a reevaluation of the macroeconomic effects of positive trend inflation abstract to date most of the papers which have examined the effects of trend inflation on the properties of new keynesian model were based on relatively simple sticky prices dsge models and whose realism was sometimes questionable in this paper we re evaluate the macroeconomic effects of non zero trend inflation building on the model of ascari 2004 as one of the most cited papers in the literature on the effects of trend inflation we show that the omission of some important theoretical ingredients significantly distorts the results obtained to date we propose a refinement of this model by introducing two theoretical important ingredients namely investment adjustment costs and a roundabout production structure once we add these features to make the model more realistic as commonly for medium scale models we find that the standard new keynesian model without real frictions overestimates the short term macroeconomic effects of a positive trend inflation rate and underestimates those of the long term

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

output dynamics in real business cycles models the time series literature reports two stylized facts about output dynamics in the united states gnp growth is positively autocorrelated and gnp appears to have an important trend reverting component this paper investigates whether current real business cycle rbc models are consistent with these stylized facts many rbc models have weak internal propagation mechanisms and must rely on external sources of dynamics to replicate both facts models that incorporate labor adjustment costs are partially successful they endogenously generate positive autocorrelation in output growth but they need implausibly large transitory shocks to match the trend reverting component in output

the quantitative analytics of the basic neomonetarist model this paper constructs a dynamic macroeconomic model with less than perfect price flexibility which has a classical side consistent with real business cycle theory augmented by investment adjustment costs increasing returns to scale and a new flexible formalization of imperfect competition something akin to the classical dichotomy is justified by a mode of approximation appropriate for a model in which one state variable adjusts quickly while another state variable adjusts slowly even with investment adjustment costs monetary expansions are found to raise the real interest rate the determinants of real rigidity and the macroeconomic rate of price adjustment are investigated copyright 1995 by ohio state university press

real rigidities and the non neutrality of money rigidities in real prices are not sufficient to create rigidities in nominal prices and real effects of nominal shocks and by themselves small frictions in nominal adjustment such as costs of changing prices create only small non neutralities but this paper shows that substantial nominal rigidity can arise from a combination of real rigidities and small nominal frictions the paper shows the connection between real and nominal rigidity given the presence of nominal frictions both in general and for two specific sources of real rigidity one arising from goods market imperfections and the other from labour market imperfections

the indirect effects of foreign direct investment on trade a network perspective the relationship between international trade and foreign direct investment fdi is one of the main features of globalisation in this paper we investigate the effects of fdi on trade from a network perspective since fdi takes not only direct but also indirect channels from origin to destination countries because of firms incentive to reduce tax burden to minimise coordination costs and to break barriers to market entry we use a unique data set of international corporate control as a measure of stock fdi to construct a corporate control network ccn where the nodes are the countries and the edges are the corporate control relationships network measures as the shortest path length and the communicability are then computed on the ccn to capture the indirect channel of fdi empirically we find that corporate control has a positive effect on trade both directly and indirectly the result is robust with different specifications and estimation strategies hence our paper provides strong empirical evidence of the indirect effects of fdi on trade moreover we identify a number of interplaying factors such as regional trade agreements and the region of asia we also find that the indirect effects are more pronounced for the manufacturing sector than for primary sectors such as oil extraction and agriculture

risk taking global diversification and growth this paper develops a continuous time stochastic model in which international risk sharing can yield substantial welfare gains through its effect on expected consumption growth the mechanism linking global diversification to growth is an attendant world portfolio shift from safe low yield capital to riskier high yield capital the presence of these two types of capital captures the idea that growth depends on the availability of an ever increasing array of specialized hence inherently risky production inputs calibration exercises using consumption and stock market data imply that most countries reap large steady state welfare gains from global financial integration copyright 1994 by american economic association

money new keynesian macroeconomics and the business cycle abstract we show in this paper that the typical modern business cycle cannot be reduced to the real business cycles archetype a monopolistic competition model with price adjustment costs affected by technological and monetary shocks better mimics the economic fluctuations in two countries with very different cyclical properties namely france and the united states in our model monetary shocks are necessary to reproduce the standard deviation of output the money output correlation the labour productivity worked hours relative standard deviation the labour productivity worked hours correlation and the mark up output correlation with two independent shocks one real more specifically defined than the solow residual and one nominal the model gives an answer to some empirical puzzles which were left unexplained by traditional rbc models

wages and employment under trade unionism microeconomic models and macroeconomic applications the first part of this paper is a critical survey of microeconomic research into behavioural models of trade unionism although certain formulations of union objectives and models of wage and employment determination in unionized markets have found favor with economists unfortunately only a little is known about their empirical relevance the second part of this paper deals with the daunting problems of applying these models at the macroeconomic level one such model is estimated with data from sweden s mining and manufacturing sector from 1968 to 1982

stabilising properties of discretionary monetary policies in a small open economy this article sets out a simple new keynesian open economy model and shows that the conduct of discretionary monetary policy in an open economy differs substantially from the closedeconomy framework the article shows analytically that the existence of the direct exchange rate channel in the open economy phillips curve impairs the perfect stabilising property of monetary policy in the face of demand side disturbances under domestic inflation targeting if cpi inflation is instead the target then the perfect stabilising property of monetary policy breaks down even in the absence of the direct exchange rate channel in the phillips curve

nominal price rigidity money supply endogeneity and business cycles abstract this paper investigates the ability of nominal price rigidity to explain the co movement of inflation with the cyclical component of output observed in the post war u s data a dynamic general equilibrium model is constructed with the introduction of monopolistic competition and nominal price rigidity in a standard real business cycle model allowing for an endogenous money supply rule it is then demonstrated that sticky price models can explain the observed associations between movements in inflation and output much better than flexible price models this result depends little on whether money supply is assumed to be endogenous or not

price elasticities and demand side real rigidities in micro data and in macro models abstract high degrees of demand side real rigidities are able to generate the large monetary non neutrality found in aggregate data this paper provides micro based evidence on the key parameters governing this rigidity using european homescan data we find strong evidence for demand side real rigidity which is however significantly lower than that normally assumed in macro models in a menu cost model calibrated to our estimates we show that these estimates are associated with reasonable values for production side parameters but they are not able to generate the degree of monetary non neutrality observed in macro data

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

sticky price models of the business cycle can the contract multiplier solve the persistence problem we construct a quantitative equilibrium model with firms setting prices in a staggered fashion and use it to ask whether monetary shocks can generate business cycle fluctuations these fluctuations include persistent movements in output along with the other defining features of business cycles like volatile investment and smooth consumption we assume that prices are exogenously sticky for a short time persistent output fluctuations require endogenous price stickiness in the sense that firms choose not to change prices much when they can do so we find that for a wide range of parameter values the amount of endogenous stickiness is small thus we find that in a standard quantitative model staggered price setting alone does not generate business cycle fluctuations

overlapping free trade agreements and international trade a network approach in our work we have analysed the effect of the hub and spoke nature of free trade agreements ftas on trade contrary to previous analyses we have considered the effects of the country s position in the fta network on the bilateral trade of the hub country we have conducted an in depth analysis of the global network of ftas focusing particularly on its evolution in the last 15 years we have utilised a panel data set covering the period 1960 2010 to investigate the effects of the hub and spoke on trade our results show that the countries that are more connected to ftas export more than those that are less involved although not all the partner countries you can connect with are the same an increase in the number of spokes that have no link between them has on average a negative effect on the trade of the hub which indicates that signing ftas with every country is not the optimal strategy for increasing trade however if we consider the way new ftas change the relative position of a country we can see that if new ftas make the country more central or less constrained in the network these new agreements have a strongly positive and significant pro trade effect

habit formation in consumption and its implications for monetary policy models this paper explores a monetary policy model with habit formation for consumers in which consumers utility depends in part on current consumption relative to past consumption the empirical tests developed in the paper show that one can reject the hypothesis of no habit formation with tremendous condence largely because the habit formation model captures the gradual hump shaped response of real spending to various shocks the paper then embeds the habit consumption specication in a monetary policy model and nds that the responses of both spending and inflation to monetary policy actions are signicantly improved by this modication jel d12 e52 e43

sticky prices as coordination failure this paper links the coordination failure and menu cost approaches to the microeconomic foundations of keynesian macroeconomics if a firm s desired price is increasing in others prices then the gain from price adjustment after a nominal shock is greater if others adjust this strategic complementarity leads to multiple equilibria in the degree of rigidity welfare may be much higher in the equilibria with less rigidity thus nominal rigidity arises from a failure to coordinate price changes jel e12 e30 keynesian macroeconomics waned in the 1970 s because economists grew disenchanted with its weak microeconomic foundations the central difficulty was that keynesian models were based on ad hoc rigidities in nominal wages and prices the 1980 s produced two approaches to reviving keynesian theory the menu cost literature n gregory mankiw 1985 george akerlof and janet yellen 1985 seeks to provide rigorous explanations for nominal rigidities these papers argue that small frictions in price setting are enough to produce large nominal rigidities in contrast the coordination failure literature russell cooper and andrew john 1988 abandons nominal rigidities and seeks alternative foundations for keynesian models the central idea is that many economic activities such as production e g john bryant 1983 trade e g peter diamond 1982 and investment e g nobuhiro kiyotaki 1988 exhibit synergism or strategic complementarity one agent s optimal level of activity depends positively on others activity strategic complementarity can lead to multiple equilibria with high activity equilibria superior to low activity equilibria thus an economy may be stuck in an underemployment equilibrium even though a superior equilibrium exists models with nominal rigidities and models with coordination failures are often presented as competing paradigms 1 this paper shows that this view is incorrect we take a step toward unifying the foundations of keynesian economics by showing that the two sets of ideas are highly complementary nominal rigidity arises from a failure to coordinate price changes this failure has the essential features of coordination failures in previous models flexibility in one firm s price increases the incentives for other firms to make their prices flexible this strategic complementarity leads to multiple equilibria in the degree of nominal rigidity equilibria with less rigidity more active price adjustment are often pareto superior to equilibria with more rigidity these results contribute to our understanding both of coordination failure and of nominal rigidity the range of keynesian phenomena explained by coordination failures is greatly expanded previous coordination failure models contain only real variables and thus ascribe no role to monetary policy or other determinants of nominal spending our results suggest that coordination failure is at the root of inefficient nonneutralities of money theories of nominal rigidities gain new empirical and policy im

is inflation sticky abstract new keynesian sticky price models predict that monetary policy can affect real variables however they also predict that inflation can be reduced without depressing output or employment in fact bringing down inflation is costly presenting a challenge to the new keynesian model two departures from the new keynesian model predict costly disinflation one assumes sticky inflation rather than sticky prices while the other assumes less than perfectly rational expectations taking into account information from surveys of inflation expectations i find the evidence suggests that inflation is not sticky and that inflation expectations are less than perfectly rational

international trade without ces estimating translog gravity this paper derives a micro founded gravity equation in general equilibrium based on a translog demand system that allows for endogenous markups and substitution patterns across goods in contrast to standard ces based gravity equations trade is more sensitive to trade costs if the exporting country only provides a small share of the destination country s imports as a result trade costs have a heterogeneous impact across country pairs with some trade flows predicted to be zero i test the translog gravity equation and find strong empirical support in its favor

the effects of real and monetary shocks in a business cycle model with some sticky prices an established characteristic of macroeconomic fluctuations is the strong positive correlation between variations in the money stock and variations in production income and employment at business cycle frequencies this finding has motivated an enormous literature that has studied the effects of monetary policy disturbances on the real economy and in particular the role of money in business cycles several classes of monetary business cycle models have been developed that feature different channels through which monetary policy can have real effects one model that has been used widely is the keynesian model in which monetary shocks can have important effects on allocations because there are nominal rigidities in prices and or wages the keynesian assumption of sticky nominal prices is often motivated by reference to studies that have analyzed the frequency of nominal price changes the broad conclusion that emerges from this literature is that there are a number of goods that have prices that appear to change infrequently for example carlton 1989 has reported slow changes in nominal transactions prices for producers goods even without long term relationships between buyers and sellers and has documented that delivery lags and other product characteristics frequently change before nominal prces change similarly blinder s survey 1991 of firms shows that prices for many goods change only about once per year while this evidence

global capital flows and financing constraints firms often cite financing constraints as one of their primary obstacles to investment global capital flows by bringing in scarce capital may ease the financing constraints of host country firms but if incoming foreign investors borrow heavily from domestic banks foreign direct investment may exacerbate financing constraints by crowding host country firms out of domestic capital markets combining a unique cross country firm level panel with time series data on restrictions on international transactions and capital flows harrison love and mcmillan find that different measures of global flows are associated with a reduction in firm level financing constraints first the authors show that one type of capital inflow foreign direct investment is associated with a reduction in financing constraints second they test whether restrictions on international transactions affects the financing constraints of firms the results suggest that only one type of restriction those on capital account transactions negatively affects firms financing constraints the authors also show that multinational firms are not financially constrained and do not appear to be sensitive to the level of foreign direct investment this implies that foreign direct investment eases financing constraints for non multinational firms finally the authors show that 1 foreign direct investment only eases financing constraints in the non g7 countries and 2 other kinds of flows such as portfolio investment have no impact on financing constraints

monetary policy shocks what have we learned and to what end this paper reviews recent research that grapples with the question what happens after an exogenous shock to monetary policy we argue that this question is interesting because it lies at the center of a particular approach to assessing the empirical plausibility of structural economic models that can be used to think about systematic changes in monetary policy institutions and rules the literature has not yet converged on a particular set of assumptions for identifying the effects of an exogenous shock to monetary policy nevertheless there is considerable agreement about the qualitative effects of a monetary policy shock in the sense that inference is robust across a large subset of the identification schemes that have been considered in the literature we document the nature of this agreement as it pertains to key economic aggregates

real and nominal propagation of nominal shocks the role of real and nominal propagation mechanisms in generating persistent real effects of nominal shocks is analysed analytically in a fully specified intertemporal general equilibrium model while neither a real propagation mechanism capital acccumulation with one period nominal contracts nor nominal propagation staggered nominal contracts in the absence of any real propagation can generate plausible impulse responses with strong persistence it is shown that the two mechanisms interact so as to strengthen persistence possibly unit roots and generate more plausible impulse responses

endogenous business cycle propagation and the persistence problem the role of labor market frictions contrasting sharply with a recent trend in dsge modeling we propose a business cycle model where frictions and shocks are chosen with parsimony the model emphasizes a few labor market frictions and shocks to monetary policy and technology the model estimated from u s quarterly postwar data accounts well for important differences in the serial correlation of the growth rates of aggregate quantities the size of aggregate fluctuations and key comovements including the correlation between hours and labor productivity despite its simplicity the model offers an answer to the persistence problem chari et al 2000 that does not rely on multiple frictions and adjustment lags or ad hoc backward looking components we conclude modern dsge models need not embed large batteries of frictions and shocks to account for the salient features of postwar business cycles

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

market structure and cyclical fluctuations in u s manufacturing the relevance of imperfect competition for models of economic fluctuations has received increased attention from researchers in both macroeconomics and industrial organization the authors outline a new methodology for estimating industry markups of price over marginal cost and the influence of market structure on cyclical movements in total factor productivity measures of industry concentration import competition and unionization are important for explaining markups in some industry groups much of the estimated markup of price over marginal cost is accounted for by noncapital fixed costs finally the authors show that their estimated margins fluctuate substantially over the cycle in particular markups are countercyclical especially in concentrated durable goods industries copyright 1988 by mit press

price stickiness trend inflation and output dynamics a cross country analysis the sticky price model of aggregate fluctuations implies that countries with high trend inflation rates should exhibit less persistent output fluctuations than countries with low trend inflation

international trade foreign investment and the formation of the entrepreneurial class in this paper i examine the argument that free trade may be harmful to less developed countries because such international competition inhibits the formation of a local entrepreneurial class i view the entrepreneur as the manager of the industrial enterprise as well as the agent who bears the risks associated with industrial production a two sector model of a small open economy is developed in which the size of the entrepreneurial class is endogenous it is shown that the entrepreneurial class is smaller under free trade than would be first best optimal in the presence of efficient risk sharing institutions such as stock markets nonetheless there are potential gains from trade and any protectionist policy that increases the number of entrepreneurs will have deleterious welfare consequences this abstract was borrowed from another version of this item

persistency in sticky price models abstract nominal rigidities imply that nominal shocks have an impact effect which may be propagated by standard mechanisms however the nominal adjustment process may in itself be a propagation mechanism causing persistent effects of nominal shocks this may be caused by inertia in nominal wage and price adjustment arising due to input output networks or multiperiod nominal contracting as captured in models with staggered price wage decisions it has recently been contested whether staggering can account for persistency of any quantitative importance this paper reviews the theory and empirical evidence on this issue and it is concluded that staggering may be a quantitative important propagation mechanism

constructing and estimating a realistic optimizing model of monetary policy abstract a dynamic stochastic general equilibrium dsge model with real and nominal both price and wage rigidities succeeds in capturing some key nominal features of u s business cycles additive technology shocks as well as multiplicative shocks are introduced and shown to be crucial monetary policy is specified as an interest rate targeting rule following developments in the structural vector autoregression var literature the interaction between real and nominal rigidities is essential to reproduce the liquidity effect of monetary policy the model is estimated by maximum likelihood on u s data and its fit is comparable to that of an unrestricted first order var besides producing reasonable impulse responses and second moments this model replicates a feature of u s business cycles never captured by previous research with dsge models that an increase in interest rates predicts a decrease in output two to six quarters in the future

how much persistence should sticky price models generate to match us data abstract a number of recent papers find that sticky price models fail to explain the persistence of output and inflation we argue that this failure is partially attributable to low frequency fluctuations present in us data but absent from sticky price models

output growth the real wage and employment fluctuations this paper is an attempt to contribute to the integration of business cycle analysis with long term growth a real business cycle model with endogenous growth is developed and estimated with u s data in the present framework wage movements do not have to be transitory to generate fluctuations in labor effort the reduced form is a constrained bivariate output hours or real wage hours vector autoregressive process the bivariate setup provides a useful framework for analyzing the persistence of output fluctuations given that the theory implies that hours of work contain information about future output movement copyright 1991 by american economic association

factor hoarding and the propagation of business cycles shocks this paper analyzes the role of variable capital utilization rates in propagating shocks over the business cycle to this end we formulate and estimate an equilibrium business cycle model in which cyclical capital utilization rates are viewed as a form of factor hoarding we find that variable capital utilization rates substantially magnify and propagate the impact of shocks to agents environments the strength of these propagation effects is evident in the dynamic response functions of various economy wide aggregates to shocks in agents environments in the statistics that we construct to summarize the strength of the propagation mechanisms in the model and in the volatility of exogenous technology shocks needed to explain the observed variability in aggregate u s output other authors have argued that standard real business cycle rbc models fail to account for certain features of the data because they do not embody quantitatively important propagation mechanisms these features include the observed positive serial correlation in the growth rate of output the shape of the spectrum of the growth rate of real output and the correlation between the forecastable component of real output and various other economic aggregates allowing for variable capital utilization rates substantially improves the ability of the model to account for these features of the data

the wage price spiral this paper rehabilitates the old wage price spiral it shows that after an increase in aggregate demand the process of adjustment of nominal prices and nominal wages results from attempts by workers to maintain or increase their real wage and by firms to maintain or increase their markups of prices over wages under continuous price and wage setting the process of adjustment would be instantaneous under staggering of price and wage decisions the adjustment takes time the more inflexible real wages and markups are to shifts in demand the higher is the degree of price level inertia and the longer lasting are the effects of aggregate demand on output

pricing production and persistence though built with increasingly precise microfoundations modern optimizing sticky price models have displayed a chronic inability to generate large and persistent real responses to monetary shocks as recently stressed by chari kehoe and mcgrattan 2000 this is an ironic finding since taylor 1980 and other researchers were motivated to study sticky price models in part by the objective of generating large and persistent business fluctuations we trace this lack of persistence to a standard view of the cyclical behavior of real marginal cost built into current sticky price macro models using a fully articulated general equilibrium model we show how an alternative view of real marginal cost can lead to substantial persistence this alternative view is based on three features of the supply side of the economy that we believe are realistic an important role for produced inputs variable capacity utilization and labor supply variability through changes in employment importantly these real flexibilities work together to dramatically reduce the elasticity of marginal cost with respect to output from levels much larger than unity in ckm to values much smaller than unity in our analysis these real flexibilities consequently reduce the extent of price adjustments by firms in time dependent pricing economies and the incentives for paying fixed costs of adjustment in state dependent pricing economies the structural features also lead the sticky price model to display volatility and comovement of factor inputs and factor prices that are more closely in line with conventional wisdom about business cycles and various empirical studies of the dynamic effects of monetary shocks federal reserve bank of philadelphia boston university nber and frb richmond this paper builds on earlier joint work with alexander l wolman on this topic we wish to thank brian boike for providing excellent research assistance and also to thank the referees and the editor for making numerous useful suggestions the views expressed in this article are those of the authors and do not necessarily represent those of the federal reserve bank of philadelphia the federal reserve bank of richmond or the federal reserve system

capacity constraints idiosyncratic demand uncertainty and the dynamics of inflation abstract this paper contributes to the theoretical modeling of inflation dynamics by analyzing the interplay between production inflexibilities and price setting behavior we formalize the capacity constraint hypothesis within the context of a new keynesian framework a key result shows how the dynamics of inflation depend on the distribution of utilization rates across firms in the economy the measure of resource utilization explicitly derived here allows the study of interesting dynamics absent in current formulations of the phillips curve

the j curve revisited an empirical examination for the united states abstract this paper examines empirical evidence for trade prices and quantities for the united states to determine whether j curve effects have occurred in recent history empirical estimates of exchnage rate pass through and trade volume responses to exchange rate changes for the 1967 to 1987 period indicate that the often told tale of trade balance deterioration and then improvement the j shaped adjustment path has not typically been experienced by the united states expenditures on imports have typically increased following dollar depreciations primarily as a result of relatively inelastic import volume responses export earnings have been seen to rise only marginally during these same dollar depreciations due to increases in export prices and the subsequent reductions induced in export volume the long run merchandise trade balance adjustment path is seen to resemble a sine wave rather the a j

nominal and real wage rigidities in new keynesian models a critical survey the labour market is receiving increasing attention in the new keynesian literature in this paper i critically survey this literature in order to highlight the role played by wage rigidities in the explanation of fluctuations caused by technology shocks to this aim i present a dynamic stochastic general equilibrium model with sticky prices nominal wage rigidities and hiring costs the comparison between this model and that of blanchard and gali highlights the non trivial differences which exist in the way nominal wage and real wage rigidities drive the economy s dynamics my conclusion is that models incorporating nominal wage rigidities and some degree of price stickiness provide a better account of macroeconomic dynamics than models with real wage rigidities copyright 2009 blackwell publishing ltd

retrospectives the convergence debate between david hume and josiah tucker one of the most interesting debates in modern economics centers around the question of whether integrating economies necessarily converge in terms of per capita income and technology this debate is often believed to have been started by thorstein veblen in 1915 however this paper demonstrates that the genesis of the convergence question goes back to the scottish enlightenment and the publication of an essay by david hume in 1742 the ensuing rich country poor country debate between david hume on the convergence side and josiah tucker on the nonconvergence side represents one of the first major doctrinal debates in economics

modeling the demand for alcoholic beverages and advertising specifications in this paper the demand for beer wine spirits and soft drinks in ontario is modeled in two parts an equation is specified to endogenize group expenditures and a demand system is set up to allocate budgeted group expenditures across types of beverages advertising is allowed to influence both the level of group expenditures and its allocation three popular advertising specifications are compared using the j test and the likelihood dominance criterion even though all three specifications fitted well according to standard criteria the calculated expenditure price and advertising elasticities were sensitive to the manner with which advertising is specified this clearly highlights the need to rely on a sound criterion to identify a dominant specification from the identified dominant specification we found that advertising has very subtle effects on expenditures on alcoholic beverages group and individual beverages thus advertising is not effective in enlarging markets and this suggests that firms especially breweries use advertising to compete in zero sum market share games from a public policy perspective our results are comforting but future research should investigate whether the neutral effect of advertising on aggregated expenditures hide substantial offsetting changes in the drinking habits of individuals 2000 elsevier science b v all rights reserved

pass through of exchange rates and competition between floaters and fixers this paper studies how a rise in the share of u s imports from china or any country with a fixed exchange rate could disproportionately lower pass through of exchange rates to u s import prices we develop a theoretical model showing how changes in the competitive environment induce exporters from other countries to lower markups in response to a dollar depreciation thereby moderating pass through the model indicates that a particular local bias condition is necessary for this effect and that free entry amplifies it the model also produces an approximately log linear structural equation for pass through regressions including the china share panel regressions over 1993 2006 indicate that the rising share of trade from china or from all countries with fixed exchange rates can explain a decline in pass through by about onefifth of its size

real exchange rate dynamics revisited a case with financial market imperfections abstract in this paper we investigate the relationship between real exchange rate dynamics and financial market imperfections for this purpose we first construct a new open economy macroeconomics noem model that incorporates staggered loan contracts as a simple form of the financial market imperfections our model with such a financial market friction replicates persistent volatile and realistic hump shaped responses of real exchange rates which have been thought very difficult to materialize in standard noem models remarkably these realistic responses can materialize even with both supply and demand shocks such as cost push loan rate and monetary policy shocks this implies that the financial market development is a key element for understanding real exchange rate dynamics

an estimated canadian dsge model with nominal and real rigidities this paper develops a dynamic stochastic general equilibrium dgse model for the canadian economy and evaluates the real effects of monetary policy shocks to generate high and persistent real effects the model combines nominal frictions in the form of costly price adjustment with real rigidities modelled as convex costs of adjusting capital and employment

an entrepreneur s choice of venture capitalist or angel financing a behavioral game theoretic approach abstract we develop a game theoretic model that analyzes the effects of economic and behavioral characteristics on an entrepreneur s choice of financier venture capitalist or angel after the entrepreneur has chosen his financier the dyad faces double sided moral hazard problems in the form of ex ante effort shirking and ex post project expropriation in making his choice of financier the entrepreneur trades off the following factors the venture capitalist has higher value creating abilities than the angel however the entrepreneur anticipates a closer more empathetic and trusting relationship with the angel entrepreneur angel empathy and trust mitigates the double sided shirking and expropriation threats our model contributes to two strands of venture capitalist research the entrepreneur s choice of financier in the face of double sided moral hazard problems and the effect of behavioral factors such as empathy and trust on the creation of relational rents

intermediate goods and business cycles implications for productivity and welfare this paper presents an aggregate demand driven model of business cycles that provides a new explanation for the procyclicality of productivity and simultaneously predicts large welfare losses from monetary nonneutrality the key features of the model are an input output production structure imperfect competition countercyclical markups and for some results state dependent price rigidity true technical efficiency is procyclical even though production takes place with constant returns without technology shocks or technological externalities the paper has observable implications that distinguish it empirically from related work these implications are generally supported by data from u s manufacturing industries copyright 1995 by american economic association

on endogenously staggered prices taylor s model of staggered contracts is an influential explanation for nominal inertia and the persistent real effects of nominal shocks however in standard imperfect competition models if agents are allowed to choose the timing of pricing decisions they will typically choose to synchronize this paper provides a simple model of imperfect competition which produces stable staggering our argument relies on strategic interaction at two levels between firms within an industries and across industries and produces a continuum of staggered price equilibria these equilibria are strict and hence stable under a simple adaptive learning process an enduring problem for business cycle theory is an explanation for the persistent effects of nominal shocks explaining persistence is particularly problematic for theories based on nominal shocks as opposed to real shocks this is because rational expectations implies that nominal shocks themselves cannot be serially correlated since nominal shocks are the deviation of realized nominal magnitudes from expected values in two important papers taylor 1979 1980 provided an argument as to why a nominal shock can have persistent effects taylor s argument required two important assumptions first he assumed that firms could adjust prices only in alternate periods an assumption which may be justified by menu or information costs taylor s second assumption was that price setting was staggered half the firms were constrained to adjust prices in odd periods while the other half were allowed to adjust prices in even periods these two assumptions combined to provide dramatic results on nominal inertia the adjustment of prices to a nominal shock is slow and hence output effects are long lasting taylor s results on persistence arise due to strategic complementarity between price setting decisions this implies that each firm s optimal price is an increasing function of the aggregate price level if a shock arrives in an even period firms in the even cohort will not adjust fully to the nominal shock since firms in the odd cohort have fixed prices in the current period furthermore with rational expectations the even cohort also takes into account the fact that its own failure to adjust fully will also make for partial adjustment in future periods this elegant story has made taylor s model possibly the most influential of new keynesian models by providing a dynamic setting within which small nominal rigidities may result in persistent nominal inertia

finance and growth for microenterprises evidence from rural china using a survey dataset of chinese rural households we find that access to external finance is positively associated with the decision to become entrepreneur and the initial investment for microenterprises also we find that use of informal finance especially financing from friends and family is positively associated with sales growth of microenterprises with employees but not of self employed we do not find any significant relationship between the use of formal finance and firm growth our findings underline the importance of finance for entrepreneurship and microenterprise growth and the role of informal finance in the absence of efficient formal financial institutions

labor hoarding and the business cycle this paper investigates the sensitivity of solow residual based measures of technology shocks to labor hoarding behavior using a structural model of labor hoarding and the identifying restriction that innovations to technology shocks are orthogonal to innovations in government consumption we estimate the fraction of the variability of the solow residual that is due to technology shocks our results support the view that a significant proportion of movements in the solow residual are artifacts of labor hoarding behavior specifically we estimate that the variance of innovations to technology is roughly 50 percent less than that implied by standard real business cycle models in addition our results suggest that existing real business cycle studies substantially overstate the extent to which technology shocks account for the variability of postwar aggregate u s output

social ties and foreign market entry the social dynamics which precede international exchange are considered in light of data collected on 133 foreign market entries from a sample of highly internationalized manufacturing firms consistent with research done in the social network field the findings support the hypothesis that knowledge of foreign market opportunities is commonly acquired via existing inter personal links rather than collected systematically via market research this study thus contributes towards an understanding of those antecedent conditions that lead to the formation of export exchange relationships

retrospectives adam smith s discovery of trade gravity the gravity equation is a current workhorse of empirical trade theory it is generally acknowledged that this theory which relates the extent of trade between countries to their respective sizes distances and relative trade barriers was first developed by jan tinbergen in 1962 acceptance of the gravity model as part of the discipline s core was limited by its scant theoretical foundation for the first 40 years of its existence this paper finds that a theory of trade gravity was first developed by adam smith in the wealth of nations moreover it is shown that smith s statement of a proportional relation between economic size and distance came about as an application of his general theory of differential capital productivity in different economic sectors and his elaboration of a theory of the gains from trade originated by david hume it is further shown that smith had an explanation of the size of border affects in trade volumes and a gravity theory of trade restrictions

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

business cycles and labor market search the quantitative implications of labor market search for economic fluctuations are evaluated in the context of a real business cycle model incorporating labor market search into the model is found to improve its empirical performance along several dimensions in particular hours now fluctuate substantially more than wages and the contemporaneous correlation between hours and productivity falls in addition the model replicates the observation that output growth displays positive autocorrelation at short horizons overall the empirical results suggest that the labor market search environment embodies a quantitatively important propagation mechanism copyright 1996 by american economic association

initial human and financial capital as predictors of new venture performance abstract this research seeks to predict the performance of new ventures based on factors that can be observed at the time of start up indicators of initial human and financial capital are considered to determine how they bear upon the probability of three possible performance outcomes 1 failure 2 marginal survival or 3 high growth four categories of initial human and financial capital are examined general human capital represented here by the entrepreneur s education gender and race may reflect the extent to which the entrepreneur has had the opportunity to develop relevant skills and contacts management know how embodied in the entrepreneur or available through advisors or partners reflects management specific skills and knowledge without regard to the kind of business industry specific know how reflects specific experience in similar businesses financial capital is one of the most visible resources it can create a buffer against random shocks and allow the pursuit of more capital intensive strategies which are better protected from imitation the study utilizes a longitudinal study of 1053 new ventures representative of all industry sectors and geographical regions the research departs from most previous studies in considering different measures of performance marginal survival and growth and in considering explicitly whether the factors contributing to marginal survival differ from those contributing to high growth it was found that measures of general human capital influenced both survival and growth except for gender with women owned ventures being less likely to grow but just as likely to survive management know how variables had more limited impact having parents who had owned a business contributed to marginal survival but not to growth number of partners contributed to growth but not to survival management level prior employment in non profit organizations or not having been in the labor force and the use of professional advisors did not have significant effects industry specific know how contributed to both survival and growth amount of initial financial capital also contributed to both the usefulness of the model is enhanced by the fact that the resource variables considered are relatively easy to assess and all can be considered at the time of start up although some of the human capital variables cannot easily be changed the benefits or risks associated with each can be assessed in some cases potential problems can be identified so that plans can be modified to improve prospects overall it appears that using a model based upon the initial human and financial capital of the venture it is possible to predict the performance of new ventures with some degree of confidence

the new open economy macroeconomics a survey since the 1995 publication of obsteld and rogoff s redux model there has been an outpouring of research on open economy dynamic general equilibrium models that incorporate imperfect competition and nominal rigidities this paper offers an interim survey of this recent literature 2001 elsevier science b v all rights reserved

monetary non neutrality in a multisector menu cost model empirical evidence suggests that as much as one third of the u s business cycle is due to nominal shocks we calibrate a multisector menu cost model using new evidence on the cross sectional distribution of the frequency and size of price changes in the u s economy we augment the model to incorporate intermediate inputs we show that the introduction of heterogeneity in the frequency of price change triples the degree of monetary non neutrality generated by the model we furthermore show that the introduction of intermediate inputs raises the degree of monetary non neutrality by another factor of three without adversely affecting the model s ability to match the large average size of price changes a single sector model with a frequency of price change equal to the median rather than the mean generates monetary non neutrality similar to that in our multisector model our multisector model with intermediate inputs generates variation in real output in response to calibrated aggregate nominal shocks that can account for roughly 23 of the u s business cycle

alternative time patterns of decisions and dynamic strategic interactions this paper offers a simple approach to study steady state markov perfect equilibria arising in dynamic games when players are obliged to commit their actions for several periods it highlights the importance of spillovers and dynamic strategic interactions when assessing the various time patterns conceivable in such games the obtained results are then applied to various either micro or macroeconomic issues where time patterns of decisions matter

staggered price setting staggered wage setting and business cycle persistence abstract staggered price setting and staggered wage setting are commonly viewed as similar mechanisms in generating persistent real effects of monetary shocks in this paper we distinguish the two mechanisms in a dynamic stochastic general equilibrium framework we show that although the dynamic price setting and wage setting equations are alike a key parameter governing persistence is linked to the underlying preferences and technologies in different ways with reasonable parameter values the staggered price mechanism by itself is incapable of while the staggered wage mechanism plays an important role in generating persistence

optimising agents staggered wages and persistence in the real effects of money shocks in this paper we incorporate taylor s 1979 staggered wage setting into an optimising dynamic general equilibrium framework to study whether staggered wages could induce a high degree of persistence in the real effects of money shocks we conclude that high persistence is an unlikely outcome sensible values of the microeconomic parameters and or a moderate rate of underlying inflation imply a low degree of persistence furthermore once explicit microfoundations are taken into account we show that i the model is highly non linear ii the inertia of the system is inversely related to the level of average inflation

endogenous capacity utilization and macroeconomic persistence abstract this paper presents a monetary dynamic general equilibrium model featuring a strong internal propagation mechanism limited short run factor substitutability and idiosyncratic demand uncertainty play a prominent role in the results firms are ex post heterogeneous and a well defined distribution of capacity utilization rates characterizes the equilibrium of the model the economy responds gradually to aggregate shocks since firms with excess capacity can raise production without experiencing large increases in their marginal costs the modeling framework presented in this paper offers a plausible microeconomic interpretation for reduced form mark up shocks typically considered in the new keynesian literature

on inflation and output with costly price changes a simple unifying result this paper determines the real effects of credible disinflation when price setting is staggered the results are surprising a fairly quick disinflation causes a boom this finding suggests that nominal price rigidity alone does not explain why disinflation is costly in actual economies this abstract was borrowed from another version of this item

the relative stickiness of wages and prices i introduction a continuing challenge to macroeconomics is to explain how a purely nominal disturbance produces short term aggregate real effects in the classical paradigm in which wages and prices are perfectly flexible a positive nominal aggregate demand disturbance will cause nominal wages and output prices to rise in the same proportion leaving real wages unchanged thus neither employment nor output will be affected consequently many business cycle theories posit the existence of wage and or price stickiness to explain how nominal aggregate demand disturbances generate real macroeconomic effects according to these theories the failure of nominal wages or prices to fully adjust in the short run to purely nominal disturbances explains why shocks to aggregate demand will cause both employment and output to temporarily deviate from their natural rates the relative importance of wage and price stickiness in the transmission of nominal shocks to the real economy however remains an unsettled issue the purpose of this paper is to exploit evidence on the behavior of real wages in an attempt to assess the relative importance of these two sources of stickiness first consider models emphasizing sticky or slowly adjusting nominal wages 1 if for example output prices are free to adjust but nominal wages are sticky a positive aggregate demand shock will cause prices to rise and real wages to temporarily fall below market clearing levels the fall in real wages will stimulate employment and thus output as the aggregate demand shock induces movement along a stable labor demand curve consequently sticky wage models predict a negative correlation between aggregate demand shocks and real wages if on the other hand wages are flexible while output prices are sticky 2 aggregate demand disturbances and real wages will tend to be positively correlated in the short run in sticky price models imperfectly competitive firms may resist adjusting output prices in response to changes in demand perhaps due to menu costs instead increases in demand are met by corresponding increases in output this requires an increase in labor inputs which in turn requires an increase in the real wage rate if wages are flexible and the labor supply curve is positively sloped thus when prices are sticky but wages are flexible a positive aggregate demand shock is associated with an increase in real wages it may be that neither prices nor wages are fully flexible if prices and wages both exhibit stickiness we would expect real wages to be positively correlated or negatively correlated with aggregate demand shocks depending in large part on whether prices or wages are stickier thus knowledge of the direction of the short run response of real wages to aggregate demand disturbances would offer important evidence on the relative stickiness of nominal wages and output prices if all business cycle fluctuations are due solely to aggregate demand disturbances such evidence could be obtained by examining the cyclical behavior of real wages since regardless of the source of stickiness aggregate demand disturbances are positively correlated with employment and output countercyclical procyclical real wages would indicate that nominal wages are stickier more flexible than output prices indeed some consider the stylized fact of slightly procyclical real wages 3 to be an important challenge to models that emphasize wage stickiness for example bennett mccallum 1986 argues for the superiority of models with sticky output prices since if wage stickiness alone were responsible for the real effects of monetary actions with product prices adjusting flexibly then we should observe countercyclical movements in the real wage that we do not has recently been reconfirmed in a study by bils 1985 gregory mankiw 1987 107 has concluded the final and perhaps most serious problem with the unadorned nominal wage story is that real wages do not move over the business cycle as the theory predicts

identifying the influences of nominal and real rigidities in aggregate price setting behavior we formulate a generalized price setting framework that incorporates staggered contracts of multiple durations and that enables us to directly identify the influences of nominal vs real rigidities we estimate this framework using macroeconomic data for germany 1975 1998 and for the u s 1983 2003 in each case we find that the data are well characterized by nominal contracts with an average duration of about two to three quarters we also find that new contracts exhibit very low sensitivity to marginal cost corresponding to a relatively high degree of real rigidity finally our results indicate that backward looking price setting behavior such as indexation to lagged inflation is not needed in explaining the aggregate data at least in an environment with a stable monetary policy regime and a transparent and credible inflation objective

raw materials world price changes and exchange rates in a small open economy this paper studies the impact of a rise in the world price of imported raw materials oil on the small open economy exchange rate we obtain a depreciation which magnitude depends on the share and substitutability in the productive structure

inflation output and markup dynamics with forward looking wage and price setters abstract medium scale new keynesian models are sometimes criticized for their use of backward looking wage and price setting mechanisms and for assuming several types of disturbances including some that would be difficult to interpret economically we propose a dsge model with purely forward looking wage and price setters and parsimoniously chosen disturbances our model emphasizes an interplay between production firms networking and working capital firms can use working capital to finance all or a fraction of their outlays on production factors and use the output of other firms as an input in a what is often called a roundabout production structure our model generates a response of inflation which is mute on impact of a monetary policy shock but highly persistent and very hump shaped afterwards it also yields a large contract multiplier for output two times larger than the one implied by a model relying on indexation only we also show that the response of the price markup can be positive on impact of an expansionary monetary policy shock which differs from the standard countercyclical markup channel emphasized in conventional new keynesian models in contrast to models relying on indexation to past inflation our model produces non inertial responses of inflation to productivity and investment shocks a finding which is broadly consistent with the existing var evidence