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

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

time to build and aggregate fluctuations some new evidence this paper presents maximum likelihood estimates and tests of a model similar to one kydland and prescott 1982 suggested for this purpose it derives equilibrium laws of motion for a set of aggregate variables as functions of the model s parameters and the innovation to the technology shock the paper shows that a single unobservable index can explain the variability in the observed series but identifying the single index with the innovation to the technology shock implies that per capita hours is not well explained it also shows that time separable preferences with respect to leisure are consistent with the data copyright 1989 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

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

experimental evidence of a sunk cost paradox a study of pricing behavior in bertrand edgeworth duopoly a well known implication of microeconomic theory is that sunk costs should have no effect on decision making we test this hypothesis with a human subjects experiment students recruited from graduate business courses with an average of over six years of work experience played the role of firms in a repeated price setting duopoly game in which both firms had identical capacity constraints and costs including a sunk cost that varied across experimental sessions over six different values we find contrary to the prediction of microeconomic theory that subjects pricing decisions show sizable differences across treatments the effect of the sunk cost is non monotonic as it increases from low to medium levels average prices decrease but as it increases from medium to high levels average prices increase these effects are not apparent initially but develop quickly and persist throughout the game cachon and camerer s 1996 loss avoidance is consistent with both effects while cost based pricing predicts only the latter effect and is inconsistent with the former

a method for taking models to the data abstract this paper develops a method for combining the power of a dynamic stochastic general equilibrium model with the flexibility of a vector autoregressive time series model to obtain a hybrid that can be taken directly to the data it estimates this hybrid model via maximum likelihood and uses the results to address a number of issues concerning the ability of a prototypical real business cycle model to explain movements in aggregate output and employment in the postwar us economy the stability of the real business cycle model s structural parameters and the performance of the hybrid model s out of sample forecasts

market contestability in the presence of sunk entry costs this article extends previous laboratory experimental research to examine the competitive discipline of contested markets with a natural monopoly type cost structure where sunk costs are neither zero nor infinite several alternative conjectures as to how or whether sunk costs can weaken the discipline of contested markets are presented and interpreted in the context of the experimental design sunk costs are found to weaken the support for strong interpretations of the contestable markets hypothesis and thus yield a wide diversity of dynamic patterns of market performance yet the disciplining power of contestability remains impressive with no indications of sustained monopoly pricing

the conventional treatment of seasonality in business cycle analysis does it create distortions abstract no so says one model that is broadly consistent with postwar u s seasonal and business cycle data

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

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

imperfect information and the house price in a general equilibrium model abstract house prices have inertia which may be because housing market participants need time to recognize long booms and recessions within a dynamic stochastic general equilibrium model with an endogenous market for housing i consider the case of rational expectations subject to imperfect information about the persistence of exogenous shocks i evaluate the performance of the model against the last 40 years of key u s macroeconomic data bayesian comparison strongly favors the model over the baseline case with perfect information under imperfect information agents rely on learning to form expectations which improves the ability of the model to generate realistic low frequency house price dynamics however as long as the agents form expectations rationally the improvement is limited furthermore to confine price inertia within the housing market is a challenge for the general equilibrium approach

a method for estimating the timing interval in a linear econometric model with an application to taylor s model of staggered contracts abstract this paper describes and implements a procedure for estimating the timing interval in any linear econometric model the procedure is applied to taylor s model of staggered contracts using annual averaged price and output data the fit of the version of taylor s model with serially uncorrelated disturbances improves as the timing interval of the model is reduced

time to build and aggregate fluctuations abstract this paper studies the contribution of time to build to the explanation of business cycle phenomena using a simple version of the neoclassical model the analysis shows that it is not evident that multiperiod construction is crucial to the theory of fluctuations

structural shocks and the comovements between output and interest rates stylized facts on u s output and interest rates have so far proved hard to match with simple dsge models i estimate covariances between output nominal and real interest rate conditional on structural shocks since such evidence has largely been lacking in previous discussions of the output interest rate puzzle conditional on shocks to technology and monetary policy the results square with simple models moreover permanent inflation shocks accounted for the counter cyclical and inversely leading behavior of the real rate during the great inflation 1959 1979 over the great moderation 1982 2006 technology shocks were more dominant and the real rate has been pro cyclical

an analytical approach to new keynesian models under the fiscal theory abstract this article illustrates a widely applicable frequency domain methodology to solving multivariate linear rational expectations models as an example we solve a prototypical new keynesian model under the assumption that primary surpluses evolve independently of government liabilities a regime in which the fiscal theory of the price level is valid the resulting analytical solution is useful in characterizing the cross equation restrictions and illustrating the complex interaction between the fiscal theory and price rigidity we also highlight some useful by products of such method which are not easily obtainable for more sophisticated models using time domain methods

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

a comparison of posted offer and double auction pricing institutions this paper presents an experimental study of a computerized posted offer pricing mechanism that captures many of the basic institutional features of retail exchange in the u s posted offer market performance is evaluated relative to double auction market performance using two supply and demand designs subject experience with the trading mechanism is explicitly considered as an experimental treatment variable the market data suggest that prices tend to be higher and efficiency lower under posted offer pricing relative to double auction however the institutional effect appears to interact with other design conditions when feasible the predictive power of competitive nash and limit price theoretic equilibria are empirically evaluated

the macroeconomic effects of distortionary taxation abstract prescott 1986 estimates that technology shocks account for 75 of the fluctuations in the postwar u s economy this paper reestimates the contribution of technological change for a standard business cycle model that includes a public sector and fiscal disturbances i find that a significant fraction of the variance of aggregate consumption investment output capital stock and hours of work can be explained by disturbances in labor and capital tax rates and government consumption i also use the model to quantify the welfare costs of capital and labor taxation for both the time series and welfare calculations maximum likelihood estimates of taste technology and policy parameters are used

implementation cycles investment and growth we develop a model of intrinsic cycles driven by the decentralized behavior of entrepreneurs and firms making continuous divisible improvements in their productivity we show that when the introduction of productivity improvements is endogenous implementation cycles arise even in the presence of reversible investment and consumption smoothing the implied cyclical equilibrium is unique within its class and shares several features in common with actual business cycles in particular its predictions are qualitatively consistent with the joint behavior of the investment rate and tobin s q during u s recessions

overtime effort and the propagation of business cycle shocks abstract this paper presents and estimates a variant of hansen and sargent s 1988 real business cycle model with straight time and overtime the model presented has only one latent variable the state of technology yet it does a better job propagating and magnifying shocks than the labor hoarding models which incorporate unobserved effort this model as well as a version of burnside eichenbaum and rebelo s 1993 labor hoarding model is estimated using maximum likelihood the maximum likelihood parameter estimates are compared to those using gmm

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

equilibria in noncooperative models of competition abstract an equilibrium in a game theoretic setting a la debreu proc nat acad sci u s a 38 1954 886 893 and shafer sonnenschein j math econ 2 1975 345 348 with a broader structure is proved in particular our framework is general enough to encompass both the aumann econometrica 34 1966 1 17 economy of perfect competition and the nonordered preferences setting of mas colell j math econ 1 1974 237 246 moreover since the dimensionality of the strategy space may be infinite it contains bewley type j econ theory 4 1972 514 540 results and may be useful in obtaining existence results for economies with a measure space of agents and infinitely many commodities

oligopoly competition in fixed cost environments abstract many industries with avoidable fixed costs face competitive price instability problems in an attempt to maintain profitability we designed an experimental environment where profitability is eroded by the addition of sunk and avoidable fixed costs while we cannot reject the hypothesis that sunk fixed costs have no effect on prices we observe a pattern of price signaling and responses which maintain above normal profits this success implies that a firm does not have to exit such an industry in order to avoid loses and may help to explain why some competitive industries appear to maintain an inefficient number of firms

estimating and testing rational expectations models when the trend specification is uncertain abstract this paper explores various strategies for estimating and testing rational expectations models when the trend specification is uncertain one approach seeks to make estimators and tests robust to trend misspecification by reducing the influence of low frequency dynamics however contrary to intuition the effects of trend specification errors are not confined to low frequencies but are spread across the entire frequency domain thus operations that damp low frequency components do not remove trend specification errors and are not sufficient for constructing robust estimators and tests another approach seeks representations of approximating models that do not condition on a specification of the trend and it uses gmm to estimate parameters and test over identifying restrictions because these methods do not condition on assumptions about trends they are robust to errors in that part of the approximating model

avoidable cost ride a double auction roller coaster the double auction trading institution has been highly efficient across diverse marginal cost market structures whether human subjects or zero intelligence robots populated those markets accordingly many researchers suspect that double auction performance transcends market structure and agent strategy but the authors show that large avoidable costs undermine the efficiency and stability of human subject double auctions and these low human efficiencies are simultaneously well above zero intelligence efficiencies their results dramatically illustrate the potential havoc wrought by highly competitive institutions when they must cope with nonconvex technologies copyright 1996 by american economic association

technology shocks and the business cycle on empirical investigation abstract this paper uses maximum likelihood to estimate a prototypical real business cycle model under several different assumptions regarding the stochastic process governing technological change the estimation approach permits the use of formal statistical hypothesis tests to help discriminate between competing specifications the approach also allows each specification to be evaluated based on its ability to generate accurate out of sample forecasts overall the results indicate that the data prefer a version of the model in which technology shocks are extremely persistent but still trend stationary

contestability in the presence of an alternate market an experimental examination most earlier experimental tests ofthe contestable market hypothesis assume a zero opportunity cost of entry this design feature makes interpretation of results in terms of entry behavior problematic the experimental study that i report tests contestability with the addition of an alternate market that yields a positive profit with certainty this safe haven operationalizes a positive opportunity cost of entry hit and run entry is observed in the experiments adjusted mean prices are not significantly different from the zero opportunity cost case two methodological questions are also examined in one treatment sellers price offers are allowed only in 0 25 increments the simplification of the sellers decision space makes collusive arrangements more probable secondly market outcomes using human subject buyers are compared with outcomes from experiments with computer simulated demand the disciplining effect of human subject buyers results in market prices that converge to competitive levels more quickly the theory of contestable markets as presented by william baumol in his 1981 address as outgoing president of the american economic association has received considerable attention since its introduction the thesis of contestability is that we can model a market that attains a competitive outcome without the large numbers price taking assumption in the perfectly contestable market envisioned by baumol and others we would observe the efficient competitive price in equilibrium even with few or only one active seller the threat of entry is the disciplining force that sustains the efficient price as an equilibrium previous experimental tests of the contestable market hypothesis for the natural monopoly case all include at least two active firms pricing in every period the laboratory outcomes of these markets are indistinguishable from the destructive competition that has historically concerned scholars sharkey 1982 one can assert that the competitive prices that result from these natural monopoly markets are due to cutthroat competition because that market is the only game in town the study of the contestable natural monopoly that i report allows subjects the option of earning a normal rate of return in an alternate market thus there is at least the possibility that we can observe a single active seller choosing the efficient price

incompatibility of usual conditions for equilibrium existence in continuum economies without ordered preferences abstract in recent years attempts were made to extend the equilibrium existence results of gale and mas colell 1975 j math econ 2 9 15 and shafer and sonnenschein 1975 j math econ 2 345 348 to continuum economies here it is shown that the usual conditions used for these attempts force the preferred to correspondence to be empty valued almost everywhere on the nonatomic part of the measure space of agents several published continuum extensions of the existence results of shafer and sonnenschein are thus rendered pointless journal of economic literature classification number c72

posterior predictive evidence on us inflation using extended new keynesian phillips curve models with non filtered data changing time series properties of us inflation and economic activity measured as marginal costs are modeled within a set of extended new keynesian phillips curve nkpc models it is shown that mechanical removal or modeling of simple low frequency movements in the data may yield poor predictive results which depend on the model specification used basic nkpc models are extended to include structural time series models that describe typical time varying patterns in levels and volatilities forward and backward looking expectation components for inflation are incorporated and their relative importance is evaluated survey data on expected inflation are introduced to strengthen the information in the likelihood use is made of simulation based bayesian techniques for the empirical analysis no credible evidence is found on endogeneity and long run stability between inflation and marginal costs backward looking inflation appears stronger than forward looking inflation levels and volatilities of inflation are estimated more precisely using rich nkpc models the extended nkpc structures compare favorably with existing basic bayesian vector autoregressive and stochastic volatility models in terms of fit and prediction tails of the complete predictive distributions indicate an increase in the probability of deflation in recent years

maximum likelihood in the frequency domain the importance of time to plan abstract we illustrate the use of various frequency domain tools for estimating and testing dynamic stochastic general equilibrium models we show how to exploit the well known fact that the log gaussian density function has a linear decomposition in the frequency domain we also propose a new resolution to the problem that the phase angle between two variables is not uniquely determined these methods are applied to the analysis of business cycles our substantive findings confirm existing results in the literature which suggest that time to plan in the investment technology has a potentially useful role to play in business cycle analysis

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

does auctioning of entry licences induce collusion an experimental study we use experiments to examine whether the auctioning of entry rights affects the behaviour of market entrants standard economic arguments suggest that the licence fee paid at the auction will not affect pricing since it constitutes a sunk cost this argument is not uncontested though and this paper puts it to an experimental test our results indicate that an auction of entry licences has a significant positive effect on average prices in oligopoly but not in monopoly these results are consistent with the conjecture that entry fees induce players to take more risk in pursuit of higher expected profits in oligopoly entry fees increase the probability that the market entrants coordinate on a collusive price path in monopoly taking more risk does not make sense since average prices are already close to the profit maximizing price

posted offer markets in near continuous time an experimental investigation this paper reports an experiment conducted to evaluate a near continuous variant of the posted offer trading institution where the number of periods in a market session is increased by reducing sharply each period s maximum length experimental results suggest that although decisions in time truncated periods are not equivalent to periods of longer duration extensive repetition improves considerably the drawing power of equilibrium predictions in some challenging environments nevertheless significant deviations remain in the near continuous framework we also observe that the extra data collected in the near continuous framework allows new insights into price convergence and price signaling