the inflation tax in a real business cycle model money is incorporated into a real business cycle model using a cash in advance constraint the model economy is used to analyze whether the business cycle is different in high inflation and low inflation economies and to analyze the impact of variability in the growth rate of money in addition the welfare cost of the inflation tax is measured and the steady state properties of high and low inflation economies are compared

efficient mechanisms for bilateral trading we consider bargaining problems between one buyer and one seller for a single object the seller s valuation and the buyer s valuation for the object are assumed to be independent random variables and each individual s valuation is unknown to the other we characterize the set of allocation mechanisms that are bayesian incentive compatible and individually rational and show the general impossibility of ex post efficient mechanisms without outside subsidies for a wide class of problems we show how to compute mechanisms that maximize expected total gains from trade and mechanisms that can maximize a broker s expected profit journal of economic literature classification number 026

robust trading mechanisms we consider the problem of designing a trading institution for a single buyer and seller when their valuation of the good is private information it is shown that posted price mechanisms are essentially the only mechanisms such that each trader has a dominant strategy a posted price mechanism is one where a price is posted in advance and trade occurs if and only if all traders agree to trade

on the transmission of world agricultural prices two questions are asked about the relationship between domestic prices and world prices of agricultural commodities are variations in world prices transmitted to domestic prices domestic prices are regressed on world prices in various forms taking into account the possible effects of exchange rates and inflation the empirical analysis is based on data from the food and agriculture organization of the united nations for 58 countries from 1968 78 and for the countries of the european community from 1961 85 the results show that most of the variations in world prices are transmitted and that they constitute the dominant component in the variations of domestic prices

determination of the international maize price what is the growing role of brazil and ukraine this paper examines the relationships among maize prices for four countries to determine if newly emerging exporters brazil and ukraine influence the international price of maize our work focuses on each market s participation in the price discovery process rather than trying to determine a price leader we find that the united states plays the largest role in price discovery followed by argentina brazil and ukraine we also search for export thresholds and find that ukraine s contribution to price discovery rises slightly when an export threshold of 2 3 million tons is reached no export thresholds were found for brazil export thresholds for argentina were found but only have a minor impact on price relationships we also found that price relationships vary considerably across seasons of the year

why has u s inflation become harder to forecast we examine whether the u s rate of price inflation has become harder to forecast and to the extent that it has what changes in the inflation process have made it so the main finding is that the univariate inflation process is well described by an unobserved component trend cycle model with stochastic volatility or equivalently an integrated moving average process with time varying parameters this model explains a variety of recent univariate inflation forecasting puzzles and begins to explain some multivariate inflation forecasting puzzles as well

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

exploiting the monthly data flow in structural forecasting a quarterly stochastic general equilibrium dsge model is combined with a now casting model designed to read timely monthly information as it becomes available this implies 1 mapping the structural quarterly dsge with a monthly version that maintains the same economic restrictions 2 augmenting the model with a richer data set and 3 updating the estimates of the dsge s structural shocks in real time following the publication calendar of the data our empirical results show that our methodology enhances the predictive accuracy in now casting an analysis of the great recession also shows that our framework would have helped tracing the dsge s structural shocks in real time obtaining for example a more timely account of the 2008 contraction

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

state intervention for food price stabilisation in africa can it work abstract although its arguments may have more general applicability this paper discusses the desirability and options for the stabilisation of staple food prices principally in eastern and southern africa it addresses three broad questions i why is stabilisation of food grain prices desirable ii what is technically feasible and iii can the governance and trade issues thrown up by suggested mechanisms be solved it considers a number of options for price stabilisation assessing the strengths and weaknesses of each and suggesting situations in which each may be appropriate

when does a central bank s balance sheet require fiscal support abstract using a simple general equilibrium model we argue that it would be appropriate for a central bank with a large balance sheet composed of long duration nominal assets to have access to and be willing to ask for support for its balance sheet by the fiscal authority otherwise its ability to control inflation may be at risk this need for balance sheet support a within government transaction is distinct from the need for fiscal backing of inflation policy that arises even in models where the central bank s balance sheet is merged with that of the rest of the government

bridging dsge models and the raw data abstract a method to estimate dsge models using the raw data is proposed the approach links the observables to the model counterparts via a flexible specification which does not require the model based component to be located solely at business cycle frequencies allows the non model based component to take various time series patterns and permits certain types of model misspecification applying standard data transformations induces biases in structural estimates and distortions in the policy conclusions the proposed approach recovers important model based features in selected experimental designs two widely discussed issues are used to illustrate its practical use

non stationary hours in a dsge model the time series fit of dynamic stochastic general equilibrium dsge models often suffers from restrictions on the long run dynamics that are at odds with the data using bayesian methods we estimate a stochastic growth model in which hours worked are stationary and a modified version with permanent labor supply shocks if firms can freely adjust labor inputs the data support the latter specification once we introduce frictions in terms of labor adjustment costs the overall time series fit improves and the model specification in which labor supply shocks and hours worked are stationary is preferred

another look at long run money demand abstract this paper investigates the long run demand for m1 in the postwar united states previous studies based on data ending in the late 1980s are inconclusive about the parameters of postwar money demand this paper obtains precise estimates of these parameters by extending the data through 1996 the income elasticity of money demand is approximately 0 5 and the interest semi elasticity is approximately 0 05 these parameters are significantly smaller in absolute value than the corresponding parameters for the prewar period a caveat is that the analysis assumes there is no trend in money demand resulting from technological change

how much should inflation targeters care about the exchange rate abstract a dsge model is used to examine whether including the exchange rate in the central bank s policy rule can improve economic performance smoothing the exchange rate helps both financially robust economies and financially vulnerable emerging economies in handling risk premium shocks and given a small weight placed on the exchange rate the effects on inflation and output volatility are minimal with demand and cost push shocks financially vulnerable economies are especially likely to benefit from exchange rate smoothing due to perverse movements of the exchange rate they experience when hit by demand shocks and being more prone to risk premium shocks

the implications of inflation in an estimated new keynesian model abstract this paper studies the steady state and dynamic consequences of inflation in an estimated dynamic stochastic general equilibrium model of the u s economy it is found that 10 percentage points of inflation entail a steady state welfare cost as high as 13 of annual consumption this large cost is mainly driven by staggered price contracts and price indexation the transition from high to low inflation inflicts a welfare loss equivalent to 0 53 of annual consumption the role of nominal real frictions as well as that of parameter uncertainty is also addressed

strategic delay in bargaining with two sided uncertainty the role of strategic delay is analyzed in an infinite horizon alternating offer model of bargaining a buyer and seller are engaged in the trade of a single object both bargainers have private information about their own preferences and are impatient in that delaying agreement is costly an equilibrium is constructed in which the bargainers signal the strength of their bargaining positions by delaying prior to making an offer a bargainer expecting large gains from trade is more impatient than one expecting small gains and hence makes concessions earlier on trade occurs whever gains from trade exist but due to the private information only after costly delay panmunjom korea upi the american general and the north korean general glared at each other across the table and the only sound was the wind howling across the barren hills outside their hut maj gen james b knapp negotiator for the united nations command unc was waiting for maj gen ri choonsun of the democratic people s republic of north korea to propose a recess they sat there arms folded for 42 hours not a word finally gen ri got up walked out and drove away evening bulletin philadelphia 11 april 1969

money demand and the effects of fiscal policies this paper reexamines the choice of the scale variable in the money demand function a variety of evidence suggests that consumer spending is a better scale variable than gnp changing the money demand specification along these lines can profoundly affect the standard keynesian analysis of a tax cut copyright 1986 by ohio state university press

comparing dsge var forecasting models how big are the differences abstract i generate priors for a vector autoregression var from a standard real business cycle rbc model an rbc model with capital adjustment costs and habit formation and a sticky price model with an unaccommodating monetary authority the response of hours worked to a tfp shock differs sharply across these models i compare the accuracy of forecasts made from each of the resulting dynamic stochastic general equilibrium vector autoregression dsge var models despite having different structural characteristics the dsge vars are comparable in terms of forecasting performance as in previous work dsge vars compare favorably with atheoretical vars

agricultural price transmission elasticity importance of controlling for unobserved common factors a voluminous amount of the literature estimates price transmission from world markets to domestic markets ignoring unobserved factors that commonly affect domestic markets this article reevaluates the long run and short run transmission elasticity of world food price shocks to domestic markets using a common factor framework that takes unobserved common factors that are correlated with regressors into consideration in the estimation annual price data for rice wheat and maize for a panel of developed and developing countries that are observed over the period of 1960 2007 are used the results from a common factor framework to those that do not account for common factors are then compared our findings suggest that ignorance of common factors is likely to result in upwardly biased elasticity estimates

optimal robust bilateral trade risk neutrality a risk neutral seller and buyer with private information bargain over an indivisible item we prove that optimal robust bilateral trade mechanisms are payoff equivalent to non wasteful randomized posted prices

stopping inflations big and small previous studies of disinflation work with models in which firms use time dependent strategies changing nominal prices at intervals of fixed length these models may be criticized for failing to allow pricing behavior to adjust after a large shift in policy regime consequently this paper develops a model that permits firms to adopt strategies that are partially state dependent changing nominal prices whenever they depart sufficiently from their target values the paper uses this model to examine how the welfare costs and benefits of disinflation vary with the initial inflation rate and the speed of disinflation copyright 1997 by ohio state university press

supplanting the minnesota prior forecasting macroeconomic time series using real business cycle model priors abstract although general equilibrium models are in wide use in the theoretical macroeconomic literature their empirical relevance is uncertain we develop procedures for using dynamic general equilibrium models to aid in analyzing the observed time series relationships among macroeconomic variables our strategy is based on that developed by doan litterman and sims 1984 who constructed a procedure for improving time series forecasts by shrinking vector autoregression coefficient estimates toward a prior view that vector time series are well described as collections of independent random walks in our case the prior is derived from a fully specified general equilibrium model we demonstrate that like the atheoretical random walk priors real business cycle model priors can aid in forecasting

optimal monetary policy under commitment with a zero bound on nominal interest rates we determine optimal monetary policy under commitment in a forwardlooking new keynesian model when nominal interest rates are bounded below by zero the lower bound represents an occasionally binding constraint that causes the model and optimal policy to be nonlinear a calibration to the u s economy suggests that policy should reduce nominal interest rates more aggressively than suggested by a model without lower bound rational agents anticipate the possibility of reaching the lower bound in the future and this amplifies the effects of adverse shocks well before the bound is reached while the empirical magnitude of u s mark up shocks seems too small to entail zero nominal interest rates shocks affecting the natural real interest rate plausibly lead to a binding lower bound under optimal policy however this occurs quite infrequently and does not imply positive average inflation rates in equilibrium interestingly the presence of binding real rate shocks alters the policy response to non binding markup shocks

economic fluctuations in the u s and euro area quantifying the contribution of technical change this article aims at quantifying the contribution of technical change to cyclical fluctuations in the u s and euro area we distinguish technical progress in labor augmenting and capital augmenting change to this end we derive and estimate a new keynesian dsge model embodying a constant elasticity of substitution ces production function for both areas our main findings are i capital augmenting progress is the main source of technical change volatility ii labor augmenting shocks give a negligible contribution to the variance of output iii technical change of both types explains more economic fluctuations in the u s than in the euro area and iv historical decomposition of gdp growth over our sample period 1980 2008 shows that capital augmenting progress is one of the key drivers of the business cycle

interest rates and prices in an inventory model of money with credit abstract using a segmented market model that includes state dependent asset market decisions along with access to credit we analyze the impact that transactions credit has on interest rates and prices the availability of credit allows agents to significantly smooth consumption reduce the movements in velocity prices become quite flexible and liquidity effects are dampened as credit costs decline in the model so does the effectiveness of monetary policy we also investigate the recessionary consequences of a shock to the cost of credit and find that the model s predictions align well with the empirical evidence

on the welfare cost of inflation and the recent behavior of money demand post 1980 u s data trace out a stable long run money demand relationship of cagan s semi log form between the m1 income ratio and the nominal interest rate with an interest semi elasticity of 1 79 integrating under this money demand curve yields estimates of the welfare cost of modest departures from friedman s zero nominal interest rate rule for the optimum quantity of money that are quite small the results suggest that the federal reserve s current policy which generates low but still positive rates of inflation provides an adequate approximation in welfare terms to the alternative of moving all the way to the friedman rule jel e31 e41 e52

agricultural trade distortions during the global financial crisis the authors are grateful for financial support from the australian research council rural industries research and development corporation and world bank

five facts about prices a reevaluation of menu cost models are price decreases 3 the frequency of price increases covaries strongly with inflation whereas the frequency of price decreases and the size of price increases and price decreases do not 4 the frequency of price change is highly seasonal it is highest in the first quarter and then declines 5 we find no evidence of upwardsloping hazard functions of price changes for individual products we show that the first second and third facts are consistent with a benchmark menu cost model whereas the fourth and fifth facts are not

frequentist evaluation of small dsge models this article proposes a new evaluation approach for the class of small scale hybrid new keynesian dynamic stochastic general equilibrium nk dsge models typically used in monetary policy and business cycle analysis the empirical assessment of the nk dsge model is based on a conditional sequence of likelihood based tests conducted in a vector autoregressive var system in which both the low and high frequency implications of the model are addressed in a coherent framework if the low frequency behavior of the original time series of the model can be approximated by nonstationary processes stationarity must be imposed by removing the stochastic trends this gives rise to a set of recoverable unit roots cointegration restrictions in addition to the short run cross equation restrictions the procedure is based on the sequence lr1 lr2 lr3 where lr1 is the cointegration rank test lr2 is the cointegration matrix test and lr3 is the cross equation restrictions test lr2 is computed conditional on lr

investment shocks and business cycles abstract the origins of business cycles are still controversial among macroeconomists this paper contributes to this debate by studying the driving forces of fluctuations in an estimated new neoclassical synthesis model of the u s economy in this model most of the variability of output and hours at business cycle frequencies is due to shocks to the marginal efficiency of investment imperfect competition and to a lesser extent technological frictions are the key to their transmission although labor supply shocks explain a large fraction of the fluctuations in hours at very low frequencies they are irrelevant over the business cycle this finding is important because the microfoundations of these disturbances are widely regarded as unappealing

monetary policy analysis with potentially misspecified models abstract the paper proposes a novel method for conducting policy analysis with potentially misspecified dynamic stochastic general equilibrium dsge models and applies it to a new keynesian dsge model along the lines of christiano eichenbaum and evans jpe 2005 and smets and wouters jeea 2003 we first quantify the degree of model misspecification and then illustrate its implications for the performance of different interest rate feedback rules we find that many of the prescriptions derived from the dsge model are robust to model misspecification jel classification c32 key words bayesian analysis dsge models model misspecification 1 introduction the quantitative evaluation of monetary policy rules plays an important role in the design of stabilization policies much of the recent debate about optimal monetary policy rules has been carried out with new keynesian dynamic stochastic general equilibrium dsge models see woodford 2003 dsge models have the advantage that one can explicitly assess the effect of policy regime changes on expectation formation and decision rules of private agents yet until recently these models were scarcely used by central banks because they were perceived as being inferior to less structural model in terms of fit recent work by christiano eichenbaum and evans 2005 and smets and wouters 2003 has changed this perception these papers show that the fit of large scale new keynesian dsge models is comparable to that of more heavily parameterized models as a consequence a number of central banks have begun to show interest in these models as tools for quantitative policy analysis despite the success in improving the empirical performance of dsge models misspecification remains a concern as shown in del negro schorfheide smets and wouters 2004 accounting for misspecification and model uncertainty in general is an important aspect of the assessment of monetary policies after all it has long been recognized that model and parameter uncertainty affects optimal policies e g brainard 1967 chow 1975 and craine 1979 1 this paper proposes a new method for taking model misspecification into account when assessing the performance of alternative interest rate feedback rules we apply this approach to evaluate different policies in the context of a new keynesian dsge model including the estimated volcker greenspan rule a natural approach in the presence of model uncertainty is to evaluate policy rules within all the model specifications that are under consideration in choosing the best performing rule one can either follow a bayesian route assigning probabilities to models and minimizing the overall posterior expected loss alternatively one can follow a minimax strategy by adopting a policy that minimizes the worst case loss across models the literature contains numerous applications of these ideas e g mccallum 1988 levin wieland and williams 1999 2003 rudebusch 2001 2003 onatski and stock 2002 onatski and williams 2003 brock durlauf and west 2004 cogley and sargent 2005 and hansen and sargent 2005 all these papers differ with regard to the type of models included in the model set and the formulation of the decision problem that leads to the choice of a preferred policy our analysis differs from previous work with respect to the method that is used to construct a model set and assign probabilities to these models so that a bayesian calculation of posterior expected performance is possible we start from a dsge model in which monetary policy is modelled through an interest rate feedback rule the dsge model imposes cross coefficient restrictions on a vector autoregressive representation of the data while we are assuming that the data obey a vector autoregressive law of motion we allow for potential deviations from the cross coefficient restrictions at the same time we maintain the assumption that monetary policy follows the same interest rate rule as in the dsge model

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

robust bilateral trade and mediated bargaining we consider bilateral trade problems subject to incomplete information on the reservation values of the agents we address negotiations where the communication of proposals takes place through the filter of a third party a mediator traders submit proposals over continuous time to the mediator that receives bids and keeps them secret until they are compatible a regular robust equilibrium rre is an undominated ex post equilibrium where with sufficient delay all compatible traders reach agreement we present a characterization of rre for risk neutral traders that discount the future at the same exponential rate we show how to compute rre strategy profiles and we explicitly display the unique one where agreements split the net surplus in equal shares our results support the claim that bargaining through a mediator is an effective procedure to promote efficiency jel c78 d02 d74 d82

agricultural price transmission across space and commodities during price bubbles this article investigates agricultural price transmission during price bubbles the empirical approach concerns the horizontal transmission of cereal prices both across different market places and across different commodities the trade policy intervention put forward to mitigate the impact of price exuberance is considered the analysis is performed using italian and international weekly spot cash price data over years 2006 2010 a period of generalized turbulence of agricultural markets firstly the properties of price time series are explored then interdependence across prices is specified and estimated by adopting appropriate cointegration techniques results suggest that the bubble had only a slight impact on the price spread and the temporary trade policy measure when effective has limited this impact

learning in an estimated medium scale dsge model in this paper we evaluate the empirical relevance of learning by private agents in an estimated medium scale dsge model we replace the standard rational expectation assumption in the smets and wouters 2007 model by a constant gain learning mechanism if agents know the correct structure of the model and only learn about the parameters both expectation mechanisms resultin asimilarfit and onlythetransition dynamicsthatare generated byspecific initial beliefs can distinguish the two approaches if in addition agents use only a reduced information set in forming the perceived law of motion the implied model dynamics change and for some initial beliefs the marginal likelihood of the model is further improved however the estimated gain parameter is estimated to be small which suggests a crucial role for the initial beliefs to explain the improved fit the learning models with the highest posterior probabilities add some additional persistence to the dsge model that reduce the gap between the irfs of the dsge model and the more data driven dsge var model however the additional dynamics that are introduced by the learning process do not systematically alter the estimated structural parameters related to the nominal and real frictions in the dsge model jel codes c11 d84 e30 e52

are daily financial data useful for forecasting gdp evidence from mexico this article evaluates the use of financial data sampled at high frequencies to improve short term forecasts of quarterly gdp for mexico the model uses both quarterly and daily sampling frequencies while remaining parsimonious in particular the mixed data sampling midas regression model is employed to deal with the multi frequency problem to preserve parsimony factor analysis and forecast combination techniques are used to summarize the information contained in a data set containing 392 daily financial series our findings suggest that the midas model incorporating daily financial data leads to improvements in quarterly forecasts of gdp growth over traditional models that either rely only on quarterly macroeconomic data or average daily frequency data the evidence suggests that this methodology improves the forecasts for the mexican gdp notwithstanding its higher volatility relative to that of developed countries furthermore we explore the ability of the midas model to provide forecast updates for gdp growth nowcasting

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

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

identification issues in limited information bayesian analysis of structural macroeconomic models the likelihood of the parameters in structural macroeconomic models typically has non identification regions over which it is constant when sufficiently diffuse priors are used the posterior piles up in such non identification regions use of informative priors can lead to the opposite so both can generate spurious inference we propose priors posteriors on the structural parameters that are implied by priors posteriors on the parameters of an embedding reduced form model an example of such a prior is the jeffreys prior we use it to conduct bayesian limited information inference on the new keynesian phillips curve with a var reduced form for us data

union wage settlements during a disinflation this paper examines the role of union wage contracts in the persistence of inflation and the implication of these contracts for the problem of disinflation in the united states a quantitative model of overlapping con tracts explicitly oriented toward the major union sector is developed the model takes account of expectations of future wage price and employment conditions as in more aggregated models that have been used in macroeconomic research in addition the distribution of workers according to contract length as well as deferred wage increases and escalator clauses are explicitly used in the model the main aim of the model is to determine the constraints which these contracts impose on disinflation paths the model indicates that the maximum speed of disinflation is extremely slow in the early phases if a rise in unemployment is to be avoided but increases considerably before the new lower rate of inflation is reached the disinflation path is considerably slower than that observed after hyperinflation periods however the existence of a path of inflation reduction raises questions about whether the institution of union wage con tracts is really the direct cause of costly disinflations or whether their influence works indirectly by raising credibility problems about a monetary disinflation this abstract was borrowed from another version of this item

comparing shocks and frictions in us and euro area business cycles a bayesian dsge approach this paper estimates a dsge model with many types of shocks and frictions for both the us and the euro area economy over a common sample period 1974 2002 the structural estimation methodology allows us to investigate whether differences in business cycle behaviour are due to differences in the type of shocks that affect the two economies differences in the propagation mechanism of those shocks or differences in the way the central bank responds to those economic developments our main conclusion is that each of these characteristics is remarkably similar across both currency areas copyright 2005 john wiley sons ltd

money demand heterogeneity and the great moderation abstract a forward looking model of the demand for money based on heterogeneous and sluggish portfolio adjustment can simultaneously account for the low short run and high long run semi elasticities reported in the literature the parameter estimates from the model for the short run and long run interest semi elasticities are 1 04 and 13 16 respectively a simulated version of the model suggests that the great moderation can be partially attributed to financial innovations in the late 1970s when moving toward a more flexible portfolio the model can account for almost one third of the observed decline in the volatilities of output consumption and investment

testing the implications of long run neutrality for monetary business cycle models this paper compares sample fluctuations of the us business cycle with those predicted by a class of equilibrium monetary business cycle models the predictions of the models are generated using the longrun neutrality restrictions implicit in the models by imposing these restrictions on sample data tests of the ability of the models to replicate the dynamics of the us business cycle are constructed although the predictions of the models for real side variables are rejected there is evidence that the nominal side predictions of the models are not rejected

real time forecasting with a mixed frequency var this article develops a vector autoregression var for time series which are observed at mixed frequencies quarterly and monthly the model is cast in state space form and estimated with bayesian methods under a minnesota style prior we show how to evaluate the marginal data density to implement a data driven hyperparameter selection using a real time dataset we evaluate forecasts from the mixed frequency var and compare them to standard quarterly frequency var and to forecasts from midas regressions we document the extent to which information that becomes available within the quarter improves the forecasts in real time this article has online supplementary materials

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

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

optimal monetary policy optimal monetary policy maximizes the welfare of a representative agent given frictions in the economic environment constructing a model with two sets of frictions costly price adjustment by imperfectly competitive firms and costly exchange of wealth for goods we find optimal monetary policy is governed by two familiar principles first the average level of the nominal interest rate should be sufficiently low as suggested by milton friedman that there should be deflation on average yet the keynesian frictions imply that the optimal nominal interest rate is positive second as various shocks occur to the real and monetary sectors the price level should be largely stabilized as suggested by irving fisher albeit around a deflationary trend path since expected inflation is roughly constant through time the nominal interest rate must therefore vary with the fisherian determinants of the real interest rate although the monetary authority has substantial leverage over real activity in our model economy it chooses real allocations that closely resemble those which would occur if prices were flexible in our benchmark model there is some tendency for the monetary authority to smooth nominal and real interest rates

priors from general equilibrium models for vars abstract this paper uses a simple new keynesian dynamic stochastic general equilibrium model as a prior for a vector autoregression shows that the resulting model is competitive with standard benchmarks in terms of forecasting and can be used for policy analysis jel classification c11 c32 c53 key words bayesian analysis dsge models forecasting vector autoregressions 1 introduction dynamic stochastic general equilibrium dsge models are popular nowadays in macroeconomics they are taught in virtually every economics ph d program and represent a predominant share of publications in the field yet when it comes to policy making these models are scarcely used at least from a quantitative point of view the main quantitative workhorse for policy making at the federal reserve system is frb us a macro econometric model built in the cowles foundation tradition a style of macroeconomics that is no longer taught in many ph d programs 1 in their decision process fed policy makers rely heavily on forecasting they want to know the expected path of inflation in the next few quarters and by how much a 50 basis point increase in the federal funds rate would affect that path frb us offers answers to these questions answers that many macroeconomists would regard with suspicion given both the lucas 1976 critique and the fact that in general the restrictions imposed by cowles foundation models are at odds with dynamic general equilibrium macroeconomics sims 1980 general equilibrium models on the other hand have a hard time providing alternative answers the fact that these models are perceived to do badly in terms of forecasting as they are scarcely parameterized is perhaps one of the reasons why they are not at the forefront of policy making while progress is being made in the development of dsge models that deliver acceptable forecasts e g smets and wouters 2003 this paper proposes an approach that combines a stylized general equilibrium model with a vector autoregression var to obtain a specification that both forecasts well and is usable for policy analysis specifically the approach involves using prior information coming from a dsge model in the estimation of a vector autoregression loosely speaking this prior can be thought of as the result of the following exercise i simulate time series data from the dsge model ii fit a var to these data in practice we replace the sample moments of the simulated data by population moments computed from the dsge model solution since the dsge model depends on unknown structural parameters we use a hierarchical prior in our analysis by placing a distribution on the dsge model parameters a tightness parameter controls the weight of the dsge model prior relative to the weight of the actual sample markov chain monte carlo methods are used to generate draws from the joint posterior distribution of the var and dsge model parameters the paper shows that the approach makes even a fairly stylized new keynesian dsge model competitive with standard benchmarks in terms of forecasting real output growth inflation and the nominal interest rate the three variables that are of most interest to policy makers 2 up to this point our procedure borrows from the work of dejong ingram and whiteman 1993 and ingram and whiteman 1994 who are the first to use priors from dsge models for vars ingram and whiteman showed that prior information from the bare bones stochastic growth model of king plosser and rebelo 1988 is helpful in forecasting real economic activity such as output consumption investment and hours worked in addition to documenting the forecasting performance of a trivariate var with a prior derived from a monetary dsge model this paper makes two contributions that significantly extend the earlier work first we show formally how posterior inference for the var parameters can be translated into posterior inference for dsge model parameters

export restrictions and price insulation during commodity price booms for individual countries variable trade barriers can be used to reduce the volatility of domestic relative to world prices if this is done by countries accounting for a large share of the market its effect is offset by increases in world price volatility this study shows the nature of the resulting collective action problem with the policy being ineffective on average in stabilizing domestic prices while increasing the volatility of the income transfers from terms of trade changes a simple approach to assessing the contribution of insulation to the price increases is developed and used with new estimates of agricultural distortions to assess its contribution to the price spikes in 1972 74 and 2006 08 for rice and wheat the analysis suggests that 45 percent of the increase in rice prices in 2006 08 and 30 percent of the increase in wheat prices was due to insulating behavior one sign of progress since 1972 74 was a substantial reduction in the extent of price insulating behavior by the industrial countries this provides little stabilizing benefit in the rice market because countries not classifying themselves at the world trade organization as developing account for only 3 percent of world rice consumption but it does offer some benefit for the wheat market where non developing countries account for 27 percent of consumption

on the fit of new keynesian models this article provides new tools for the evaluation of dynamic stochastic general equilibrium dsge models and applies them to a large scale new keynesian model we approximate the dsge model by a vector autoregression and then systematically relax the implied cross equation restrictions and document how the model fit changes we also compare the dsge model s impulse responses to structural shocks with those obtained after relaxing its restrictions we find that the degree of misspecification in this large scale dsge model is no longer so large as to prevent its use in day to day policy analysis yet is not small enough to be ignored

the welfare cost of inflation in general equilibrium abstract this paper presents a general equilibrium monetary model in which inflation distorts a variety of marginal decisions although individually none of the distortions is very large they combine to yield substantial welfare cost estimates a sustained 4 percent inflation like that experienced in the us since 1983 costs the economy the equivalent of 0 41 percent of output per year when currency is identified as the relevant definition of money and over 1 percent of output per year when m1 is defined as money the results illustrate how the traditional partial equilibrium approach can seriously underestimate the true cost of inflation

implications of higher global food prices for poverty in low income countries in many poor countries the recent increases in prices of staple foods raise the real incomes of those selling food many of whom are relatively poor while hurting net food consumers many of whom are also relatively poor the impacts on poverty will certainly be very diverse but the average impact on poverty depends upon the balance between these two effects and can only be determined by looking at real world data results using household data for ten observations on nine low income countries show that the short run impacts of higher staple food prices on poverty differ considerably by commodity and by country but that poverty increases are much more frequent and larger than poverty reductions the recent large increases in food prices appear likely to raise overall poverty in low income countries substantially

on the precision of calvo parameter estimates in structural nkpc models abstract we study the extent of empirical information that can be obtained from alternative structural new keynesian inflation equations concerning the average duration of prices in the united states given that such specifications may be hard to identify using four different indexation and real wage rigidity based models in conjunction with identification robust econometric methods we evaluate the precision of calvo parameter estimates while results are sensitive to calibration and instrument selection we find confidence bounds on the average duration of prices that line up with available micro founded studies statistically significant coefficients for the forcing variables and non zero estimates on the coefficient of lagged inflation

inflation dynamics the role of public debt and policy regimes abstract in a passive monetary and active fiscal policy regime changes in the value of public debt generate wealth effects on households then in contrast to the active monetary and passive fiscal policy regime inflation moves oppositely from the inflation target and a stronger reaction of interest rates to inflation increases the response of inflation to shocks moreover a higher level of public debt increases the response of inflation while a weaker reaction of taxes to debt decreases the response of inflation to shocks in a passive monetary and passive fiscal policy regime both monetary and fiscal policy parameters affect inflation

on delay in bargaining with one sided uncertainty recently attention has been given to a model of two person bargaining in which the parties alternate making offers and there is uncertainty about the valuation of one party the purpose of the analysis has been to identify delay to agreement with a screening process where agents with relatively lower valuations distinguish themselves by waiting longer to settle we point out a fundamental difficulty with this program by demonstrating that the assumptions used in the literature allow for delay only in so far as the time between offers is significant

combining var and dsge forecast densities a popular macroeconomic forecasting strategy utilizes many models to hedge against instabilities of unknown timing see among others stock and watson 2004 clark and mccracken 2010 and jore et al 2010 existing studies of this forecasting strategy exclude dynamic stochastic general equilibrium dsge models despite the widespread use of these models by monetary policymakers in this paper we use the linear opinion pool to combine inflation forecast densities from many vector autoregressions vars and a policymaking dsge model the dsge receives a substantial weight in the pool at short horizons provided the var components exclude structural breaks in this case the inflation forecast densities exhibit calibration failure allowing for structural breaks in the vars reduces the weight on the dsge considerably but produces well calibrated forecast densities for inflation

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

strategic delay in bargaining this paper analyses a bargaining model with incomplete information in which the time between offers is an endogenous strategic variable we find equilibria involving a delay to agreement that is due to the use of strategic time delay by bargainers to signal their relative strength under some specifications of the parameters delay is present in the unique sequential equilibrium whose beliefs satisfy one intuitive restriction this delay does not vanish as the minimal time between offers becomes small