the impact of incomplete risk sharing on growth and welfare the source of market incompleteness in our economy is private information a household s idiosyncratic productivity shock is not observable by others risk sharing between households occurs through long term contracts with intermediaries we find that incomplete risk sharing tends to reduce the rate of growth relative to the complete risk sharing benchmark numerical examples indicate that the welfare cost and the growth effect of private information are small

net exports consumption volatility and international business cycle models abstract conventional two country rbc models interpret countercyclical net exports as reflecting primarily the dynamics of capital i show that quantitatively theoretical economies rely on counterfactual terms of trade effects trade fluctuations on the contrary are driven by consumption smoothing thus generating procyclical net trade in goods i then consider a class of preferences that embeds home production in a reduced form consumption volatility increases so that countercyclical net exports reflect primarily a strong relation between consumption and imports as in the data the major discrepancy between theory and data concerns the variability of international prices

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

the dynamics of a small open economy in response to monetary fiscal and productivity shocks abstract this paper evaluates empirically the relative importance of monetary and fiscal versus technology shocks in an open economy characterized by perfect international capital mobility the variance covariance matrix of these shocks is estimated a stochastic model is used to perform numerical simulations the results show that persistent shocks to productivity can reproduce several empirical regularities including the puzzling high correlation between national saving and investment remarkably well and that monetary and fiscal shocks play a minor role

evaluating monetary policy under preferences with zero wealth effect a bayesian approach abstract both real and monetary macro models have parallely exploited the potential for various preferences in accounting for empirical facts this paper brings the two literatures together by estimating time non separable preferences with habit formation in consumption that nests several commonly used preferences in the absence of wealth effects and external habits these preferences fail to generate observed inflation inertia and output persistence after a monetary policy shock furthermore the data strongly rejects these preferences in favor of preferences with external habits an alternative solution is to include habit adjusted intermediate wealth effect preferences which are able to simultaneously generate sluggish responses of the variables to a monetary policy shock and fit the data better

are correlations of stock returns justified by subsequent changes in national outputs abstract in an integrated world capital market the same pricing kernel is applicable to all securities we apply this idea to the stock returns of different countries we investigate the underlying determinants of cross country stock return correlations first we determine for a given measured degree of commonality of country outputs what should be the degree of correlation of national stock returns we propose a framework that contains a statistical model for output and an intertemporal financial market model for stock returns we then attempt to match the correlations generated by the model with measured correlations our results show that under the hypothesis of market segmentation the model correlations are much smaller than observed correlations however assuming world markets are integrated our model correlations can be matched with observed correlations

the long side of the market and the short end of the stick bargaining power and price formation in buyers sellers and balanced markets the determinants of bargaining power and price formation in a dynamic exchange market where new traders enter randomly over time are studied when agents on the long side of the market possess the option to wait for the arrival of future partners the terms of trade in the spot market must honor the value of this option the equilibrium terms of trade are expressed in intuitive closed form equations that highlight the distinct influences of short run spot market conditions and long run market demographics i introduction few concepts in economics are as intuitive as the idea that traders on the long side of a market wind up holding the short end of the stick that is they receive little or none of the gains from trade consider for instance the classic setting in which b identical buyers each with unit demands for an indivisible homogeneous good face s identical sellers each with one unit of the good for sale it is well known that in a broad class of one shot trading games all of the surplus in this setting goes to the short side of the market in equilibrium that is if b s buyers bid the price up to their reservation value often it is only when b s that market institutions the rules of the game have any bearing on the equilibrium division of surplus this classic result is somewhat brittle because of the discontinuity in the terms of trade when moving from positive to negative levels of excess demand its logic is familiar however from bertrand competition and it is very compelling the option value to an agent frozen out of a trade in a one shot market game is his reservation payoff of zero any outcome that confers nonzero surplus to a long side agent cannot be sustained in equilibrium because all of the long side agents who would otherwise be frozen out possess a strict incentive to undercut

methodological and empirical issues in real business cycle theory abstract in this paper we argue that the major impact of the rbc literature has been to propose a new methodology for macroeconomics this methodology is distinguished first by the importance it attributes to the empirical description of the phenomena to be explained and second by the use of this description in conjunction with quantitative theorizing i e the construction of computable general equilibrium models whose characteristic statistics match those of the data in accordance with this approach we first report on the current state of knowledge concerning business cycle regularities and conclude that additional empirical effort is called for in order to arrive at the appropriate basis for theorizing we then examine the performance of existing models and evaluate the case for integrating monetary factors and demand shocks into them lastly we review the recent efforts to explain the employment variability puzzle and argue that the search for a solution naturally leads to the incorporation of significant non walrasian features into the rbc framework

cointegration of long span saving and investment abstract we find that saving and investment cointegrate in all or most countries in maddison s research memorandum no 443 1991 long span data set by a variety of time series and panel data tests we interpret our results as reflecting current account solvency and not capital immobility

demand shocks and open economy puzzles abstract we pose good markets frictions on top of an otherwise standard two country international real business cycle irbc model shopping for goods takes effort which prevents perfect matching between customers and producers an increase in search effort implies increased measured productivity demand shocks increase expenditures and search effort simultaneously increasing output consumption productivity and the trade deficit and appreciating the real exchange rate thus we solve the backus smith puzzle and we show that the cross country correlation of consumption is higher than that of output standard irbc models cannot account for these puzzles along with movements in tfp

one is almost enough for monopoly it has been argued that two factors product durability and potential entry may force a monopolist to price at marginal cost this article shows that when these two forces coexist the tendency toward competition may be negated first we prove that durable goods oligopolists without commitment powers may attain joint profits arbitrarily close to those of a monopolist with perfect commitment power second we demonstrate that the presence of a potential entrant may enable a durable goods monopolist to act as if he had commitment power thus potential as well as actual entry may restore monopoly power

leverage and the foreclosure crisis how much of the foreclosure crisis can be explained by the large number of high leverage mortgages originated during the housing boom in our model heterogeneous households select from mortgages with different down payments and choose whether to default given income and housing shocks the use of low down payment loans is initially limited by payment to income requirements but becomes unrestricted during the boom the model approximates key housing and mortgage market facts before and after the crisis a counterfactual experiment suggests that the increased number of high leverage loans originated prior to the crisis can explain over 60 percent of the rise in foreclosure rates

heterogeneous preferences and equilibrium trading volume abstract the representative agent lucas model stresses aggregate risk and hence does not allow us to study the impact of agents heterogeneity on the dynamics of equilibrium trading volume in this paper we investigate under what conditions non informational heterogeneity i e differences in preferences and endowments leads to nontrivial trading volume in equilibrium we present a non informational no trade theorem that provides necessary and sufficient conditions for zero equilibrium trading volume in a continuous time lucas market model with heterogeneous agents multiple goods and multiple securities we explain in detail how no trade equilibria are related to autarky equilibria portfolio autarky equilibria and peculiar financial market equilibria which play an important role in the literature on international risk sharing

terms of trade and exchange rate regimes in developing countries abstract since friedman essays in positive economics university of chicago press chicago 1953 157 203 an advantage often attributed to flexible exchange rate regimes over fixed regimes is their ability to insulate more effectively the economy against real shocks i use a post bretton woods sample 1973 96 of 75 developing countries to assess whether the responses of real gdp real exchange rates and prices to terms of trade shocks differ systematically across exchange rate regimes i find that responses are significantly different across regimes in a way that supports friedman s hypothesis the paper also examines the importance of terms of trade shocks in explaining the overall variance of output and prices in developing countries

the impact of energy price uncertainty on macroeconomic variables abstract this paper evaluates the macroeconomic implications of energy price volatility through the lens of a dynamic stochastic general equilibrium dsge model in an open economy the model develops a small open economy in which households consume energy products and firms use energy as productivity inputs where the country is so small that it needs to import energy the price of which is determined abroad whereas positive energy price shocks cause an economic slowdown due to higher costs for consumers and firms energy price volatility shocks generate an increase in gdp in the short run and a reversal in the long run these findings are empirically supported by estimates from a panel var model applied to 10 asian economies where energy price volatility has a positive impact on gdp in the short run moreover the paper finds that increasing demand or supply uncertainty also affect energy prices with amplified fluctuations relative to a model that abstracts from energy market volatility leads households to cut consumption for precautionary savings motives which in turn increases investment both energy price and uncertainty fluctuation lead to high macroeconomic volatility in the business cycle policy makers should encourage investment in energy security and renewable energy such that households and firms would become less responding to fluctuations in the non renewable energy market

modelling competitive behavior a single seller of an indivisible object wishes to sell the good to one of many buyers the seller has zero value for the good the buyers have a commonly known identical value of one this article attempts to determine strategic environments that ensure the seller s ability to exploit the competitive behavior of the buyers to extract all the surplus in the game i show that in many simple dynamic games there are subgame perfect equilibria that involve the seller s giving up the good for free even if the seller has an informational advantage that allows him to keep bidders from learning the bidding behavior of their opponents there still exist perfect bayesian equilibria that involve a sale at the price of zero however in this case a simple refinement in the spirit of sequential equilibria can be used to rule out such collusive behavior and to show that the unique equilibrium outcome satisfying this refinement yields the seller a price of one

on the international transmission of technology shocks abstract using vector autoregressions on u s time series and an aggregate of industrialized countries we find that technology shocks appreciate the terms of trade and lower the trade balance they induce an s shaped cross correlation function for both variables the s curve in calibrating a prototypical international business cycle model under complete and incomplete financial markets we find two distinct sets of parameter values while both model specifications deliver the s curve the underlying transmission mechanism of technology shocks is fundamentally different most importantly only in the incomplete markets economy the terms of trade appreciate and thus amplify the relative wealth effects of technology shocks as suggested by the evidence

home production labor wedges and international business cycles non separabilities due to home production break the link between market consumption and its marginal utility and help explain several stylized facts of the open economy in an estimated two country model with complete asset markets in which home production generates a labor wedge that mimics its empirical counterpart output is more correlated than consumption across countries labor inputs and labor wedges are positively correlated across countries and relative market consumption is negatively related to the real exchange rate evidence from time use surveys corroborates some of the predictions of the model

value added trade and business cycle synchronization ever since frankel and rose s 1998 seminal paper the literature on trade and business cycle synchronization has relied on gross trade data with weak results in recent papers that carefully address omitted variable bias this paper re examines this relationship using new value added trade data for 63 advanced and emerging economies during 1995 2013 in a panel framework we identify a significantly positive impact of bilateral value added trade intensity on business cycle synchronization controlling for global common shocks country pair heterogeneity and other covariates that is absent when gross trade data are used there is also some evidence that the impact of value added trade on synchronization increases with the degree of value added intra industry trade we provide a theoretical rationale for the role of value added trade for synchronization using a simple international business cycle model that features cross country input linkages in production

savings investment and international capital flows abstract the high correlation between national savings and domestic investment rateshas been interpreted as evidence that capital is not internationally mobile this paper surveys the theory and evidence on the relationship between savings and investment in a sample of 23 oecd countries a positive correlation between savings and investment rates is found in both the short and long runs however a wide variety of models generate such co movements in savings and investment in response to exogenous disturbances even under conditions of complete financial markets thus the savings investment correlation provides little evidence on the question of international capital mobility

noncooperative collusion in durable goods oligopoly coase conjectured that a durable goods monopolist who can make offers to sell arbitrarily frequently will lose the ability to extract positive profits this result which has now been proved can be attributed to the inability of the monopolist to commit to maintaining sufficiently high prices in the near future for the case of durable goods oligopoly we show that letting the firms make offers arbitrarily frequently enhances their ability to commit to high prices and in the limit enables the firms to enjoy total market profits equal to the full commitment one shot monopoly profit

realistic cross country consumption correlations in a two country equilibrium business cycle model abstract a well known feature of one good multi agent arrow debreu economies with edentical additively separable homothetic preferences is that the consumptions of all agents are perfectly correlated such economies are widely used in interpreting business cycles but seem to be inconsistent with observed cross country correlations of aggregate consumption this paper provides an example of a two country real business cycle model in which preferences are not separable between consumption and labor supply the model has a simple closed form solution closed form solution and allows for fluctuations in labor supply in equilibrium moreover it generates correlations between national consumption rates which are close to some of those observed in historical data jel f41

unconventional policies and exchange rate dynamics abstract we study exchange rate dynamics under cooperative and self oriented policies in a two country dsge model with unconventional monetary and exchange rate policies the cooperative solution features a large exchange rate adjustment that cushions the impact of negative shocks and a moderate use of unconventional policy instruments self oriented policies nash equilibrium however entail limited exchange rate movements and an aggressive use of unconventional policies in both countries our results suggest that sizable exchange rate depreciations are not always a symptom of beggar thy neighbor policies they could also reflect a desirable process of external adjustment that improves global welfare

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

capital flows investment and exchange rates abstract this paper incorporates international capital flows into a two country monetary general equilibrium model of asset prices with investment and production we calculate theoretical covariances between investment the current account the exchange rate and the terms of trade these covariances depend upon the coefficient of relative risk aversion the magnitude and sign of a country s net international indebtedness other properties of tastes and technologies and the stochastic processes on disturbances to productivity and monetary growth rates international capital flows arise from changes in world wealth and its relative composition in foreign and domestic assets

fiscal federalism and monetary unions a quantitative assessment abstract in this paper i provide a quantitative analysis of three different forms of fiscal federalism in monetary unions fully decentralized regional fiscal authorities as the benchmark fiscal equalization with nominal tax revenue sharing and a common central fiscal authority i assess the capability of the different arrangements to stabilize regional consumption output and employment over the business cycle i also study the implications for interregional income consumption risk sharing and welfare from this analysis the following results emerge first a central fiscal authority stabilizes consumption fluctuations and increases the scope of interregional income and consumption risk sharing second fiscal equalization destabilizes consumption fluctuations and also reduces the scope of interregional income and consumption risk smoothing third a central fiscal authority leads to welfare gains whereas fiscal equalization leads to welfare losses

the international ramifications of tax reforms supply side economics in a global economy this paper studies tax reforms in a dynamic model of a global economy calibrated to current u s and european tax policies world capital markets add consumption smoothing and income redistribution effects that alter closed economy predictions in the absence of taxes on foreign interest welfare gains of eliminating u s income taxes are enlarged by up to 34 percent at the expense of european losses caused by transitional declines in consumption and leisure and a permanent capital outflow in contrast if foreign interest is taxed the same tax reform reduces u s welfare 0 7 percent and increases european welfare 1 8 percent copyright 1998 by american economic association