sticky prices and monetary policy evidence from disaggregated us data this paper disentangles fluctuations in disaggregated prices due to macroeconomic and sectoral conditions using a factor augmented vector autoregression estimated on a large data set on the basis of this estimation we establish eight facts 1 macroeconomic shocks explain only about 15 of sectoral inflation fluctuations 2 the persistence of sectoral inflation is driven by macroeconomic factors 3 while disaggregated prices respond quickly to sector specific shocks their responses to aggregate shocks are small on impact and larger thereafter 4 most prices respond with a significant delay to identified monetary policy shocks and show little evidence of a price puzzle contrary to existing studies based on traditional vars 5 categories in which consumer prices fall the most following a monetary policy shock tend to be those in which quantities consumed fall the least 6 the observed dispersion in the reaction of producer prices is relatively well explained by the degree of market power 7 prices in sectors with volatile idiosyncratic shocks react rapidly to aggregate monetary policy shocks 8 the sector specific components of prices and quantities move in opposite directions

an economic theory of self control the concept of self control is incorporated in a theory of individual intertemporal choice by modeling the individual as an organization the individual at a point in time is assumed to be both a farsighted planner and a myopic doer the resulting conflict is seen to be fundamentally similar to the agency conflict between the owners and managers of a firm both individuals and firms use the same techniques to mitigate the problems which the conflicts create this paper stresses the implications of this agency model and discusses as applications the effect of pensions on saving saving and the timing of income flows and individual discount rates

by force of demand explaining international comovements abstract this paper explores the possibility that economic fluctuations may be largely demand driven it is shown that the stylized open economy business cycle regularities documented by feldstein and horioka 1980 the economic journal 90 june 314 329 and backus et al 1992 journal of political economy 100 4 745 775 can be explained by demand shocks alone even in a standard general equilibrium model frictions such as market incompleteness increasing returns to scale and sticky prices do not appear to be the preconditions for resolving these long standing puzzles

animal spirits and household spending in europe and the us abstract we investigate whether consumer confidence has an independent effect on household spending first we determine a common set of factors that drive both consumer confidence and household spending next we interpret the non systematic residuals in the country consumer confidence equations as a proxy for animal spirits and include this proxy in the spending equations as an additional explanatory variable our results suggest that animal spirits exist and may have a considerable impact on spending growth in europe and the us

on the imputation of rental prices to owner occupied housing this paper challenges the usual objections to the possibility of applying the rental equivalent approach to determine the weight that nonrental housing services should have in the consumer price index cpi using data from two spanish household budget surveys it is shown that market rents can be well represented in terms of an index of housing quality two geographical variables and the year of occupancy this parsimonious empirical model is used to impute a rental value to nonrental housing units taking into account the possible selection bias induced by systematic differences in housing characteristics between the market rental sector and the nonrental stock on average the estimated hedonic values are relatively close to the self imputations provided in the household surveys by the occupants of such dwellings therefore using either of the two alternatives to assess the importance of nonrental housing services in the cpi have small consequences for inflation instead dropping these services from the cpi creates a downward bias in the measurement of inflation of 0 33 percentage points per year during 1985 1992 and an upward bias of 0 38 percentage points per year during 1993 to 2000 jel c43 d12 r21 c21 e31

endogenous money or sticky prices comment on monetary non neutrality and inflation dynamics abstract we show that the highly persistent inflation dynamics and its lead lag relationship with output can be explained by a standard flexible price rbc model augmented with endogenous monetary policy endogenous monetary policy acting upon the illusion that prices are sticky and money is effective can create price movements that appear to indicate price stickiness although there is none in the economy

do switching costs make markets less competitive abstract the conventional wisdom in economic theory holds that switching costs make markets less competitive this article challenges this claim the authors formulate an empirically realistic model of dynamic price competition that allows for differentiated products and imperfect lock in they calibrate this model with data from frequently purchased packaged goods markets these data are ideal in the sense that they have the necessary variation to identify switching costs separately from consumer heterogeneity equally important consumers exhibit inertia in their brand choices a form of psychological switching cost this makes the results applicable to the broad range of products that are distinctly identified i e branded rather than just to products for which there is a product adoption cost or explicit switching fee in the simulations prices are as much as 18 lower with than without switching costs more important equilibrium prices do not increase even in the presence of switching costs that

does consumer sentiment forecast household spending if so why in the three months following the iraqi invasion of kuwait the university of michigan s index of consumer sentiment ics fell an unprecedented 24 3 index points to its lowest level since the 1981 1982 recession this collapse in household confidence became the focus of a great deal of economic commentary and indeed frequently was cited as an important if not the leading cause of the economic slowdown that ensued concern was fueled by the well known contemporaneous correlation between the ics and the growth of household spending figure 1 shows quarterly averages of the index 1978 1993 together with the quarterly growth in real personal consumption expenditures as measured in the national income accounts bureau of economic analysis the correlation is impressive of course it is not surprising that sentiment and the growth of spending are positively correlated this correlation may simply reflect that when economic prospects are poor households curtail their spending and also give gloomy responses to interviewers thus the contemporaneous correlation between sentiment and spending does not refute traditional life cycle or permanentincome models of consumption nor does it necessarily make the job of forecasting changes in consumption any easier from the point of view of an economic forecaster the questions of interest are first whether an index of consumer sentiment has any predictive power on its own for future changes in consumption spending and second whether it contains information about future changes in consumer spending aside from the information contained in other available indicators in section i we present evidence that the answer to the first question is a clear yes we find that lagged values of the ics taken on their own explain about 14 percent of the variation in the growth of total real personal consumption expenditures over the post1954 period further investigation shows that the answer to the second question is probably yes as well though here the margin is narrower and the evidence more murky the ics contributes about 3 percent to the r2 of a simple reduced form equation for total personal consumption expenditures in the longer of the two sample periods we examine but nothing in the shorter sample period though the latter result is heavily influenced by the observation for 1980 2 for the major subcategories of spending the contribution generally ranges between 1 percent and 8 percent overall we read the evidence as pointing toward at least some significant incremental explanatory power therefore we take as given for the remainder of the paper that sentiment forecasts spending and we turn to the issue of how that statistical relationship should be interpreted one possible interpretation is that sentiment is an independent driving factor in the economy and that changes in carroll division of research and statistics stop 80 federal reserve board washington dc 20551 fuhrer research department federal reserve bank of boston boston ma 02106 wilcox division of monetary affairs stop 71 federal reserve board washington dc 20551 we have benefited from the research assistance of stephen helwig and christopher geczy and the comments of an anonymous referee the views expressed in this paper are those of the authors and not of the federal reserve board the federal reserve bank of boston or the other members of the staff of either institution ithe conference board s consumer confidence index also plunged at the same time

conversions condominiums and capital gains the transformation of the ontario rental housing market this paper challenges the widespread view that there was a rental housing supply crisis in the late 1980s in ontario and shows that the increase in rental during that period was far greater than the number of new purpose built rental units conversions and investor owned condominiums made a major contribution contrary to conventional wisdom conversions came from the relatively new stock and tenure switches unassociated with structural change were important the importance of the conversion phenomenon is underlined by evidence that the conversion sector of the rental market was far looser in 1989 than in 1971 this suggests that the official rental vacancy rate for large buildings is misleading as an indicator of overall availability the paper argues that the rise in the relative importance of conversions and investor owned condominiums is no fluke but rather is the consequence of the interaction of the income tax system and the high rates of inflation and capital gains of the 1970s and 1980s as wel

forecasting uk commercial real estate cycle phases with leading indicators a probit approach this paper examines the significance of widely used leading indicators of the uk economy for predicting the cyclical pattern of commercial real estate performance the analysis uses monthly capital value data for uk industrials offices and retail from the investment property databank ipd prospective economic indicators are drawn from three sources namely the series used by the us conference board to construct their uk leading indicator and the series deployed by two private organisations lombard street research and ntc research to predict uk economic activity we first identify turning points in the capital value series adopting techniques employed in the classical business cycle literature probit models are then estimated using the leading economic indicators as independent variables and forecast the probability of different phases of capital values that is periods of declining and rising capital values the forecast performance of the models is tested and found to be satisfactory the predicta

understanding the inventory cycle abstract careful examination of aggregate data from the u s and other oecd countries reveals that production and inventory behavior exhibit paradoxical features 1 inventory investment is strongly countercyclical at very high frequencies e g 2 3 quarters per cycle it is procyclical only at relatively low cyclical frequencies such as the business cycle frequencies e g 8 40 quarters per cycle 2 production is less volatile than sales around the high frequencies it is more volatile than sales only around business cycle or lower frequencies 3 unlike capital investment or gdp the bulk of the variance of inventory investment is concentrated around high frequencies rather than around business cycle frequencies these features of production and inventory behavior at the low and high frequencies provide a litmus test for inventory theories this paper shows that the stockout avoidance theory kahn j 1987 inventories and the volatility of production american economic review 77 667 679 has much better potential than other competing theories for explaining the seemingly paradoxical features of inventory fluctuations observed at different cyclical frequencies my analysis suggests that demand shocks are the main source of the business cycle

the asymmetric information model of state dependence marketing researchers and practitioners are interested in consumer loyalty because of its managerial consequences previous empirical studies find that consumers are loyal not only to a brand but also to a firm umbrella brand that is even when firms offer new products consumers tend to continue to purchase from the same firm this repeat purchase behavior might result from state dependence or from heterogeneity the meaning of state dependence is that the current choice behaviorally depends on the previous one the traditional model of state dependence assumes that the previous choice affects the current utility this study suggests another source of state dependence the previous choice affects the current information set specifically the model assumes that the consumer a knows the attributes of the new product offered by the firm from which he she purchased in the previous period b is uncertain about the attributes of the new products offered by the other firms c can obtain full information about the attributes of all the products through a costly search and d if the consumer decides not to search he she purchases the new product offered by the firm from which he she purchases in the previous period it is shown that state dependence can result either from the effect of previous choices on the current utility or from its effect on the current information set this theoretical result raises the following question what kind of data does a researcher need in order to distinguish between the two sources of state dependence this study shows that the two sources can be distinguished with a standard panel data set in other words although the new source of state dependence is based on the search activity of consumers there is an identifying factor that enables a researcher to detect such activity even without direct data on search the empirical distinction is possible because the behavioral implications of the two sources of state dependence are different they differ in the effect of product attributes on the repeat purchase probability the following example partially illustrates this result there are two firms a and b the consumer purchased a product from firm a in period t 1 the only product attribute is x and the utility is a linear function of x one aspect of our findings is that in the traditional model of state dependence a change in both x a and x b that leaves the difference between them x a x b unchanged neutral change hereinafter has no effect on the repeat purchase probability however such a change does affect the repeat purchase probability in the asymmetric information model of state dependence this is only one aspect of the finding the implications of the models differ in a more general fashion the intuition of this result is the following a neutral change has no effect on the repeat purchase probability in the traditional model of state dependence because it does not affect the difference between the utilities from both alternatives in the asymmetric model of state dependence the consumer s decision process consists of two stages first he decides whether to search for information about the other alternative or not then if he searches for information he chooses the alternative that maximizes his utility in the second stage a neutral change has no effect on choices since such a change does not affect the difference between the utilities from the two alternatives in the first stage the consumer knows x a but does not know x b it turns out that in this stage a neutral change does affect the search decision when for example both x s decrease and the utility is a positive function of x the probability of search increases and thus the repeat purchase probability decreases the proposed source of state dependence is examined using structural estimation and panel data on television viewing choices in the united states controlling for both observed and unobserved heterogeneity it is found that the suggested source is more important in creating repeat purchase than the traditional one for most of the population 71 this indicates that what was considered by previous studies to result from the dependence of consumer utility on their previous choices is at least partially due to the effect of the previous choices on consumers information set the distinction between the two sources of repeat purchase is important because ignoring the informational explanation may lead to incorrect theoretical and empirical conclusions for example price discounts to induce trial are more important for consumers whose utility depends on previous choices while advertising is more effective for those whose information set depends on previous choices

consumer sentiment and consumer spending decomposing the granger causal relationship in the time domain it is often believed that the consumer sentiment index has predictive power for future consumption levels while granger causality tests have already been used to test for this no attempt has been made yet to quantify the predictive power of the consumer sentiment index over different time horizons in this article we decompose the granger causality at different time lags by looking at a sequence of nested prediction models since the consumer sentiment index turns out to be cointegrated with real consumption we resort to error correcting models four consumption series are studied namely total real consumption real consumption of durables non durables and services among other findings we show that the consumer sentiment index granger causes future consumption with an average time lag of 4 5 months furthermore it is found that the consumer sentiment index has more incremental predictive power for consumption of services than for consumption of durables or non durables and that the index is not

productivity growth consumer confidence and the business cycle abstract the objective of this paper is to provide in the context of a dynamic general equilibrium model an answer to the following five questions 1 to what extent does an economy subject to regular variations in labor productivity growth differ from one where labor productivity is constant 2 what is the impact on major macro indicators of a one time change in labor productivity growth 3 what are the business cycle implications of autonomous non falsifiable changes in growth expectations 4 what is the potential of such expectation changes for explaining the volatility of consumption to output ratio 5 can autonomous changes in growth expectations help us understand recent business cycle episodes

switching costs price sensitivity and health plan choice we investigate the extent to which sensitivity to health plan premiums differs across individuals according to characteristics related to the cost of switching plans our results indicate substantial variation in price sensitivity related to expected health care costs younger healthier employees are between two and four times more sensitive to price than employees who are older and who have been recently hospitalized or diagnosed with cancer we also find evidence of status quo bias estimated premium elasticities are significantly higher for new hires than for incumbent employees simulations combining our results with actuarial data illustrate the cost implications of risk related differences in price elasticity

consumer confidence and rational expectations are agents beliefs consistent with the theory consumer confidence is found to have predictive content for a wide range of macroeconomic variables including consumption growth contrary to standard repih we find that on uk data the repih is rejected due to the predictive content of consumer confidence and not labour income we explain this finding in terms of precautionary behaviour extending the hansen and singleton consumption capm model to allow a conditional variance we find a high level of confidence is associated with both greater optimism about the level of consumption and greater uncertainty about the forecaster variance once allowance is made for time aggregation the over identifying restrictions implied by this model are accepted we estimate a small but statistically significant intertemporal elasticity of substitution

confidence and the real economy the japanese case this paper empirically analyses whether consumer confidence has an effect on the real economy in japan this paper uses vector autoregressions including variables which represent consumer confidence it is shown that in the cases of quarterly and monthly data consumer confidence has a significant effect on gdp fluctuations whereas in the case of semiannual data it has no effect in other words consumer confidence has an effect on only short term economic fluctuations

what happens during recessions crunches and busts we provide a comprehensive empirical characterization of the linkages between key macroeconomic and financial variables around business and financial cycles for 21 oecd countries over the period 1960 2007 in particular we analyse the implications of 122 recessions 113 28 credit contraction crunch episodes 114 28 episodes of house price declines busts 245 61 episodes of equity price declines busts and their various overlaps in these countries over the sample period our results indicate that the interactions between macroeconomic and financial variables can play a major role in determining the severity and duration of a recession specifically we find evidence that recessions associated with credit crunches and house price busts tend to be deeper and longer than other recessions stijn claessens m ayhan kose and marco e terrones

estimating switching costs with market share data an application to medicare part d abstract choice inertia and switching frictions are well documented features of the demand for health insurance in this paper we estimate switching costs in the medicare part d market with aggregate market share data using standard discrete choice models for differentiated products we consider various modelling assumptions myopic and forward looking consumers and with and without random coefficients both myopic and forward looking consumer models with no random coefficients yield switching cost estimates that closely match the actual average switching frequency with implied dollar valued switching costs of 1600 to 2000 we find the inclusion of random coefficients to the myopic consumer model results in smaller estimates of switching costs but only at the expense of the model s fit to the switching frequency the estimated welfare losses from switching frictions are large but they are smaller under the forward looking consumer model amounting to around 500 per enrollee annually compared to over 1000 under the myopic model

comparison friction experimental evidence from medicare drug plans consumers need information to compare alternatives for markets to function efficiently recognizing this public policies often pair competition with easy access to comparative information the implicit assumption is that comparison friction the wedge between the availability of comparative information and consumers use of it is inconsequential because information is readily available and consumers will access this information and make effective choices we examine the extent of comparison friction in the market for medicare part d prescription drug plans in the united states in a randomized field experiment an intervention group received a letter with personalized cost information that information was readily available for free and widely advertised however this additional step providing the information rather than having consumers actively access it had an impact plan switching was 28 percent in the intervention group versus 17 percent in the comparison group and the intervention caused an average decline in predicted consumer cost of about 100 per year among letter recipients roughly 5 percent of the cost in the comparison group our results suggest that comparison friction can be large even when the cost of acquiring information is small and may be relevant for a wide range of public policies that incorporate consumer choice

length of residence discounts and rental housing demand theory and evidence the improved availability of crosssectional household level data over the past decade has led to substantive improvements in estimates of housing demand better techniques have been developed to measure permanent income and housing price to determine proper functional forms for demand equations and to consider the endogenous nature of the mobility move non move and or the tenure own rent decision this paper examines two rental housing market features which have been alluded to elsewhere but which have not received systematic attention first many analysts have estimated substantial length of residence discounts for example merrill 1977 lowery 1980 follain and malpezzi 1980 downs 1980 and marshall and guasch 1983 35778 these discounts are consistent with several explanations including turnover minimization by landlords screening of good tenants or sample truncation due to random error in the setting of rental prices irrespective of the source they imply that any crosssection sample of tenants will indicate rental prices that decrease all else equal with length of residence their pervasive nature suggests that they will be expected by consumers who will act accordingly in housing demand decisions this consumer optimization is the second feature of the analysis in what might be termed the equilibrium disequilibrium question the substantial search and moving costs that often accompany a housing purchase suggest that the random cross sectional

willingness to consume and ability to consume abstract george katona 1960 introduced the distinction between ability to buy and willingness to buy ability to buy refers to the objective factors determining actual purchases whereas willingness to buy captures subjective factors such as attitudes or moods i show that katona s theory can be reconciled easily with standard models of intertemporal utility maximization if one allows for a time varying preference parameter that is exogenous to the consumer and determined by the social environment such a willingness to consume model is tested against standard alternatives using data from seven european countries the empirical evidence rejects the permanent income hypothesis and supports the willingness to consume model

security of tenure costly tenants and rent regulation many jurisdictions give residential tenants legislated packages of rights known generically as security of tenure and some protect tenants further by prohibiting unjustified rent increases the paper considers the effects of security of tenure on a competitive rental housing market to illustrate the concepts the paper describes current security of tenure and rent regulation provisions in the province of ontario canada a model of rational behaviour by landlords is then presented in which landlords choose simultaneously a rent for a standard lease and the quality of tenant to be accepted heterogeneity among landlords and tenants and imperfect information are introduced the effect of security of tenure legislation on this behaviour is assessed the paper then considers the difficulty of defining an unjustified rent increase when some tenants are more costly to serve than others and when the landlords have imperfect information about prospective tenants

indeterminacy aggregate demand and the real business cycle abstract we show that under indeterminacy aggregate demand shocks are able to explain not only aspects of actual fluctuations that standard rbc models predict fairly well but also aspects of actual fluctuations that standard rbc models cannot explain such as the hump shaped trend reverting impulse responses to transitory shocks found in us output cogley and nason am econom rev 85 1995 492 the large forecastable movements and comovements of output consumption and hours rotemberg and woodford am econom rev 86 1996 71 and the fact that consumption appears to lead output and investment over the business cycle indeterminacy arises in our model due to capacity utilization and mild increasing returns to scale

the confidence effects of fiscal consolidations we explore how fiscal consolidations affect private sector confidence a possible channel for the transmission of fiscal policy that has received particular attention recently as a result of governments embarking on austerity trajectories in the aftermath of the crisis panel regressions based on the annual action based datasets of devries et al 2011 and alesina et al 2014a show that consolidations and in particular their unanticipated components affect confidence negatively to obtain a more accurate picture of how consolidations affect confidence we construct a monthly dataset of consolidation announcements so that we can investigate the confidence effects in real time using an event study the results suggest that consumer confidence falls around announcements of consolidation measures an effect likely driven by revenue based measures moreover these effects are highly relevant for european countries with weak institutional arrangements as measured by the tightness of fiscal rules or budgetary transparency the effects on producer confidence are generally similar but weaker than for consumer confidence long term interest rates as a measure of confidence in the sovereign tend to fall around spending based consolidation announcements we have no evidence that the confidence effects of consolidation announcements are worse in slumps than in booms generally strengthening institutional arrangements may help in mitigating adverse confidence effects of consolidations

entry deterrence in markets with consumer switching costs in many markets consumers have transaction or learning switching costs between functionally undifferentiated brands new entry into such markets may be deterred either by large customer bases and or large switching costs which deny customers to an entrant or by small customer bases and or small switching costs which mean an incumbent will respond aggressively to an entrant an incumbent threatened by entry may therefore price either lower or higher than otherwise a firm with the right to enter early may make less profits over time than an otherwise identical firm that is unable to enter the market until later

what caused the early millennium slowdown evidence based on vector autoregressions this paper uses a simple var for the usa and euro area to analyse the underlying shocks of the early millennium slowdown i e supply demand monetary policy and oil price shocks the results of two identification strategies are compared one is based on traditional zero restrictions and as an alternative an identification scheme based on more recent sign restrictions is proposed the main conclusion is that the recent slowdown is caused by a combination of several shocks negative aggregate supply and aggregate spending shocks the increase of oil prices in 1999 and restrictive monetary policy in 2000 these shocks are more pronounced in the usa than the euro area the results are somewhat different depending on the identification strategy it is illustrated that traditional zero restrictions can have an influence on the estimated impact of certain shocks copyright 2005 john wiley sons ltd

expectations heterogeneous forecast errors and consumption micro evidence from the michigan consumer sentiment surveys the household data underlying the michigan index of consumer sentiment are used to test the rationality of consumer expectations and their usefulness in forecasting expenditure the results can be interpreted as characterizing the shocks that hit different types of households over time expectations are found to be biased and inefficient at least ex post people underestimated the disinflation of the early 1980s and the severity of recent business cycles people s forecast errors are also systematically correlated with their demographic characteristics in part because of time varying group level shocks further sentiment helps forecast consumption growth some of this rejection of the permanent income hypothesis is due to the systematic demographic components in forecast errors

walras keynes equilibria coordination and macroeconomics in decentralised market economies supply constrained equilibria may persist as coordination failures sustained but not caused by price rigidities this feature may be arbitrarily severe even at prices compatible with competitive equilibrium the supply constraints may originate in rational expectations some implications for macroeconomics are drawn the possibility of coordination failures explains why organised labour may resist wage flexibility these features are illustrated in elementary macroeconomic prototypes like rbc or barro grossman malinvaud prototypes

house prices borrowing constraints and monetary policy in the business cycle i develop a general equilibrium model with sticky prices credit constraints nominal loans and asset prices changes in asset prices modify agents borrowing capacity through collateral value changes in nominal prices affect real repayments through debt deflation monetary policy shocks move asset and nominal prices in the same direction and are amplified and propagated over time the financial accelerator is not constant across shocks nominal debt stabilises supply shocks making the economy less volatile when the central bank controls the interest rate i discuss the role of equity debt indexation and household and firm leverage in the propagation mechanism finally i find that monetary policy should not target asset prices as a means of reducing output and inflation volatility

demand for differentiated durable products the case of the u s computer printer market i introduction this paper aims to provide a theoretical and empirical description of consumer behavior in a dynamic market for differentiated durable goods the computer hardware industry serves as an example of the type of market we consider markets for computer systems and components as well as for many other high technology products exhibit some striking similarities that are of particular concern for an empirical economist as follows products are differentiated in multiple dimensions in addition to price products are durable yielding consumption services over multiple periods product quality rapidly improves over time empirical work on estimating differentiated product demand systems has been dominated by static discrete choice models with random utility see berry levinsohn and pakes 1995 goldberg 1995 and nevo 2001 among others however markets for durable goods exhibit several features at odds with their assumption of myopic consumer behavior first traditional static discrete choice models implicitly assume that consumers participate in the market every period choosing one of the available products or an outside option thus the fraction of consumers who do not buy any product in a given period could only be explained by the high value they assign to the outside alternative for durable goods however purchases are made infrequently and result in a consumer s exiting the market for a significant period of time hence the model needs to account for consumers outflow from the market arising from their purchase decisions second a static framework may give a misleading picture of the aggregate sales time pattern in a dynamic industry in many markets for durable products it is not uncommon to see rapidly improving product quality and falling prices given any reasonable set of consumer preferences over the product characteristics space static discrete choice models for such an industry will tend to predict an upward trend in aggregate sales this fails to account for a variety of patterns commonly seen in the data third the evolution of product quality leads to the possibility of intertemporal demand substitution by forgoing a current purchase the consumer retains the option to buy a potentially better product in the future hence the decision of when to buy may be just as important for consumers as the decision of what to buy this trade off cannot be accounted for in the static framework the purpose of this paper is to remedy these shortcomings of static discrete choice models in durable goods markets with particular attention paid to technological change and the dynamics of new products adoption the paper presents a dynamic model of consumer demand for differentiated durable products that explicitly accounts for consumers expectations of future product quality and consumers outflow from the market that arises endogenously from their purchase decisions in this model the consumer faces a sequence of static discrete choice problems over a non stationary choice set we show that for a subclass of random utility models which include the multinomial logit and the mcfadden 1978 generalized extreme value gev model there exists a scalar valued sufficient statistic that determines the value of the option to postpone the purchase this allows us to model industry evolution over a vastly reduced state space and to formalize the consumer s decision of when to buy as an optimal stopping problem a solution to that problem defines the hazard rate of product adoptions while the nested discrete choice model determines the alternative specific purchase probabilities integrating individual decisions over the population distribution generates rich dynamics of aggregate and product level sales the paper proceeds to present monte carlo evidence that ignoring the time dimension of consumer choice will induce a downward bias in the estimates of consumer preferences over quality sometimes reversing the sign of the coefficients

sinking swimming or learning to swim in medicare part d under medicare part d senior citizens choose prescription drug insurance offered by numerous private insurers we examine nonpoor enrollees actions in 2006 and 2007 using panel data our sample reduced overspending by 298 on average with gains by 81 percent of them the greatest improvements were by those who overspent most in 2006 and by those who switched plans decisions to switch depended on individuals overspending in 2006 and on individualspecific effects of changes in their current plans the oldest consumers and those initiating medications for alzheimer s disease improved by more than average suggesting that real world institutions help overcome cognitive limitations

state dependence and alternative explanations for consumer inertia for many consumer packaged goods products researchers have documented inertia in brand choice a form of persistence whereby consumers have a higher probability of choosing a product that they have purchased in the past using data on margarine and refrigerated orange juice purchases we show that the finding of inertia is robust to flexible controls for preference heterogeneity and not due to autocorrelated taste shocks thus the inertia is at least partly due to structural not spurious state dependence we explore three economic explanations for the observed structural state dependence preference changes due to past purchases or consumption experiences which induce a form of loyalty search and learning our data are consistent with loyalty but not with search or learning properly distinguishing among the dierent sources of inertia is important for policy analysis because the alternative sources of inertia imply qualitative dierences in firm s pricing incentives and lead to quantitatively dierent equilibrium

consumption sentiment and economic news this paper investigates the influence of economic news on consumer sentiment and examines whether news shocks changes in coverage that would not be expected from incoming data on economic fundamentals have aggregate effects using monthly u s data and a structural vector autoregression i find that 1 sentiment is affected by news shocks 2 after filtering out effects of news shocks shocks to sentiment still have positive effects on consumer spending and 3 news shocks influence both spending and unemployment in significant though transitory ways these results are consistent with other evidence of a role of nonfundamental factors in aggregate fluctuations jel e21 e32 d12

debt deflation theory and evidence abstract in the early 1990s the most severe recessions occurred in those countries which had experienced the largest increases in private debt burdens was this an accident of history or did it reflect deeper forces affecting market economies the paper comprises three parts first it presents three stylised facts about debt and its impact on consumption growth in the 1930s and the 1990s second it discusses the reception of irving fisher s work on debt deflation by his contemporaries and argues that it is helpful to think of debt deflation as a real business cycle phenomenon third there is a theoretical discussion of the reaction of debt and consumption to shocks in the context of a model of precautionary saving central to the model is the role of distributional shocks which implies that aggregate demand may be a nonmonotonic function of the price of assets in terms of the consumption good multiple equilibria may exist leading to the possibility of financial instability the analysis of debt deflation requires the construction of real business cycle models without a representative consumer

living in an imaginary world that looks real abstract in the paper we show using standard approaches general equilibrium modeling and the assumption of complete rationality that the macroeconomic environment is endogenous and is indeterminate specifically it is argued without resorting to sunspot type arguments that microeconomic fundamentals do not suffice to characterize the economy at the macro level in particular we show how perceptions of rational agents of the workings of the economy a shape the environment b affect the environment sufficiently to ensure that rational economic agents find the observed environment consistent with their beliefs even though it is not as a by product we illustrate that endogenous macro uncertainty can arise as an outcome if rational economic agents whose expectations are anchored on endogenous variables expect them to arise finally we show that systematic errors can persist indefinitely under rationality

gross credit flows the paper estimates gross credit flows for the u s banking system between 1979 and 1999 and shows that sizable gross flows coexist at any phase of the cycle even within narrowly defined loan categories bank size categories and regional units to investigate the macroeconomic dimensions of gross credit flows the paper studies the cyclical behavior of aggregate credit flows and documents three key cyclical facts first excess credit reallocation is countercyclical for any given rate of change of net credit gross flows are larger in a recession than in a boom second gross credit flows are highly volatile with a cyclical volatility which appears more than an order of magnitude larger than gdp volatility third credit contraction is more volatile than credit expansion furthermore the behavior of gross flows over the 1991 recession suggests that persistent and historically high credit contraction is a key feature of the relatively mild cyclical downturn the results lends some support to aggregate models that emphasize the asymmetric behavior of credit expansion and credit contractions

anxious periods and bank lending we examine the lending behavior of banks during anxious periods the main characteristic of anxious periods is that the perceptions and expectations about economic conditions worsen for economic agents even though the economy is not in a recession we identify distinct periods of anxiety for consumers ceos firms and analysts subsequently we study the lending behavior of us banks during the anxious quarters from 1985 to 2010 using bank level data the results show that banks lending falls when consumers and analysts are anxious and this effect is more pronounced when banks hold a higher level of credit risk these effects are more pronounced in anxious periods that were followed by recessions and in these periods loan growth also responds negatively to the anxiety of ceos yet these effects are quite less prevalent in the period after 2001

consumer misperceptions uncertain fundamentals and the business cycle abstract this paper estimates the importance of shocks to consumer misperceptions noise shocks for u s business cycle fluctuations i embed imperfect information as in lorenzoni 2009 into a smets and wouters 2007 type dsge model agents only observe aggregate productivity and a signal about the permanent component contaminated with noise based on this information agents form beliefs about the temporary and the permanent component of productivity shocks to the signal noise shocks trigger aggregate fluctuations unrelated to changes in productivity bayesian estimation shows that noise shocks explain up to 14 percent of output and up to 25 percent of consumption fluctuations nominal rigidities and the specification of the monetary policy rule are crucial for the importance of noise shocks these features help to resolve conflicting results in the previous literature

corporate debt overhang and macroeconomic expectations one way in which corporate financial structure affects macroeconomic performance is by creating debt overhang debt overhang occurs when existing debt deters new investment because the benefits from new investment will go to the existing creditors not to the new investors if the economy is booming debt overhang will not bind because the returns to investing are high if the economy is stagnant debt overhang will bind because the returns to investing are low as a result high levels of debt can create multiple expectational equilibria in which animal spirits determine economy activity copyright 1995 by american economic association

consumer confidence and economic activity a factor augmented var approach abstractthis study aims to analyse the effects of the consumer confidence on economic activity for the us market we use the empirical factor augmented vector autoregression favar method which enables us to incorporate a wide range of economic activity factors into the analysis the consumer confidence index cci is chosen as the principal variable that is presumed to represent the degree of optimism on the state of economic activity the results show that consumer confidence and economic activity are strongly correlated for manufacturing related factors such as industrial production and inventories we also observe strong relation among cci and personal consumption expenditures as well as housing market variables

the transmission of international shocks a factor augmented var approach the empirical literature on the transmission of international shocks is based on small scale vars in this paper we use a large panel of data for 17 industrialized countries to investigate the international transmission mechanism and revisit the anomalies that arise in the empirical literature we propose a factor augmented var favar that extends the model in bernanke boivin and eliasz 2003 to the open economy the main results can be summarized as follows first the dynamic effects on the uk economy of an unanticipated fall of short term interest rates in the rest of the world are real house price inflation investment gdp and consumption growth peak after one year wages peak after two years cpi and gdp deflator inflation peak during the third year second a positive international supply shock makes the distribution of the components of the uk consumption deflator negatively skewed third in response to a domestic monetary shock we find no evidence of the exchange rate and liquidity puzzles and little evidence of the forward discount and price anomalies

did sunspot forces cause the great depression abstract we apply a dynamic general equilibrium model to the period of the u s great depression in particular we examine a modification of the real business cycle model in which the possibility of indeterminacy of equilibria arises in other words agents self fulfilling expectations can serve as a primary impulse behind fluctuations we find that the model driven only by these measured sunspot shocks can explain well the entire depression era that is the decline from 1929 to 1932 the subsequent slow recovery and the recession that occurred in 1937 1938

news driven business cycles insights and challenges there is a widespread belief that changes in expectations may be an important independent driver of economic fluctuations the news view of business cycles offers a formalization of this perspective in this paper we discuss mechanisms by which changes in agents information due to the arrival of news can cause business cycle fluctuations driven by expectational change and we review the empirical evidence aimed at evaluating their relevance in particular we highlight how the literature on news and business cycles offers a coherent way of thinking about aggregate fluctuations while at the same time we emphasize the many challenges that must be addressed before a proper assessment of the role of news in business cycles can be established jel d83 d84 e13 e32 o33

time to implement and aggregate fluctuations in this paper we slightly modify the canonical rbc model by adding an implementation lag in the technology to reproduce the fact that consumption is a leading indicator of output indeed we assume that agents have today some information on the realization of the technology shock that will occur tomorrow today inventions are known and give information on the innovations which will be implemented tomorrow the model is estimated and tested on us data by a simulated method of moments using some suitable reconstructed data that are compatible with that model the results are in favor of this implementation lag hypothesis the model is not rejected by us post war data

assessing monetary policy in the euro area a factor augmented var approach in order to overcome the omitted information problem of small scale vector autoregression var models this study combines the var methodology with dynamic factor analysis and assesses the effects of monetary policy shocks in the euro area in the period during which there is a single monetary policy using the factor augmented vector autoregressive favar approach of bernanke et al 2005 we summarize the information contained in a large set of macroeconomic time series with a small number of estimated factors and use them as regressors in recursive vars to evaluate the impact of the nonsystematic component of the european central bank s ecb s actions overall our results suggest that the inclusion of factors in the var allows us to obtain a more coherent picture of the effects of monetary policy innovations both by achieving responses easier to understand from the theoretical point of view and by increasing the precision of such responses moreover this framework allows us to compute impulse res

the contemporaneous correlation between price shocks and output shocks until the 1990s prices were believed to be procyclical several researchers have since presented evidence of counter cyclical prices this evidence proved robust but its interpretation has varied some have argued that the contemporaneous correlation between output and prices reflects both the source of the current shock and the adjustment process from short run to long run equilibrium the adjustment to the long run imparts a bias towards a negative price output correlation the issue of dynamics is addressed by estimating price shocks and output shocks the sign of the correlation between these shocks does not reveal anything about the relative importance or frequency of demand versus supply shocks however some understanding is gained from the time series of the product of the shocks in periods when the product is negative supply shocks must have been either relatively large or relatively important in periods when the product is positive demand shocks must have been either relatively large or re

the welfare impact of reducing choice in medicare part d a comparison of two regulation strategies motivated by widely publicized concerns that there are too many plans we structurally estimate and validate an equilibrium model of the medicare part d market to study the welfare impacts of two feasible similar sized approaches for reducing choice one reduces the maximum number of firm offerings regionally the other removes plans providing donut hole coverage consumers most valued dimension we find welfare losses are far smaller when coupled with elimination of a dimension of differentiation we illustrate our findings relevance under current health care reforms and consider the merits of instead imposing ex ante competition for entry

a theory of demand shocks this paper presents a model of business cycles driven by shocks to consumer expectations regarding aggregate productivity agents are hit by heterogeneous productivity shocks they observe their own productivity and a noisy public signal regarding aggregate productivity the public signal gives rise to noise shocks which have the features of aggregate demand shocks they increase output employment and inflation in the short run and have no effects in the long run numerical examples suggest that the model can generate sizable equilibrium dsge models of the business cycle include a large number of shocks to technol ogy monetary policy preferences etc but typically do not include expectational shocks as independent drivers of short run fluctuations 1 this paper explores the idea of expectation driven cycles looking at a model where technology determines equilibrium output in the long run and consumers receive noisy signals about technology in the short run the presence of noisy signals produces expectational errors this paper studies the role of these expectational errors in gener ating volatility at business cycle frequencies the model is based on two ingredients first consumers take time to recognize permanent changes in aggregate fundamentals although they may have good information on the current state of the individual firm or sector where they operate they have only limited information regarding the long run determinants of aggregate activity second consumers have access to public information that is relevant to estimate long run productivity this includes news about technological innovations publicly released macroeconomic and sectoral statistics financial market prices and public statements by policy makers however these signals provide only a noisy forecast of the long run effects of technological innovations this opens the door to noise shocks which induce consumers to temporarily overestimate or underestimate the productive capacity of the economy

switching cost and deposit demand in china this article develops and estimates a dynamic model of consumer demand for deposits in which banks provide differentiated products and product characteristics that evolve over time the switching cost is 0 8 of the deposit s value which leads the static model to bias the demand estimates the dynamic model shows that the price elasticity over a long time horizon is larger than the same elasticity over a short time horizon counterfactual experiments with a dynamic monopoly show that reducing the switching cost has a comparable competitive effect on bank pricing as a result of reducing the dominant position of the monopoly

choice inconsistencies among the elderly evidence from plan choice in the medicare part d program we evaluate the choices of elders across their insurance options under the medicare part d prescription drug plan using a unique data set of prescription drug claims matched to information on the characteristics of choice sets we document that elders place much more weight on plan premiums than on expected out of pocket costs value plan financial characteristics beyond any impacts on their own financial expenses or risk and place almost no value on variance reducing aspects of plans partial equilibrium welfare analysis implies that welfare would have been 27 higher if patients had all chosen rationally

measuring consumer switching costs in the television industry in this article i develop and estimate a model of dynamic consumer behavior with switching costs in the market for paid television services i estimate the parameters of the structural model using data on cable and satellite systems across local us television markets over the period 1992 2006 the results suggest switching costs range from 159 to 242 for cable and from 212 to 276 for satellite providers in 1997 dollars using a simple dynamic model of cable providers i demonstrate that switching costs of these magnitudes can significantly affect the firms optimal strategies

information animal spirits and the meaning of innovations in consumer confidence we show that unexplained innovations in several variables representing survey responses to forwardlooking questions on the michigan survey of consumers have powerful prognostic implications for the future paths of macroeconomic variables we attempt to distinguish the hypothesis that these impulse responses indicate a causal channel from autonomous movements in sentiment to economic outcomes the animal spirits view from the alternative interpretation that the surprise confidence movements summarize information about future economic prospects the information view in natural rate models animal spirits shocks are associated with overshooting of among other variables consumption that attenuates when agents come to grips with their overreaction while information shocks about the long future are followed by gradual movements in macroeconomic variables that are not subsequently reversed in a baseline vector autoregression involving consumption income and confidence the data come down sharply in favor of the information view the impulse responses of consumption and gdp show no tendency to attenuate even after a number of years further confidence innovations have strong implications for labor productivity many quarters into the future in somewhat larger vars with an information block that includes inflation and or stock prices the impulse responses to confidence innovations continue to have the permanent shape that defines information shocks but they are smaller in magnitude we demonstrate that this is due to the fact that both inflation and stock price innovations have prognostic implications for future productivity that are very similar to the implications of innovations in confidence addition of unemployment to the system induces a transitory component that changes the shape of the impulse responses and somewhat weakens the previously airtight case against animal spirits but it does not provide constructive evidence of such effects

consumer inertia choice dependence and learning from experience in a repeated decision problem abstract understanding when and how individuals think about real life problems is a central question in economics this paper studies the role of inertia inattention state dependence and learning the empirical setting is a tariff experiment when optional measured tariffs for local telephone calls were introduced unanticipatedly we find that consumers tend to align their choices of tariff and telephone use levels correctly despite low potential savings mistakes are not permanent as individuals actively engage in tariff switching in order to reduce the monthly cost of telephone service ignoring unobservable heterogeneity and the endogeneity of past choices would have reversed these results

implicit contracts a survey 7mplicit contracts resolve the distribution of uncertainty and utilization of specific human capital between risk averse workers and less risk averse firms incomplete contracts are required to yield involuntary layoffs in contract markets otherwise contracts are efficient and pareto optimal by construction there is a close relation between contract theory and neoclassical labor market theory contracts smooth consumption but increase the volatility of labor supply and labor utilization to demand disturbances because contractural insurance eliminates the income effects of socially diversifiable risks this result is similar to the intertemporal substitution hypothesis however the price mechanism in a contract is substantially different contracts embody a nonlinear two part pricing scheme the lump sum part allocates the income consumption consequences of risks and the marginal pricing part allocates production and labor utilization this implicit pricing mechanism is in all respects flexible though the observed average hourly wage combines both parts and may give the outward appearanceof rigidity furthermore the observed average wage rate in a contract does not reflect marginal conditions necessary for structural econometric estimation indivisibilities appear necessary to account for the split between work sharing and layoffs contracts with private information are also considered in the nonlinear pricing context this abstract was borrowed from another version of this item

dynamics of consumer demand for new durable goods most new consumer durable goods experience rapid prices declines and quality improvements suggesting the importance of modeling dynamics this paper specifies a dynamic model of consumer preferences for new durable goods with persistently heterogeneous consumer tastes rational expectations and repeat purchases over time we estimate the model on the digital camcorder industry using panel data on prices sales and characteristics we find that the 1 year elasticity in response to a transitory industrywide price shock is about 25 percent less than the 1 month elasticity standard cost of living indices overstate welfare gain in later periods due to a changing composition of buyers

rent control its rationale and effects this paper discusses the rationale behind rent control and analyses its effects using a capital theory framework in combination with traditional bid rent analysis the experience in hong kong and o

optimal housing maintenance under uncertainty abstract in this paper we give the optimal maintenance policy of a building where we let the rent depend on the quality of the building we assume that the quality of the building can be described by a stochastic process on which the maintenance policy has an influence furthermore we give rules for when the landlord has to sell the building or when he has to rent it from these rules it follows that under uncertainty the landlord is more prepared to rent the building than without uncertainty

theory and history behind business cycles are the 1990s the onset of a golden age the theory presented in this paper ties together profits investment credit stock prices inflation and interest rates the author discusses new estimates of profit and investment functions with important roles for growth and demand and productivity price and cost levels risk perception credit volume and credit difficulties the relationships among these endogenous variables are viewed as constituting an enduring core of business cycles the exogenous shocks and policy effects as more transitory and peripheral

a theoretical and empirical analysis of the length of residency discount in the rental housing market abstract we present an analysis of occupancy discounts and suggest a decomposition of the discount into two components a sit discount and a length of residency discount data from the national longitudinal survey of the annual housing survey in which 75 000 housing units from around the united states were followed from 1974 to 1977 are used to obtain consistent and efficient estimates of those discounts the econometric models account for censoring in the data by endogenously treating the tenant s staying decision the estimation indicates that neither discount is significant this result is contrary to the commonly accepted result in the urban literature that landlords offer discounts to their current tenants when contracts are renegotiated

crazy explanations of international business cycles international real business cycle models have been unable to provide a good explanation for the consumption output anomaly in theoretical economies consumption is more strongly correlated across countries than is output whereas the opposite is the case in the data this paper examines an increasing returns to scale model in which the economy is subject to belief shocks that affect the consumption euler equations rather than productivity under the assumption that there are no contingent claim markets on the realizations of sunspots the belief driven model can account for the consumption output anomaly even with a separable period utility function copyright 1998 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

bad news in the great depression the great recession and other u s recessions a comparative study in economic recessions consumption usually drops in tandem with other aggregate quantities as output or employment following the permanent income hypothesis these drops can be rationalized by the idea that consumers have pessimistic views about their long run income using a standard signal extraction model we show that this pessimism can be due either to a persistent fall of aggregate productivity before and during the recession signaling a future decline of income or to other negative information unrelated to contemporaneous fundamentals which we label bad news we classify u s recessions from 1919 to 2015 according to a bad news index reflecting this negative information we find that both the great depression and the great recession score highest in this index the index is such that we can rule out that this is due merely to the length or the depth of these recessions instead these two recessions are similar in that both were aggravated by a wave of pessimism about future income which cannot be related to contemporaneous fundamentals

increasing returns and the evolution of violent crime the case of colombia abstract this paper presents an explanation of the recent escalation of violent crime in colombia the paper considers three implicit models that isolate different types of externalities among criminals in the first model criminals make crime more appealing to nearby residents by congesting the law enforcement system and hence lowering the probability of punishment in the second model the interaction of career criminals and local crooks speeds up the diffusion of criminal know how and criminal technology in the third model the daily contact of youth with criminal adults and criminal peers results in the erosion of morals and hence in a greater predisposition toward crime the paper shows that a myriad empirical evidence both statistical and anecdotal lends support to the previous models in general and to the congestion in law enforcement model in particular