implicit contracts and the cyclicality of the skill premium to examine the cyclical behavior of the skill premium this paper introduces implicit labor contracts in a dsge model where production is characterized by capital skill complementarity and the utilization of capital is endogenous it is shown that this model can reproduce the observed cyclical patterns of wages and the skill premium the feature of capital skill complementarity coupled with variable capital utilization rates does not come at odds with the acyclical behavior of the skill premium the paper argues that the skill complementarity of capital is not a quantitatively significant factor at high frequencies the key aspects are the contracts and the capital utilization margin

the market for used capital endogenous irreversibility and reallocation over the business cycle capital reallocation is strongly procyclical in the data but in standard business cycle models with heterogeneous firms it is countercyclical in this paper i argue that endogenizing the price of used capital solves this puzzle first i show empirically that for several sectors the price of used investment goods relative to new is procyclical second i build an equilibrium model of endogenous partial irreversibility with heterogeneous firms facing aggregate and idiosyncratic productivity shocks used investment goods are imperfect substitutes for new investment because of firm level capital specificity and this creates a downward sloping demand for used capital that shifts in response to aggregate shocks the model generates a procyclical resale price and procyclical reallocation in a recession when the price of used capital is low both static and dynamic real options effects induce unproductive firms to sell fewer assets to more productive firms this generates an amplification mechanism for measured aggregate tfp finally the model shows that endogenous irreversibility smooths aggregate investment and generates a countercyclical cross sectional dispersion of returns from capital consistent with the empirical evidence

consumption housing collateral and the canadian business cycle using bayesian methods we estimate a small open economy model in which consumers face limits to credit determined by the value of their housing stock the purpose of this paper is to quantify the role of collateralized household debt in the canadian business cycle

the role of investment specific technological change in the business cycle this is a quantitative investigation of the importance of technological change speci c to new investment goods for postwar us aggregate uctuations a growth model that incorporates this form of technological change is calibrated to us data and simulated using the relative price of new equipment to identify the process driving investmentspeci c technology shocks the analysis suggests that this form of technological change is the source of about 30 of output uctuations 2000 elsevier science b v all rights reserved

time consistent consumption taxation abstract we characterise optimal tax policies when the government has access to consumption taxation and cannot credibly commit to future policies we consider a neoclassical economy where factor income taxation is distortionary within the period due to endogenous labour and capital utilisation and non tax deductibility of depreciation contrary to the case where only labour and capital income are taxed the optimal time consistent policies with consumption taxation are remarkably similar to their ramsey counterparts the welfare gains from commitment are negligible while they are substantial without consumption taxation further the welfare gains from taxing consumption are much higher without commitment

energy consumption synchronization between europe united states and japan a spectral analysis assessment abstract this paper aims to advance a model able to explain the synchronization tendency in energy consumption under the impact of international technology transfers the key argument is related to the differences in energy consumption efficiency of local and foreign technologies one direct testable consequence of the model is that there might be a certain correlation between the energy consumption between countries and or economic areas where a free movement of capital goods and technologies takes place hence it is further tested in the framework of a multivariate spectrum analysis the case of energy consumption synchronization between europe and respectively united states and japan for a time span between 1981 and 2011 based on the data provided by u s energy information administration there are evidences of a leading behavior of energy consumption in united states and japan in respect to europe as well as of short run phase delays of 2 up to 5 months

polarized business cycles abstract four stylized facts motivate this paper i business cycle movements are wider in emerging countries ec than in developed ones ii ec experience greater economic policy uncertainty iii ec are more polarized and less politically stable and iv epu is positively related to political polarization a standard real business cycle model augmented to incorporate political polarization a polarized business cycle pbc model is shown to be consistent with these facts we first derive our results analytically and then quantify the effects of a permanent increase in polarization to the us economy

total factor productivity and the measurement of technological change tfp is interpreted in the literature in different mutually contradictory ways changes in tfp are shown to measure not technological change only the super normal returns to investing in such change returns that exceed the full opportunity cost of the activity thus in the limit technological change can proceed with unchanged tfp measuring the effects of technological change instead requires counterfactual estimates reasons why changes in tfp are imperfect measures of super normal returns are also studied reasons connected with the timing of output responses the treatment of r d in the national accounts the omission of resource inputs and two types of aggregation la productivite totale des facteurs et la mesure du changement technologique la productivite totale des facteurs ptf est interpretee dans la litterature de manieres differentes et mutuellement contradictoires on montre que les changements dans la ptf ne mesurent pas le changement technologique mais seulement les rendements supra normaux sur les investissements dans de tels changements des rendements qui depassent le plein cout d opportunite de cette activite donc a la limite le changement technologique peut proceder sans que la ptf change mesurer les effets du changement technique reclame des evaluations d hypotheses de rechange les raisons pour lesquelles les changements dans la ptf sont des mesures imparfaites des rendements supra normaux sont aussi etudiees raisons connectees avec la reponse des niveaux de production le traitement de la r d dans les comptes nationaux l omission des intrants de ressources et deux types d agregation

behavioral theories of the business cycle we explore the business cycle implications of expectation shocks and of two well known psychological biases optimism and overconfidence the expectations of optimistic agents are biased toward good outcomes whereas overconfident agents overestimate the precision of the signals that they receive both expectation shocks and overconfidence can increase business cycle volatility while preserving the model s properties in terms of comovement and relative volatilities in contrast optimism is not a useful source of volatility in our model jel e3

variance properties of solow s productivity residual and their cyclical implications abstract for the united states economy 1960 1989 the correlation between the growth rates of the solow residual and the real price of energy government spending is 0 55 0 09 this study develops a model to see if it quantitatively captures the endogenous transmission mechanism underlying the observed solow residual correlations it does the transmission mechanism depends on endogenous capital utilization incorporating shocks to true technology energy prices and government spending the model economy accounts for 76 or 89 percent of u s output volatility and is generally consistent with features of u s business cycles

horizons of understanding a review of ray fair s estimating how the macroeconomy works ray fair s estimating how the macroeconomy works is the latest in a series of books by fair that build estimate and apply his macroeconometric model to study the u s economy in this book fair updates the model to incorporate the most recent data and uses it to analyze several important empirical questions such as whether the u s economy moved into a new age of high productivity in the last half of the 1990s and the dynamics of prices output and unemployment this review places his work in the context of the historical evolution of aggregate econometric models compares it with the current developments in the estimation of dynamic stochastic general equilibrium models and discusses some salient aspects of fair s contributions

cyclical factor utilization abstract we introduce procyclical labor and capital utilization as well as costs of rapidly increasing employment into a business cycle model plausible variations in factor utilization enable us to explain observed variability of real gnp with considerably smaller economy wide disturbances the costs of adjustment create very interesting and realistic lead and lag relationships employment does not peak until a full quarter after output workweeks effort capital utilization and productivity all sharply lead the business cycle

international business cycles and the relative price of investment goods is the relative price of investment goods a good proxy for investment specific technology we model this relative price in a flexible price international economy with two fundamental shocks namely the total factor productivity tfp shock and the investment specific technology ist shock we show that the one to one correspondence between the ist shock and the relative price of investment goods breaks down in an international economy because of the short run correlation between the terms of trade and the relative price of investment goods the data congruent negative correlation between the investment rate and the relative price of investment goods thus does not necessarily reflect decline in investment frictions rise in ist as suggested by many studies a calibration experiment with the us data demonstrates that such an inverse relation between rate of investment and the relative price of investment goods basically reflects the positive effect of tfp on the terms of trade for a broad range of economies where the home bias in consumption exceeds investment and there is a sizable adjustment cost of investment est ce que le prix relatifs des biens d investissement est un bon indicateur du changement technique fonde sur l investissement on construit un modele du prix relatif des biens d investissement dans une economie internationale a prix flexibles soumis a deux chocs fondamentaux la productivite totale des facteurs tfp et le changement technique fonde sur l investissement ist on montre que la correspondance bijective entre le choc ist et les prix relatifs des biens d investissement disparait dans une economie internationale a cause de la correlation a court terme entre les termes d echange et les prix relatifs des biens d investissement la correlation negative entre le taux d investissement et les prix relatifs des biens d investissement qu on retrouve dans les donnees ne reflete donc pas necessairement un declin dans les frictions d investissement accroissement de ist comme certaines etudes le suggerent un effort de calibration a l aide de donnees americaines montre qu une telle relation entre le taux d investissement et le prix relatif des biens d investissement reflete l effet positif de la tfp sur les termes d echange pour un grand eventail d economies ou la preference pour les produits domestiques est plus grande dans les biens de consommation que dans les biens d investissement et qu il y a donc un ajustement considerable dans le cout de l investissement

lumpiness capital adjustment costs and investment dynamics aggregate investment in the us economy displays a hump shaped pattern in response to shocks and the autocorrelation of aggregate investment growth is positive for the first few quarters turning negative for the later quarters this paper shows that this feature of the data is the natural outcome of a two sector consumption investment model designed and calibrated to reproduce plant level evidence on capital accumulation

investment specific news shocks and u s business cycles we provide robust evidence that news shocks about future investment specific technology ist constitute a significant force behind u s business cycles positive ist news shocks induce comovement that is raise output consumption investment and hours these shocks account for 70 of the business cycle variation in output hours and consumption and 60 of the variation in investment and have played an important role in 9 of the last 10 u s recessions our findings provide strong support for shifting focus to ist news shocks when investigating the role of news in driving u s business cycles

labor and investment frictions in a real business cycle model abstract this paper develops a prototype real business cycle model in which labor and investment frictions may compete directly with technology shocks in accounting for fluctuations in the postwar us economy using ireland s 2004a a method for taking models to the data journal of economic dynamics and control 28 1205 1226 methodology we establish that both types of friction are quantitatively important technology shocks still explain a substantial fraction of the fluctuations in aggregate output as the baseline real business cycle model predicts formal hypothesis tests suggest that changes in the recurrence of shocks frictions and structural parameters all play a role in accounting for the shift in the time series properties of the data between the periods before and after 1980

risk shocks and housing supply a quantitative analysis this paper analyzes the role of stochastic uncertainty in a multi sector housing model with financial frictions we include time varying uncertainty i e risk shocks in the technology shocks that affect housing production and provide estimates of the time series properties of risk shocks by using firm level productivity data the analysis demonstrates that risk shocks to the housing production sector are a quantitatively important impulse mechanism for understanding housing price movements specifically the model can match the volatility of housing prices observed in the data it is also demonstrated that adjustment costs are important in replicating the contemporaneous correlation of housing prices with gdp and residential investment critically bankruptcy costs act as an endogenous markup factor in housing prices and are an important determinant of house price volatility however in comparison to housing demand shocks risk shocks have low explanatory power for real quantities

do tfp and the relative price of investment share a common i 1 component abstract results from cointegration tests clearly suggest that tfp and the relative price of investment rpi are not cointegrated evidence on the alternative possibility that they may nonetheless contain a common i 1 component generating long horizon co variation between them crucially depends on the fact that i structural breaks are or are not allowed for and ii the precise nature and timing of such breaks not allowing for breaks evidence points towards the presence of a common component inducing positive long horizon covariation which is compatible with the notion that the technology transforming consumption goods into investment goods is non linear and the rpi is also impacted upon by neutral shocks allowing for breaks evidence suggests that long horizon covariation is either nil or negative assuming for illustrative purposes that the two series contain a common component inducing negative long horizon covariation evidence based on structural vars shows that this common shock i plays an important role in macroeconomic fluctuations explaining sizeable fractions of the forecast error variance of main macro series and ii generates disinflationary booms characterized by transitory increases in hours and decreases in inflation

labor market volatility in the search and matching model the role of investment specific technology shocks abstract shocks to investment specific technology have been identified as a main source of u s aggregate output volatility in this paper we present a model with frictions in the labor market and explore the contribution of these shocks to the volatility of labor market variables namely unemployment vacancies tightness and the job finding rate thus our paper contributes to a recent body of literature assessing the ability of the search and matching model to account for the large volatility observed in labor market variables to this aim we solve a neoclassical economy with search and matching where neutral and investment specific technologies are subject to shocks the three key features of our model economy are i firms are large in the sense that they employ many workers ii adjusting capital and labor is costly iii wages are the outcome of an intra firm nash bargaining problem between the firm and its workers in our calibrated economy we find that shocks to investment specific technology explain 40 of the observed volatility in u s labor productivity moreover these shocks generate relative volatilities in vacancies and the workers job finding rate which match those observed in u s data relative volatilities in unemployment and labor market tightness are 55 and 75 of their empirical values respectively

consumption heterogeneity employment dynamics and macroeconomic co movement abstract real business cycle models rely on total factor productivity tfp shocks to explain the observed co movement among consumption investment and hours however an emerging body of evidence identifies investment shocks as important drivers of business cycles this paper shows that a neoclassical model consistent with observed heterogeneity in labor supply and consumption across employed and non employed can generate co movement in response non tfp shocks estimation reveals fluctuations in the marginal efficiency of investment that explain the bulk of business cycle variance in consumption investment and hours a corollary of the model s empirical success is the labor wedge that is not important at business cycle frequencies

the role of intratemporal adjustment costs in a multisector economy abstract in this paper we construct a multisector business cycle model which is capable of reproducing the procyclical behavior of cross sector measures of capital employment and output we start by documenting the difficulty that a standard variant of a conventional real business cycle model has in accounting for these facts we then show how the introduction of intratemporal adjustment costs for investment can significantly enhance the performance of such a model these costs make it difficult to alter the composition of production of new capital goods the presence of these costs eliminates many counterfactual observations of the model that would otherwise be present the dynamic response of variables in the model is different from what one would observe in the standard one sector model we also examine the implications of imposing intratemporal adjustment costs for labor the model can also account for the cross sector behavior of employment observed in the data

indivisible labor lotteries and equilibrium abstract this paper considers an economy where labor is indivisible and agents are identical although the discontinuity in labor supply at the individual level disappears as a result of aggregation it is shown that indivisible labor has strong consequences for the aggregate bahavior of the economy it is also shown that optimal allocations involve lotteries over employment and consumption

international portfolios capital accumulation and foreign assets dynamics despite the liberalization of capital ows among oecd countries equity home bias remains sizable we depart from the two familiar explanations of equity home bias transaction costs that impede international diversi cation and terms of trade responses to supply shocks that provide risk sharing so that there is little incentive to hold diversi ed portfolios we show that the interaction of the following ingredients generates a realistic equity home bias capital accumulation shocks to the e ciency of physical investment as well as international trade in stocks and bonds in our model domestic stocks are used to hedge uctuations in local wage income terms of trade risk is hedged using bonds denominated in local goods and in foreign goods in contrast to related models the low level of international diversi cation does not depend on strongly countercyclical terms of trade the model also reproduces the cyclical dynamics of foreign asset positions and of international capital ows

firm dynamics in news driven business cycles the role of endogenous survival rate evidences from the structural vector error correction model shows that the new business formation and stock prices co moves with output under news shocks however simply incorporating firm dynamics into jaimovich and rebelo s jaimovich and rebelo 2009 model cannot explain these empirical findings we show that this problem can be resolved by introducing endogenous survival rates for the new entrants

capital reallocation and liquidity this paper studies the cyclical properties of capital reallocation and the frictions which inhibit such reallocation we show that the amount of capital reallocation and the benefits to reallocation vary at the business cycle frequency the amount of capital reallocation is procyclical in contrast the benefits to capital reallocation appear countercyclical we measure the amount of reallocation using data on flows of capital across firms and the benefits to capital reallocation using several measures of the cross sectional dispersion of the productivity of capital we then study a calibrated model of an economy where capital reallocation is costly and impute the cost of reallocation which is consistent with the amount of and benefits to reallocation in the data we find that the cost of reallocation needs to be substantially countercyclical to be consistent with the observed joint cyclical properties of reallocation and productivity dispersion the cyclical variation in this cost is interpreted as variation in the liquidity of capital broadly defined since physical costs are unlikely to vary countercyclically

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

limited participation in international business cycle models a formal evaluation in this paper we study the role of limited asset market participation lamp for international business cycles we show that when limited participation is introduced into an otherwise standard model of international business cycles the performance of the model improves signi cantly especially in matching cross country correlations to perform formal evaluation of the models we develop a novel statistical procedure that adapts the test of vuong 1989 to dsge models and accounts for the possibility that models are misspeci ed based on this test we show that the improvements brought out by lamp are statistically signi cant leading a model with lamp to outperform a representative agent model furthermore when lamp is introduced a model with complete markets is found to do better than a model with no trade in nancial assets a well known favorite in the literature our results remain robust to the inclusion of investment speci c technical change

the optimal economic lifetime of vintage capital in the presence of operating costs technological progress and learning abstract this paper studies the optimal vintage specific investment and disinvestment decision of a firm the decision is formulated as a distributed optimal control problem with a constraint on the state variable the economic model takes into accounts maintenance and operating costs technological progress and learning it allows firms to purchase not only the latest technology but also previous year vintages and completely disinvest old machines it does not assume that the firms keep machines of all vintages as other similar models do an analytical expression for the optimal economic lifetime of capital is derived and the qualitative dynamics of the optimal investment and disinvestment rules is analyzed

durable goods investment shocks and the comovement problem sticky price models suggest that capital investment shocks are an important driver of business cycle fluctuations despite quantitative importance in explaining business cycles a comovement problem emerges because the shocks generate intertemporal substitution effects away from consumption toward investment this paper resolves the problem by extending the standard sticky price model to a two sector model with consumer durable services when durable goods are used as investment in capital and consumer durables positive capital investment shocks also generate intratemporal substitution effects away from consumer durable services toward nondurable consumption that dominates intertemporal effects consequently consumption increases and the comovement problem is resolved

investment specific technological change and growth accounting greenwood et al 1997 long run implications of investment specific technological change american economic review 87 3 342 362 and 2000 the role of investment specific technological change in the business cycle european economic review 44 91 115 and hercowitz 1998 the embodiment controversy a review essay journal of monetary economics 41 217 224 have claimed that the jorgenson form of growth accounting is conceptually flawed and severely understates the importance of technological progress embodied in new capital goods for explaining growth to the contrary this paper shows that in its technology aspects their model is a special case of the jorgensonian growth accounting model what they call investment specific technological change is shown to be closely related to the more familiar concept of total factor productivity tfp growth statements about the one can be translated into statements about the other empirically differences between their conclusions and those of growth accounting studies about the extent to which embodiment explains us economic growth are found to relate more to data than to methodology

bad luck bad policy and learning a markov switching approach to understanding postwar u s macroeconomic dynamics abstract this paper evaluates the role of monetary policy in understanding the u s post war macroeconomic fluctuations we construct a medium size dsge model in which the central bank through a real time learning process can make mistakes in estimating key elasticities between macroeconomic aggregates and the central banks objectives may change over time the model also features time varying volatilities of non policy shocks we find that misperceptions of the persistence of inflation and the slope of the phillips curve could affect optimal monetary policy decision making therefore their accurate prediction is key for achieving successful monetary policy outcomes in addition we argue that the monetary policy shift geared toward inflation stabilization in the late 1970s changed the composition of output making the marginal efficiency of investment shock that proxies for the functioning of the financial sector the most important contributor to the business cycle

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

financial integration and growth in a risky world abstract we revisit the debate on the benefits of financial integration in a two country neoclassical growth model with aggregate uncertainty the framework accounts simultaneously for gains from a more efficient capital allocation and gains from risk sharing together with their interaction global numerical methods allow for meaningful welfare comparisons gains from integration are quantitatively small even for riskier and capital scarce emerging economies these countries import capital for efficiency reasons before exporting it for self insurance leading to capital flows and growth reversals along the transition this opens the door to richer empirical implications than previously considered in the literature

real rigidities productivity improvements and investment dynamics abstract the theoretical literature on business cycles predicts a positive investment response to productivity improvements a prediction we question from theoretical and empirical perspectives we show that a short term negative response of investment to a positive technology shock is consistent with a reasonably parameterized new keynesian dynamic stochastic general equilibrium dsge model in which firm specific capital introduces an additional real rigidity and monetary policy is not fully accommodative employing bayesian techniques we provide evidence that permanent productivity improvements have short term contractionary effects on investment although this result can be obtained from both firm specific and rental capital models only in the case of the former is the average price duration in line with the microeconometric evidence

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

what really accounts for the fall in hours after a technology shock abstract the paper asks how state of the art dsge models that account for the conditional response of hours following a positive neutral technology shock compare in a marginal likelihood race to that end we construct and estimate several competing small scale dsge models that extend the standard real business cycle model in particular we identify from the literature six different hypotheses that generate the empirically observed decline in hours worked after a positive technology shock these models alternatively exhibit i sticky prices ii firm entry and exit with time to build iii habit in consumption and costly adjustment of investment iv persistence in the permanent technology shocks v labor market friction with procyclical hiring costs and vi leontief production function with labor saving technology shocks in terms of model posterior probabilities impulse responses and autocorrelations the model favored is the one that exhibits habit formation in consumption and investment adjustment costs a robustness test shows that the sticky price model becomes as competitive as the habit formation and costly adjustment of investment model when sticky wages are included

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

the role of out of market corrections in day ahead scheduling in order to ensure a reliable and continuous supply of electric energy operators must manage hundreds to thousands of generators with complex operating requirements maintain synchronism and manage thousands of transmission assets further complications arise due to stringent reliability standards resource uncertainty and limited economical energy storage with advances in algorithmic performance and hardware such optimization problems still require an engineered and simplified market structure market operators must therefore adjust the proposed market solution in order to obtain a valid solution an overview of existing industry practices related to such market adjustments referred to as out of market corrections is presented this paper also analyzes the market implications and required out of market corrections for the day ahead scheduling process multiple out of market correction algorithms are created and used to analyze the potential impacts on market solutions and settlements finally such solutions are compared against an extensive form stochastic unit commitment solution

markov perfect capital and labor taxes abstract this paper analyzes the markov perfect equilibrium of an economy were a benevolent government that lacks the ability to commit to future policy choices uses taxes on capital and labor income to finance the provision of a public good the main finding is that the government taxes capital and subsidizes labor so that only the dynamic inefficiency of future capital taxes remains if agents preference for the public good is sufficiently high then capital is confiscated setting bounds on taxes alleviates the dynamic inefficiency inherent in capital taxation but some implementations carry a high welfare cost allowing for endogenous capital utilization makes the current capital tax distortionary and implies capital and labor tax rates that are relatively close to those measured for the u s economy

capital maintenance and depreciation over the business cycle abstract this paper develops and estimates a stochastic general equilibrium model with capital maintenance which affects endogenously the depreciation rate of capital the estimate of maintenance series is found to track survey based measures for canada quite closely and to generate the procyclical pattern of maintenance observed in the data we use our model estimates to infer the time profile of equipment capital depreciation in canadian and us manufacturing the depreciation rate is estimated to be volatile and highly procyclical in both countries

what does a technology shock do a var analysis with model based sign restrictions abstract this paper estimates the effects of technology shocks in var models of the u s identified by imposing restrictions on the sign of impulse responses these restrictions are consistent with the implications of a popular class of dsge models with both real and nominal frictions and with sufficiently wide ranges for their parameters this identification strategy thus substitutes theoretically motivated restrictions for the atheoretical assumptions on the time series properties of the data that are key to long run restrictions stochastic technology improvements persistently increase real wages consumption investment and output in the data hours worked are very likely to increase displaying a hump shaped pattern contrary to most of the related var evidence results are not sensitive to a number of specification assumptions including those on the stationarity properties of variables

learning adaptive expectations and technology shocks this study explores the macroeconomic implications of adaptive expectations in a standard growth model we show that the self confirming equilibrium under adaptive expectations is the same as the steady state rational expectations equilibrium for all admissible parameter values but that dynamics around the steady state are substantially different between the two equilibria the differences are driven mainly by the dampened wealth effect and the strengthened intertemporal substitution effect not by escapes emphasised by williams 2003 consequently adaptive expectations can be an important source of frictions that amplify and propagate technology shocks and seem promising for generating plausible labour market dynamics

appropriate technology and balanced growth we provide a general theoretical characterization of how firms technology choice on a technology frontier determines the long run elasticity of substitution between capital and labour we show that the shape of the frontier determines factor shares and the elasticity of substitution between capital and labour if there are adjustment costs to technology choice the short and long run elasticities differ with the long run always higher if the technology frontier is log linear the production function becomes cobb douglas in the long run but consistent with empirical evidence short run dynamics are characterized by gross complementarity the approach is easily implementable and yields a powerful way to introduce ces type production functions in macroeconomic models we provide an illustration within an estimated dynamic general equilibrium model and show that the use of our production technology provides a good match for the short and medium run behaviour of the u s labour share

cultural influences on international capital structure many studies have been conducted on the impact of various factors on international capital structure the literature still reveals disagreement on the significance of the industry and country effects in determining capital structure and the basis of country differences this paper presents the results of a study of the debt structure of 677 firms in 9 industries headquartered in 23 countries the results of this study tend to agree with the hypothesis that cultural differences are correlated with the significant country and minimal industry influences which are found further there appear to be some intercountry influences caused by underlying cultural patterns among groups of countries

endogenous capital depreciation and technology shocks i examine the dynamic impact of capital maintenance on key aggregates through the depreciation rate i find that two factors are crucial for the short run effects of total factor productivity and investment specific shocks i the marginal efficiency of maintenance and its connection with the rate of utilization and ii the interplay between the intertemporal effect of maintenance and the substitution effect between maintenance and utilization the latter is expressed by the relative size of the elasticity of maintenance to the hicksian elasticity of complementarity between maintenance and utilization these theoretical results suggest that to match the observed responses of the macroeconomic aggregates the sign of the cross derivative should be negative and that the relative size of the hicksian elasticity should be smaller than the maintenance elasticity of marginal depreciation finally the model suggests that the main macroeconomic aggregates react procyclically with the exception of maintenance the behavior of which depends on the type of the shock

technology shocks and aggregate fluctuations in an estimated hybrid rbc model this paper contributes to the on going empirical debate regarding the role of the rbc model and in particular of technology shocks in explaining aggregate fluctuations to this end we estimate the model s posterior density using markov chain monte carlo mcmc methods within this framework we extend ireland s 2001 2004 hybrid estimation approach to allow for a vector autoregressive moving average varma process to describe the movements and co movements of the model s errors not explained by the basic rbc model the results of marginal likelihood ratio tests reveal that the more general model of the errors significantly improves the model s fit relative to the var and ar alternatives moreover despite setting the rbc model a more difficult task under the varma specification our analysis based on forecast error and spectral decompositions suggests that the rbc model is still capable of explaining a significant fraction of the observed variation in macroeconomic aggregates in the post war u s economy

productivity technology and economic growth what is the relationship the relationship between productivity technology and economic growth has been debated extensively in the endogenous growth growth accounting new economy and policy literature this paper briefly surveys the literature on total factor productivity tfp calculations the various techniques and problems associated with it we argue that tfp is not a measure of technological change and only under ideal conditions does it measure the supernormal profits associated with technological change the critical driving force of economic growth is not the super normal profits that technological change generates but rather the continuous creation of opportunities for further technological development six illustrations of when tfp fails to correctly measure these super normal profits are provided a version carlaw and lipsey s 2003b model of endogenous general purpose technology driven growth is then utilized to make some progress toward answering prescott s 1998 call for a theory of tfp the model is used to simulate artificial data and connect theoretical assumptions of returns to scale and resource costs to the conditions under which tfp miss measures the actual growth of technological knowledge

productivity shocks and real business cycles abstract productivity shocks play a central role in real business cycles as an exogenous impulse to macroeconomic activity however measured solow prescott residuals do not behave as an exogenous impulse rather econometric evidence provided in this paper indicates that 1 money interest rates and government spending granger cause these impulses and 2 a substantial component of the variance of these impulses between one quarter and one half is attributable to variations in aggregate demand these results are robust to a number of econometric issues including measurement errors specification of the production function and certain forms of omitted real variables

an analysis of fiscal policy with endogenous investment specific technological change the effects of distortional fiscal policies are studied within a model in which there is endogenous investment specific technological change labor is used in the production of output and also for research purposes labor or capital taxes then distort the trade off between developing new technologies and investing in existing types of capital it is shown that if there is an externality in the research activity then it may be socially optimal to impose both a capital tax and an investment tax credit the growth rate is shown to be increasing in the rate of capital taxation and decreasing in the rate of labor taxation although the effect of taxation on the growth rate is modest this supports the observation that there is relatively little relationship between growth rates of economies and their rates of taxation

credit traps and credit cycles we develop a simple macroeconomic model of credit market imperfections with heterogeneous investment projects the projects differ in productivity the investment requirement and the severity of agency problems behind the borrowing constraints a movement in borrower net worth shifts the composition of the credit between projects with different productivity levels thereby causing endogenous investment specific technological change furthermore such endogenous technological change in turn affects borrower net worth these composition effects could give rise to credit traps credit collapse leapfrogging credit cycles and growth miracles in the dynamics of the aggregate investment and borrower net worth jel e22 e44 o33

flexible prices and the business cycle business cycles models with flexible prices face two major empirical challenges one regards observed output dynamics the positive short run autocorrelation in gnp growth and the hump shaped trend reverting output response to transitory shocks cogley and nason 1995 the other regards the alleged persistent decline in employment following a positive technology shock gali 1999 no determinate model with flexible prices has so far been able to address all of the cogley nason gali challenges we show that the standard rbc model can do so if it contains a signal extraction problem involving permanent and temporary supply shocks

a comparison of forecast performance between federal reserve staff forecasts simple reduced form models and a dsge model this paper considers the forecast performance of the federal reserve staff five atheoretical reduced form models and an estimated dynamic stochastic general equilibrium dsge model focusing on the late 1990s through 2001 our analysis finds that the dsge model and atheoretical models forecast real gdp growth better than the federal reserve staff during this period by an economically significant margin we find smaller differences across each method in the quality of inflation forecasts over this period these results provide some support to the notion that richly specified dsge models such the one used in this paper belong in the forecasting toolbox of a central bank rochelle m edge rochelle m edge frb gov michael t kiley michael t kiley frb gov and jeanphilippe laforte jean philippe laforte frb gov are affiliated with the macroeconomic and quantitative studies section at the board of governors of the federal reserve system this paper represents ongoing work in the section on developing dge models that can be useful for policy analysis nevertheless any views expressed in this paper remain solely those of the authors and do not necessarily reflect those of the board of governors of the federal reserve system or it staff all errors are our own

the external finance premium and the macroeconomy us post wwii evidence abstract the central variable of theories of financial frictions the external finance premium is unobservable this paper distils the external finance premium from a dynamic stochastic general equilibrium dsge model estimated on us macroeconomic data covering the period 1954 to 2004 within the dsge framework movements in the premium can be given an interpretation in terms of shocks driving business cycles a key result is that the estimate based solely on non financial macroeconomic data picks up over 70 of the dynamics of lower grade corporate bond spreads the paper also identifies a gain in fitting key macroeconomic aggregates by including financial frictions in the model and documents how shock transmission is affected

intermediate inputs and sectoral comovement in the business cycle abstract the post war us business cycle is characterized by positive comovement of employment and output across sectors it has been argued that multi sector growth models are inconsistent with this observation when changes in relative productivities are the main source of fluctuations we suggest that the input output structure of an economy in particular the pervasive use of intermediate inputs can induce positive comovement in sectoral employment and output following changes in relative productivities we calibrate a model of the us economy for the durable and nondurable goods producing sectors and show that sectoral employment and output move together if intermediate inputs are used in production the model is also consistent with the observation that the relative price of nondurable goods is procyclical

interaction between knowledge and technology a contribution to the theory of development this article attempts to explain the large and persistent disparities in levels of output per worker across countries it is argued that an explanation for these disparities requires an understanding of the relationship between knowledge and technology the model that is constructed can be summarized as an open economy version of the solow swan growth model in which technological change is investment specific and knowledge about new technologies is embodied in labour in the model income differences arise because poor countries lack the knowledge to implement foreign technologies productively furthermore these disparities persist when countries differ in their ability to learn jel

r d and aggregate fluctuations the research and development r d sector is considered one of the main driving forces of sustainable growth in the long run the sector however also shows excessive volatility which raises interesting questions regarding the sources of this volatility as well as the nature of the relation between the sector and aggregate fluctuations using data from the united states bureau of economic analysis and national science foundation we show that technology innovations are the main source of fluctuations in r d investment while r d technology shocks are important in driving aggregate output fluctuations after taking nominal innovations into consideration such as shocks in monetary policy and inflation capital investment specific shocks explain 70 percent of fluctuations of r d investment while r d technology shocks explain 30 percent of the variation in the output of the non r d sector technology innovations jointly explain most of the variation of output in the r d sector and 78 percent of the variation of output in the rest of the economy

trade in capital goods and investment specific technical change abstract this paper studies the role of trade in capital goods and investment specific technical change in the determination of the cross country correlation of output and the volatility of the terms of trade the cross country correlation of output for g7 countries ranges from 0 42 to 0 85 and the relative volatility of the terms of trade ranges from 1 24 to 6 06 the standard model with total factor productivity change and trade in final goods only generates an average cross country correlation of 0 05 and an average volatility of 0 68 models with trade in capital goods and investment specific technical change produce an average cross country correlation of 0 71 and an average volatility of 2 81

news and financial intermediation in aggregate fluctuations an important disconnect in the news view of fluctuations is the lack of consistent evidence suggestive of significant macroeconomic effects of news shocks findings from estimated dsge models that in theory allow news shocks to matter quantitatively suggest that they do not this disconnect can be resolved once we augment a dsge model with a financial channel that provides amplification to news shocks our results suggest that news shocks to the future growth prospects of the economy are significant drivers of u s fluctuations explaining as much as 50 and 37 of the variance in hours worked and output respectively in cyclical frequencies

can public spending boost private consumption this paper analyses the effects on private consumption from an increase in productive and unproductive public spending a new keynesian model incorporating price and wage rigidities monetary policy and various fiscal rules is developed and estimated using bayesian techniques to capture the key cyclical characteristics of the us economy we find that price and wage rigidities along with a positive shock to the part of public spending that is productive are suficient to boost private consumption moreover we show that this initial positive reaction of private consumption is adequate to create a positive present value consumption multiplier for more than five years finally we show that our main results remain robust to changes in the monetary rule and the various methods of deficit financing

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

commodity price shocks and the business cycle structural evidence for the u s this paper evaluates the relative importance of commodity price shocks in the u s business cycle therefore we extend the standard set of business cycle shocks to include unexpected changes in commodity prices the resulting svar shows that commodity price shocks are a very important driving force of macroeconomic fluctuations second only to investment specific technology shocks particularly with respect to inflation neutral technology shocks and monetary policy shocks on the other hand seem less relevant at business cycle frequencies neutral technology shocks rather play an important role at low frequencies

local identification in dsge models abstract the issue of identification arises whenever structural models are estimated lack of identification means that the empirical implications of some model parameters are either undetectable or indistinguishable from the implications of other parameters therefore identifiability must be verified prior to estimation this paper provides a simple method for conducting local identification analysis in linearized dsge models estimated in both full and limited information settings in addition to establishing which parameters are locally identified and which are not researchers can determine whether the identification failures are due to data limitations such as lack of observations for some variables or whether they are intrinsic to the structure of the model the methodology is illustrated using a medium scale dsge model

what can we learn about news shocks from the late 1990s and early 2000s boom bust period this is a substantially revised version of the paper previously circulated as a new var based approach to identifying news shocks

modeling investment sector efficiency shocks when does disaggregation matter the most straightforward way to analyze investment sector productivity developments is to construct a two sector model with a sector specific productivity shock an often used modeling shortcut accounts for such developments using a one sector model with shocks to the efficiency of investment in a capital accumulation equation this shortcut is theoretically justified when some stringent conditions are satisfied using a two sector model we consider the implications of relaxing several of the conditions that are at odds with the u s input output tables including equal factor shares across sectors the effects of productivity shocks to an investment producing sector of our two sector model differ from those of efficiency shocks to investment in a one sector model notably expansionary productivity shocks boost consumption in every period whereas expansionary efficiency shocks cause consumption to fall substantially for many periods

interpreting aggregate fluctuations looking at sectors abstract a dynamic factor model is used to investigate on the variability in labor productivity and hours across the 2 digit us manufacturing industries two kind of shocks emerge as quantitatively relevant during the postwar period they can be reasonably interpreted as technology shocks to the production of equipment and economy wide shocks the former induces a positive correlation between productivity and hours growth rates in the durable goods producing sector the latter spurs a negative correlation in the nondurable goods producing sector such evidence provides a novel interpretation of the aggregate near zero correlation between the two variables

real business cycles in this paper we demonstrate how certain very ordinary economic principles lead maximizing individuals to choose consumption production plans that display many of the characteristics commonly associated with business cycles our explanation is entirely consistent with i rational expectations ii complete current information iii stable preferences iv no technological change v no long lived commodities vi no frictions or adjustment costs vii no government viii no money and ix no serial dependence in the stochastic elements of the environment we also provide a completely worked out example of the type of artificial economy we have in mind the time series properties of the example exhibit some major features of observed business cycles although this type of model may not be capable of explaining all of the regularities in actual business cycles we believe that it provides a useful well defined benchmark for assessing the relative importance of factors e g monetary disturbances

aggregate fluctuations and the industry structure of the us economy abstract in a two sector economy changes in intermediate input trade as reflected in cost share fluctuations are key to determining the amplification properties of investment specific and neutral shocks i document that the cost shares of intermediate inputs produced by the investment sector correlate positively with gdp whereas those of inputs produced by the consumption sector correlate negatively with gdp the two sector model of greenwood et al 1988 is extended to allow for trade of intermediate goods and to show that the documented correlations discipline heterogeneous elasticities of substitution in intermediate inputs across sectors shock amplification that is the effect of a sectorial shock on aggregate value added depends on the degree of heterogeneity in these elasticities of substitution for a calibrated economy to that of the united states i find that shock amplification is stronger than in a unitary elasticity economy it is also stronger than in an economy with a common non unitary elasticity that is either inferred from data via reduced form estimates or calibrated to match the same targets as our benchmark economy

determination of asset prices with an investment specific technology model implications for the equity premium puzzle abstract we explore how the introduction of an investment specific technology shock and capacity utilization into the dynamic asset pricing model improves the equity premium and sharpe ratio using the method of undetermined coefficients we show approximate closed form analytical solutions for a variety of prices for financial assets our main empirical findings show that asset pricing models with an investment specific technology shock and capacity utilization perform better than a model with the standard productivity shock and adjustment costs in terms of mimicking the sharpe ratio and risk premiums of a firm s equity and long term government bonds furthermore when we introduce habit formation as a special case in our model the model improves further in terms of replicating the risk premiums of the real economy

the dynamic effects of neutral and investment specific technology shocks the neoclassical growth model is used to identify the short run effects of neutral technology shocks which affect the production of all goods homogeneously and investment specific shocks which affect only investment goods the real equipment price crucial for identifying the investment shocks experiences an abrupt increase in its average rate of decline in 1982 so the analysis is based on a split sample on the basis of the preferred specification the two technology shocks account for 73 percent of hours and 44 percent of output s business cycle variation before 1982 and 38 percent and 80 percent afterward the shocks also account for more than 40 percent of hours and 58 percent of output s forecast errors over a three to eight year horizon in both samples the majority of these effects are driven by the investment shocks

the workweek of capital and its cyclical implications abstract the neoclassical growth model studied in the kydland and prescott time to build paper is modified to permit the capital utilization rate to vary the effect of this modification is to increase the amplitude of the aggregate fluctuations predicted by theory as the equilibrium response to technological shocks if following solow the changes in output not accounted for by changes in the labor and tangible capital inputs are interpreted as being the technology shocks the statistical properties of the fluctuations in the postwar united states economy are close in magnitude and nature to those predicted by theory

fiscal policy with limited time commitment we propose a theory of optimal fiscal policy consistent with the observation that governments typically inherit their predecessors plans and formulate their policies over a finite future horizon we use this framework which we call limited time commitment ltc to make two contributions first in a general stochastic model we show that under an intuitive sufficient condition a chain of successive governments with ltc sustains the full commitment fc ramsey equilibrium this equivalence result clarifies in which cases existing recursive methods to solve for fc plans have a positive interpretation based on partial commitment we apply this result in two benchmark models of optimal fiscal policy with and without capital in which the fc policy is time inconsistent second we investigate the implications of ltc in a model of capital taxation in which the fc outcome cannot be achieved with finite commitment we show that the internalisation of near future tax distortions represents a key distinction with respect to the literature on no commitment nc in a calibrated version of the model we find that a single year of fiscal commitment leads to large welfare gains approximately a third of the difference between fc and nc finally we use ltc to analyse commitment to different fiscal instruments and to study the importance of state contingency in fiscal plans

methods versus substance measuring the effects of technology shocks abstract calibration and modern bayesian estimation methods for a neoclassical stochastic growth model are applied to make the case that the identification of key parameters rather than quantitative methodologies per se is responsible for empirical findings for concreteness the model is used to measure the contributions of technology shocks to the business cycle fluctuations of hours worked and output along the way new insights are provided in the parameter identification associated with likelihood based estimation the sensitivity of likelihood based estimation to the choice of structural shocks is assessed and bayesian model averaging is used to aggregate findings obtained from different dsge model specifications