economic determinants of free trade agreements abstract the purpose of this study is to provide the first systematic empirical analysis of the economic determinants of the formation of free trade agreements ftas and of the likelihood of ftas between pairs of countries using a qualitative choice model we develop this econometric model based upon a general equilibrium model of world trade with two factors of production two monopolistically competitive product markets and explicit intercontinental and intracontinental transportation costs among multiple countries on multiple continents the empirical model correctly predicts based solely upon economic characteristics 85 of the 286 ftas existing in 1996 among 1431 pairs of countries and 97 of the remaining 1145 pairs with no ftas

the federal funds rate and the channels of monetary transmission the authors show that the interest rate on federal funds is extremely informative about future movements of real macroeconomic variables then they argue that the reason for this forecasting success is that the funds rate sensitively records shocks to the supply of bank reserves that is the funds rate is a good indicator of monetary policy actions finally using innovations to the funds rate as a measure of changes in policy the authors present evidence consistent with the view that monetary policy works at least in part through credit i e bank loans as well as through money i e bank deposits copyright 1992 by american economic association

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

environmental taxation in open economies unilateralism or partial harmonization there are two reasons why countries might set weak environmental policies transboundary pollution and concerns for competitiveness this article explores the full interactions between these two features within a unified general equilibrium framework first we show that competitive concerns change the structure of output taxes but not that of emission taxes they lead to a lowering of output taxes lower polluting good prices an increase in emission taxes adoption of less or same polluting technologies increased aggregate emissions and lower overall welfare levels second we show that partially harmonizing commodity taxes above their unrestricted nash equilibrium value can potentially hurt as well as improve the pollution technology overall quality of the environment and welfare the three attributes move positively together on the other hand harmonizing of emission taxes above their nash equilibrium values appear to always lead to improvements in the environment and welfare via adoption of cleaner technologies

kick starting diffusion explaining the varying frequency of preferential trade agreements environmental provisions by their initial conditions most recent preferential trade agreements ptas include environmental provisions while a number of these environmental provisions remain rare and are incorporated in just a few ptas others are widely popular and are duplicated in more than 100 ptas we still lack a convincing explanation for this varying frequency while the diffusion literature typically tries to explain how diffusion occurs we investigate why certain provisions diffuse more often than others we hypothesise that the initial conditions under which provisions first emerge determine the scope of their diffusion our results support this hypothesis and indicate that provisions originating from intercontinental agreements diffuse more often than others at the same time provisions first designed by economically powerful or environmentally credible countries are not related to more frequent occurrences of diffusion these findings are of interest for the literatures on international institutions design interaction and diffusion

will business cycles in the euro area converge a critical survey of empirical research this survey of business cycle synchronization in the european monetary union focuses on two issues have business cycles become more similar and which factors drive business cycle synchronization we conclude that business cycles in the euro area have gone through periods of both convergence and divergence still there is quite some evidence that during the 1990s business cycle synchronization in the euro area has increased higher trade intensity is found to lead to more synchronization but the point estimates vary widely the evidence for other factors affecting business cycle synchronization is very mixed

the case of the negative nominal interest rates new estimates of the term structure of interest rates during the great depression throughout the 1930s and early 1940s u s treasury bonds and notes appeared to have negative nominal yields as they approached maturity but negative nominal interest rates are impossible in a world in which one can always hold cash the resolution to this puzzle is that treasury securities in addition to making coupon payments gave the owner the right to buy a new security on a future date this paper describes the institutional environment that led to the apparent negative nominal interest rates develops a method for valuing the exchange privilege and computes accurate measures of the yield to the coupon bearing component of these composite bond options these corrected bond and not yields are then used to calculate new estimates of the term structure of interest rates from 1929 to 1949

the not so generalized effects of the generalized system of preferences we use an empirical gravity equation approach to study how nonreciprocal trade preferences nrtps enacted mainly through the generalized system of preferences affect the exports of the beneficiary nations in line with existing studies the average trade effect stemming from nonreciprocal preferences is highly unstable across specifications however once we allow for heterogeneous effects results become robust and economically important specifically nrtps have a strong effect on the exports of beneficiaries when they are members of the world trade organization and are very poor not so poor beneficiaries also expand foreign sales but only if they are not wto members for all others the average export effects of nrtps are mute

estimating the effects of free trade agreements on international trade flows using matching econometrics abstract this paper provides the first cross section estimates of long run treatment effects of free trade agreements on members bilateral international trade flows using nonparametric matching econometrics our nonparametric cross section estimates of ex post long run treatment effects are much more stable across years and have more economically plausible values than corresponding ols cross section estimates from typical gravity equations we provide plausible estimates of the long run effects of membership in the original european economic community eec and the central american common market cacm between 1960 and 2000 and the estimates confirm anecdotal reports of these agreements effectiveness

common ground between free traders and environmentalists we use a north south model with property right differences and resource dynamics to study the effects of trade on resource use and welfare autarky is likely to pareto dominate free trade in the long run when the environment is quite fragile and the result is reversed when the environment is quite resilient trade may cause an environmentally poor country to drag down its richer trading partner when they degrade their stocks which would be preserved under autarky it may enable the environmentally richer country to pull up its partner when they preserve their stocks which would be degraded under autarky

deep integration and production networks an empirical analysis this paper investigates the two way relationship between deep integration and production networks trade we capture deep integration with a set of indices constructed in terms of policy areas covered in preferential trade agreements we estimate an augmented gravity equation to investigate the impact of deep integration on production networks trade the results show that on average signing deeper agreements increases production networks trade between member countries by almost 12 percentage points in addition the impact of deep integration is higher for trade in automobile parts and information and technology products compared with textile products to analyse whether higher levels of network trade increase the likelihood of signing deeper agreements we follow the literature on the determinants of preferential trade agreements the estimation results show that after taking into account other pta determinants a ten percentage increase in the share of production network trade over total trade increases the depth of an agreement by approximately 6 percentage points in addition the probability of signing deeper agreements is higher for country pairs involved in north south production sharing and for countries belonging to the asia region

labour markets liquidity and monetary policy regimes dans leur etude les auteurs elaborent un modele d equilibre du mecanisme de transmission de la politique monetaire qui fait ressortir les elements de friction relatifs a l acquisition d information sur le marche de la monnaie et a la recherche d emploi

aggregate employment real business cycles and superior information abstract we test whether dynamic stochastic general equilibrium artificial economies associated with several labor market structures provide an adequate characterization of aggregate employment volatility and dynamics our test is robust to possible misspecifications about the information set used by economic agents to forecast future events accounting for agents superior information we find that the divisible labor indivisible labor labor adjustment costs and labor hoarding structures replicate employment volatility in contrast to the nominal wage contracts structure also the labor hoarding structure provides a substantially better account of employment dynamics

heterogeneous trade agreements wto membership and international trade an analysis using matching econometrics this article explores the heterogeneous effects of trade agreements tas and world trade organization wto membership on the volume of international trade we extend baier and bergstrand s 2009a application of matching econometrics by distinguishing between different types of tas and wto participation and account for the endogenous nature of trade policy for a panel data set covering 1960 2005 and 187 countries we find that the treatment effect on international trade systematically varies with the type of ta and wto membership

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

assessing the impact of unilateral trade policies eba and agoa on african beneficiaries exports using matching econometrics the existing literature studying the impact of non reciprocal preferential trade agreements nrptas assumes implicitly nrptas are non randomly assigned without showing the evidence of that using a matching methodology this paper investigates whether the african growth and opportunity act agoa and the everything but arms eba unilateral trade concessions have had an impact and in what magnitude on the exports of african beneficiary countries in the light of the evidence of the non random nature endogeneity of nrptas methodologically previous studies using the matching procedure focused on bi or multilateral trade agreements our work focuses on nrptas that depend only on donors conditions accordingly we show that for nrptas gravity covariates cannot be used for the matching procedure we propose to use political variables as determinants for obtaining non reciprocal trade preferences in order to address the endogenous nature of nrpta assignment our main results confirm that a country becomes eligible for a nrpta only when it meets certain conditions defined by their donors such as political stability and economic regulation for agoa and freedom of expression and human development for eba results also show that both agoa and eba policies have had a positive impact on african beneficiary countries exports to nrpta s providers even if the magnitude impact of eba is significantly lower than that of agoa

nonlinear strategies in dynamic duopolistic competition with sticky prices abstract we discuss nonlinear strategies in an infinite horizon duopoly game with sticky prices where firms maximize their discounted sum of profit we construct a stationary feedback equilibrium without guessing value functions and feedback strategies that solve the hamilton jacobi equation for this purpose we study the auxiliary equation that is derived from the hamilton jacobi equation we show that the domain of the state space plays an crucial role in characterizing feedback equilibria and discuss several implications of this observation in particular we find that when the upper bound of the state space is not very high previously unknown feedback equilibria emerge

inflation targeting as a monetary policy rule the purpose of the paper is to survey and discuss in ation targeting in the context of monetary policy rules the paper provides a general conceptual discussion of monetary policy rules attempts to clarify the essential characteristics of in ation targeting compares in ation targeting to other monetary policy rules and draws some conclusions for the monetary policy of the european system of central banks jel classi cation e42 e52

firm specific assets and the link between exchange rates and foreign direct investment foreign direct investment fdi theory and empirical studies have generated mixed support for a link between exchange rates and fdi this paper argues that exchange rate movements may affect acquisition fdi because acquisitions involve firm specific assets which can generate returns in currencies other than that used for purchase using data on japanese acquisitions in the united states across three digit sic industries from 1975 to 1992 maximum likelihood estimates from discrete dependent variable models support the hypothesis that real dollar depreciations make japanese acquisitions more likely in u s industries particularly those which more likely have firm specific assets copyright 1997 by american economic association

beyond the wto an anatomy of eu and us preferential trade agreements it is often alleged that ptas involving the ec and the us include a significant number of obligations in areas not currently covered by the wto agreement such as investment protection competition policy labour standards and environmental protection the primary purpose of this study is to highlight the extent to which these claims are true the study divides the contents of all ptas involving the ec and the us currently notified to the wto into 14 wto and 38 wto x areas where wto provisions come under the current mandate of the wto and wto x provisions deal with issues lying outside the current wto mandate as a second step the legal enforceability of each obligation is evaluated and judged on the extent to which the text specifies clear obligations among the findings are i ec agreements contain almost four times as many instances of wto x provisions as do us agreements ii but ec agreements evidence a very significant amount of legal inflation i e non legally enforceable provisions in the wto x category and us agreements actually contain more enforceable wto x provisions than do the ec agreements iii us agreements tend to emphasise regulatory areas more compared to ec agreements 2010 blackwell publishing ltd

inflation forecast targeting an alternative approach to estimating the inflation output variability tradeoff we suggest a new way of computing the inflation output variability tradeoff under inflation forecast targeting our approach is based on dynamic stochastic simulations of the average inflation rate over a two year horizon using the moving average representation of a vector autoregressive var model using real time data over two samples we estimate the inflation output variability tradeoff for the united states and show that it has shifted favorably over time we analyze the policy interventions required to achieve target inflation in each sample and compare these interventions over time

inflation forecast targeting implementing and monitoring inflation targets abstract inflation targeting is shown to imply inflation forecast targeting the central bank s inflation forecast becomes an explicit intermediate target inflation forecast targeting simplifies both implementation and monitoring of monetary policy the weight on output stabilization determines how quickly the inflation forecast is adjusted towards the inflation target money growth or exchange rate targeting is generally inferior than inflation targeting and leads to higher inflation variability commitment to target rules may be better than commitment to instrument rules

job matching and propagation in the u s labor market the vacancy unemployment ratio and employment react sluggishly to productivity shocks we show that the job matching model in its standard form cannot reproduce these patterns due to excessively rapid vacancy responses extending the model to incorporate sunk costs for vacancy creation yields highly realistic dynamics creation costs induce entrant firms to smooth the adjustment of new openings following a shock leading the stock of vacancies to react sluggishly

the theory of preferential trade agreements historical evolution and current trends the theory of preferential trade agreements pta s or what might be described in policy terms as the general agreement on tariffs and trade gatt article xxiv sanctioned freetrade areas fta s and customs unions cu s has undergone two phases of evolution in two very different modes largely reflecting the contrasting policy concerns of the time in this paper we trace this evolution offering both a historical context and an intellectual coherence to diverse analytical approaches

the wto trade effect this paper reexamines the gatt wto membership efiect on bilateral trade ows using nonparametric methods including pair matching permutation tests and a rosenbaum 2002 sensitivity analysis together these methods provide an estimation framework that is robust to misspeciflcation biases allows general forms of heterogeneous treatment efiects and addresses potential hidden selection biases this is in contrast to most conventional parametric studies on this issue our results suggest large gatt wto trade promoting efiects robust to various restricted matching criteria alternative indicators for gatt wto involvement different matching methodologies non random incidence of positive trade ows and inclusion of multilateral resistance terms

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

labor market search endogenous disasters and the equity premium puzzle abstract the present paper investigates i the endogenous disaster mechanism in a textbook search and matching model when calibrated with a constant flow value of unemployment that is close to average labor productivity and ii its contribution to solve the equity premium puzzle i offer a simple explanation for the core of the disaster mechanism the lower bound say xkink on the annuitized costs the firm incurs from investing in a match lies sufficiently close to the body of productivity s distribution if labor productivity drops close to or even below xkink for consecutive periods the firm s annuitized share in expected future productivity of a worker can either only barely or even no longer at all break even the annuitized lower bound of the costs the firm faces vacancies become unprofitable and the economy quickly enters a downward spiral the core of the mechanism relies critically on an unreasonably high and constant flow value of unemployment disasters disappear entirely for slightly smaller or procyclical values and the effects cannot be compensated by empirically plausible adjustments of the model s remaining parameters while the model can generate a sizeable equity premium combined with a small risk free rate if the flow value of unemployment is large and constant and if the coefficient of relative risk aversion and the elasticity of intertemporal substitution are both high premia again collapse by an order of magnitude in the versions of the model without disasters

output inflation and stabilization a counterfactual analysis abstract we estimate a small open economy macro model in which movements in inflation and output are driven by fiscal real monetary exchange rate and asset disturbances we use 1980 s data from bolivia and brazil each of which undertook stabilization programs though only bolivia s succeeded an important part of our analysis is counterfactual where hypothetical paths of output and inflation under alternative policymaking scenarios are investigated for bolivia there is clear evidence that deficits affect inflation largely through their effects on money growth and do not have much influence on output external shocks are important for brazilian inflation

distinguished lecture on economics in government what central bankers could learn from academics and vice versa academic writing about monetary policy has been useful to practical central bankers but more of certain aspects of the economists way of thinking could profitably be imported on the other hand academics could improve their analysis and make it more useful to policymakers if they would pay more attention to certain real world aspects of monetary policy the author draws on his experience at the federal reserve board to point out a number of specific lessons for each side

search for a monetary propagation mechanism abstract this paper examines a monetary propagation mechanism in an economy where exchanges in goods and labor markets involve costly search it is shown that an increase in the money growth rate increases steady state employment and output when the money growth rate is low but reduces steady state employment and output when the money growth rate is already high the model produces persistent hump shaped responses in employment and output to money growth shocks even when the shocks have no persistence the model also generates desirable features in job vacancy sales inventory and the velocity of money all these features emerge here in an economy with perfectly flexible prices and wages journal of economic literatureclassification numbers e40 e30

has monetary policy become more efficient a cross country analysis over the past twenty years macroeconomic performance has improved in industrialized and developing countries alike in a broad cross section of countries inflation volatility has fallen markedly while output variability has either fallen or risen only slightly this increased stability can be attributed to either 1 more efficient policymaking by the monetary authority 2 a reduction in the variability of the aggregate supply shocks or 3 changes in the structure of the economy in this paper we develop a method for measuring changes in performance and allocate the source of performance changes to these two factors our technique involves estimating movements toward an inflation and output variability efficiency frontier and shifts in the frontier itself we study the change from the 1980s to the 1990s in the macroeconomic performance of 24 countries and find that for most of the analyzed countries more efficient policy has been the driving force behind improved macroeconomic performance

a sunspot paradox abstract this paper shows that the local stability properties of dynamic general equilibrium macroeconomic models may depend on the length of a period in the model economy this leads to the following paradoxical situation the economy may be driven by sunspots for some decision frequencies while sunspots can have no impact at other decision frequencies

refinements on macroeconomic modeling the role of non separability and heterogeneous labor supply abstract this paper proposes a dynamic stochastic general equilibrium model characterized by heterogenous labor schedules and non separability between consumption and labor in the utility function the model successfully describes output consumption investment and interest rates after a monetary expansion the proposed formulation improves on standard models by using preferences favored by the data and by requiring investment adjustment costs and habit formation parameters more in line with the micro based evidence

human capital formation and business cycle persistence abstract in this paper we examine the role of the formation of human capital in propagating shocks over the business cycle we show that a two sector equilibrium business cycle model with human capital is able to generate persistence in the growth of output and other aggregate variables comparable to that observed in the post war us data a key feature is the relatively low elasticity of substitution between skilled and unskilled labor in the production of human capital

which border taxes origin and destination regimes with fiscal competition in output and emission taxes abstract this paper posits a two stage game in tax regime and tax rates to study the property of second best emission and output taxes in a two country world with an atmospheric externality it shows that i either the destination destination or the origin origin tax regime may constitute the subgame perfect nash equilibrium of this game ii either regime may pareto dominate the other iii it is possible to have a prisoner s dilemma game where the origin origin regime pareto dominates but the choice of the destination regime is the dominant strategy for each country other results include iv under origin origin regime the output tax is used for fiscal competition the emission tax is set at a rate equal to the national marginal social damage of emissions and public goods are provided suboptimally v under destination destination regime the output tax is ineffective as an instrument for fiscal competition the emission tax is used not only for combating pollution but also for tax competition the tax is set at a rate below the national marginal social damage of emissions emissions are pushed above their closed economy level the provision of public goods are optimal

do we really know that the wto increases trade comment in a recent article in the american economic review andrew k rose 2004 finds that countries belonging to the general agreement on tariffs and trade gatt and its successor the world trade organization wto did not trade more than countries that abstained from membership a vast literature on the gatt and the wto presupposes that these organizations were important but until rose there were few systematic efforts to test the assumption that membership increased trade rose s contribution is striking because he assembles a large dataset performs a myriad of analyses and uncovers scant evidence that the gatt and the wto had any impact rose describes his negative findings as an interesting mystery 112 the solution to this mystery lies in understanding who actually participated in the gatt we show that rose has overlooked a large proportion of countries to which the agreement applied and mistakenly classified them as nonparticipants when in fact they had rights and obligations under the agreement this causes a downward bias in his estimates of the gatt s effect on trade because his gravity regressions

endogenous enclosure in north south trade we show that the second best case against the optimality of free trade remains valid in the face of a well targeted but costly policy response trade between a north where property rights can be enforced at relatively low cost and an otherwise identical south yields trade patterns and welfare results nearly identical to those previously shown to arise if north and south differ exogenously in the extent of control over resources both nations respond optimally to world prices and the opening of trade leads to the development of property rights in the south nonetheless for a set of world prices bounded by the south s autarky price the south is better off under autarky and is made worse off by each increase in its export price on montre que l optimum de second ordre par rapport a l optimalite du libre echange reste valide quand on fait face a une strategie de reponse bien ciblee mais couteuse le commerce entre un nord ou les droits de propriete sont polices a un cout relativement bas et un sud identique sauf pour ce qui est de ce facteur engendre des patterns de commerce et de bien etre a peu pres identiques aux resultats obtenus si nord et sud different de maniere exogene dans le controle qu ils ont sur les ressources les deux pays repondent optimalement aux prix mondiaux et l ouverture du commerce entraine le developpement de droits de propriete dans le sud toutefois pour un ensemble de prix mondiaux bornes par les prix d autarcie du sud le sud s en tire mieux en autarcie et voit sa situation s empirer a proportion que son prix a l exportation s accroit

moving to autarky trade creation and home market effect an exhaustive analysis of regional trade agreements in africa this article analyses the effects of regional trade agreements rtas on bilateral trade in africa a structural gravity equation is estimated over the period 1955 2014 the overall effect of rtas

fleshing out the monetary transmission mechanism output composition and the role of financial frictions financial frictions affect the way in which different macroeconomic series respond to a monetary policy shock we embed the financial accelerator of bernanke gertler and gilchrist 1999 into a medium scale dsge model and evaluate the relative importance of financial frictions in explaining monetary transmission specifically we apply minimum distance estimation based on impulse responses for the volcker greenspan period apart from providing estimates for structural parameters our procedure lends itself for specification tests that can be used to assess the relative fit of various restricted models financial frictions turn out to be of lesser importance for the descriptive success of our model

can a real business cycle model pass the watson test abstract watson 1993 measures of fit for calibrated models journal of political economy 101 6 1011 1041 proposes a procedure for evaluating the fit of a dynamic equilibrium business cycle model under watson s criterion the standard real business cycle rbc model fails dramatically in reconciling the dynamics of the model with the data this inability to account for the dynamics of us aggregate data remains a major challenge to rbc theory this paper demonstrates that reasonable modifications can bring rbc theory into closer conformity with the data the empirical results indicate that when habit formation on leisure choice and employment externality are incorporated into the analysis the striking spectral density differentials documented by watson virtually vanish at business cycle frequencies

inflation targeting a new framework for monetary policy he world s central bankers and their staffs meet regularly in venues from basle to washington to share ideas and discuss common problems perhaps these frequent meetings help explain why changes in the tactics and strategy of monetary policymaking such as the adoption of money growth targets in the 1970s the intensification of efforts to reduce inflation in the 1980s and the recent push for increased institutional independence for central banks tend to occur in many countries more or less simultaneously whatever their source major changes in the theory and practice of central banking are of great importance for both individual countries and the international economy in this article we discuss a new strategy for monetary policy known as inflation targeting which has sparked much interest and debate among central bankers and monetary economists in recent years this approach is characterized as the name suggests by the announcement of official target ranges for the inflation rate at one or more horizons and by explicit acknowledgment that low and stable inflation is the overriding goal of monetary policy other important features of inflation targeting include increased communication with the public about the plans and objectives of the monetary policymakers and in many cases increased accountability of the central bank

on the dynamics of international inflation abstract we investigate the dynamic properties of inflation in 20 oecd countries with a novel approach based on the autocorrelation function we find evidence in favor of long memory and nonlinearity linear autoregressive models are shown to be misspecified

real business cycle models and the forecastable movements in output hours and consumption the authors study the movements in output consumption and hours that are forecastable from a vector autoregression and analyze how they differ from those predicted by standard real business cycle models they show that actual forecastable movements in output have a variance about one hundred times larger than those predicted by the model the authors also find that forecastable changes in the three series are strongly positively correlated with each other on the other hand for parameters whose implications are plausible in other respects the model implies that output consumption and hours should not all be expected to move in the same direction copyright 1996 by american economic association

contagious cooperation temptation and ecosystem collapse real world observations suggest that social norms o f cooperation can be effective in overcoming social dilemmas such as the joint management of a c ommon pool resource but also that they can be subject to slow erosion and sudden collapse we show that these patterns of erosion and 15 collapse emerge endogenously in a model of a closed community harvesting a renewable natural resource in which individual agents face the tempta tion to overexploit the resource while a cooperative harvesting norm spreads through the community via interpersonal relations we analyze under what circumstances small changes in key parameters including the size of the community and the rate of technological progress trigger catastrophic transitions from 20 relatively high levels of cooperation to widespread norm violation causing the social ecological system to collapse

on measuring the welfare cost of business cycles lucas 1987 argues that the gain from eliminating aggregate fluctuations is trivial following lucas a number of researchers have altered assumptions on preferences and found that the gain from eliminating business cycles are potentially very large however in these exercises little discipline is placed on preference parameters this paper estimates the welfare cost of business cycles allowing for potential time non separabilities in preferences where discipline is placed on the choice of preference parameters by requiring that the preferences be consistent with observed fluctuations in a model of business cycles that is a theoretical real business cycle world is constructed and the representative agent is then placed in this world the agent responds optimally to exogenous shocks given the frictions in the economy the agent s preference parameters along with other structural parameters are estimated using a bayesian procedure involving markov chain monte carlo methods two main results emerge from the paper first the form for the time non separability estimated in this paper is very different than the forms suggested and used elsewhere in the literature second the welfare cost of business cycles is close to lucas s estimate

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

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

do trade agreements stimulate international trade differently evidence from 296 trade agreements in a seminal article rose 2004 found that the assumed positive impact of the wto on international trade was questionable this finding has been scrutinised and modified in subsequent research using different data sets econometric methods and separating the wto from other forms of trade agreements a key characteristic of the subsequent literature is the rather simplistic way in which trade agreements are treated whereby all trade agreements are lumped together trade agreements come however in many different forms and shapes this study addresses these differences in trade agreements using a unique database of 296 trade agreements we distinguish 17 trade related policy domains and indicate whether the agreements contain legally enforceable commitments this extensive and novel taxonomy of trade agreements enables us to allow for the possible heterogeneity of the impact of trade agreements on international trade using a gravity model we find that trade agreement heterogeneity indeed matters for international trade and that countries experience significant trade increases due to comprehensive trade agreements even if not all participants are in the wto

the real impact of gatt wto a generalised approach rose s result in 2004 that gatt wto has no significant impact on bilateral trade triggered off a series of empirical studies each of those studies augments rose s paper in one specific methodological aspect with the general finding that gatt wto significantly fosters members trade although the estimated impact varies between 2 per cent and 195 per cent of trade creation we combine the methodological contributions of previous studies to overcome these isolated approaches to account for possible interactions and to develop a more general view on the impact of gatt wto in particular we find that gatt wto promotes members trade by around 86 per cent

let s take a break trends and cycles in us real gdp abstract trend cycle decompositions for us real gdp such as the unobserved components models the beveridge nelson decomposition the hodrick prescott filter and others yield very different cycles which bear little resemblance to the nber chronology ascribes much movements to the trend leaving little to the cycle and some imply a negative correlation between the noise to the cycle and the trend we argue that these features are artifacts created by the neglect of a change in the slope of the trend function once this is accounted for all methods yield the same cycle with a trend that is non stochastic except for a few periods around 1973 the cycle is more important in magnitude than previously reported and it accords well with the nber chronology our results are corroborated using an alternative trend cycle decomposition based on a generalized unobserved components models with errors having a mixture of normals distribution for both the slope of the trend function and the cyclical component

sequencing regional trade integration and cooperation agreements trade integration agreements and other international cooperation agreements have proliferated in recent years around the world rather than being spurred by exogenous forces alone the two phenomena are likely to be both path dependent and endogenous to one another however the theoretical and empirical understanding of the relationships between agreements forged in different domains of cooperation remains nascent the purpose of this paper is to describe a new extensive dataset on international agreements that can be employed to start mending the gaps in the literature and to develop best practices of sequencing international agreements to obtain higher pay offs from cooperation of particular interest here is the relationship between trade integration and other cooperation agreements the data provide preliminary grounds for hypothesising that trade integration agreements can be a particularly likely catalyst for further cooperation between states

evaluating monetary policy options we present a procedure for evaluating ex ante the effects of alternative paths of a monetary policy tool the federal funds rate in our illustrations on output and the price level within a variant of a widely used vector autoregressive model of the u s economy this exercise is a supplement to or even an alternative to analysis that relies on a particular structural model illustrations of the method are provided by evaluating the effects of changes in the funds rate target additionally the taylor rule is used to generate target funds rates for different target inflation rates and the effects of these are evaluated one of the critical elements in the formulation of monetary policy is the evaluation of the effects of alternative paths of the policy instrument on the macroeconomy for example in federal open market committee fomc meetings estimates of the effects of alternative paths of the federal funds rate are presented to policymakers as an input into the policy process for a discussion see meulendyke 1998 the effects of the alternative paths are evaluated within the context of a structural model of the economy the latest version of the structural model used at the board of governors is described in brayton et al 1997 in this article we present a procedure for evaluating ex ante the effects of alternative paths of a monetary policy tool the federal funds rate in our illustrations on output and the price level we demonstrate this procedure employing a variant of a widely used vector autoregressive var model of the u s economy this exercise can be viewed as a supplement to or even an alternative to analysis that relies on a particular structural model given the lack of general agreement on the appropriate structural model evaluation of the effects of changes in the policy instrument within a variety of different types of models is appropriate the discussion of the proposed procedure is in the spirit of recent work by leeper and sims 1994 who following earlier work by sims 1982 1987 distinguish between normal policymaking and regime changes for purposes of illustration we employ a var model comprised of the same variables used by christiano eichenbaum and evans hereafter cee 1994 1996 and bernanke and mihov hereafter bm 1998 we show how to evaluate and compare the current policy path with normal policy alternatives such as typically sized changes in the federal funds target we stress that this model is used only for illustrative purposes our methodology applies to any generic structural model and thus can easily

is the political business cycle for real abstract this paper constructs and examines a macroeconomic model which combines features from both real and political business cycle models we augment a standard real business cycle tax model by allowing for varying levels of government partisanship and competence in order to replicate two important empirical regularities first that on average the economy expands early under democratic presidents and contracts early under republican presidents second that presidents whose parties successfully retain the presidency have stronger than average growth in the second half of their terms the model generates both of these features that conform to u s post world war ii data

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

what is wrong with taylor rules using judgment in monetary policy through targeting rules it is argued that inflation targeting is best understood as a commitment to a targeting rule rather than an instrument rule e ither ageneral targeting rule explicit objectives for monetary policy or a specific targeting rule a criterion for the forecasts of the target variables to be fulfilled essentially the equality of the marginal rates of transformation and substitution between the target variables targeting rules allow the use of judgment and extramodel information are more robust and easier to verify than optimal instrument rules and they can nevertheless bring the economy close to the socially optimal equilibrium

bernanke versus taylor a post mortem our analysis sheds light on the issue of whether the monetary policy contributed to the recent housing boom and bust we have estimated and analysed a model that allows a comparison between the actual policy and several alternative taylor rules when the taylor rule path was computed using revised data and the deflator for the gdp we found a notable impact on key housing market variables supporting taylor s critique of the fed policy however the bulk of our evidence suggests that the policy as it would have been conducted under our real time taylor rules would not have had any significant impact on the housing market variables this conclusion is robust with regard to the price index used as well as the relative weights used on the inflation and output gaps

dynamic formation of preferential trade agreements the role of flexibility in practice free trade agreements ftas vastly outnumber customs unions cus nevertheless the literature traditionally views cus as optimal for members because cu members coordinate external tariffs i show that a dynamic fta flexibility benefit can help explain the prevalence of ftas individual fta members have the flexibility to form their own future ftas whereas cu members must jointly engage in future cu formation i show how the relative prevalence of ftas versus cus depends on the structure of market size asymmetry across countries and use these predictions to shed some light on fta versus cu formation in europe and south america formation dynamique d accords commerciaux preferentiels le role de la flexibilite en pratique les accords de libre echange ale sont plus nombreux que les unions douanieres ud neanmoins la litterature specialisee percoit traditionnellement que les ud sont optimales pour les membres parce qu ils peuvent coordonner leurs tarifs externes on montre qu une flexibilite dynamique de l ale peut aider a expliquer la prevalence des ale les membres des ale ont la flexibilite de former leurs propres ale dans l avenir alors que les membres des ud s engagent conjointement pour la formation des ud futures on montre comment la prevalence des ale versus les ud depend de la structure de l asymetrie de la taille entre les pays et on utilise ces previsions pour eclairer les choix entre la formation de ale et de ud en europe et en amerique du sud

sources and propagation of international output cycles common shocks or transmission abstract this paper studies the generation and transmission of international cycles in a multi country model with production and consumption interdependencies two sources of disturbance are considered and three channels of propagation are compared technology disturbances which are mildly correlated across countries are more successful than government expenditure disturbances in reproducing actual data the presence of a common component to the shocks and of production interdependencies appear to be crucial in quantitatively matching the properties of the data

alliances in international governmental organizations regional trade agreement formation and multinational enterprise regionalization strategy abstract drawing from political science alliance theories we explain why countries are likely to enter regional trade agreements we argue that the probability that this will happen is higher if the countries are allies in the same international governmental organizations igos as such alliances can help build trust and reduce political risk our results show that igo scope and also partner reliability and influence in the igo network play important roles our findings provide guidance to multinational enterprises in formulating regionalization strategies

endogenous vs exogenously driven fluctuations in vintage capital models in this paper we present a particular case of the creative destruction model of caballero and hammour quart j econ 111 1996 805 851 in which both exogenous and endogenous fluctuation sources are present we show that job creation follows a delayed differential equation with periodic coefficients the delay is equal to the optimal age of capital goods the period of the coefficients is equal to the period of an exogenous profitability cycle we mathematically show that job creation is asymptotically periodic with the same period as the profitability cycle furthermore using an explicit numerical method we find that replacement echoes generally dominate the short run dynamics finally we find that the combination of the two fluctuations sources favors the appearance of asymmetries in job creation and job destruction patterns

financing constraints and inventories abstract this paper investigates the impact of financing constraints on firms inventory and cash management in particular it examines the extent to which the presence of such constraints may account for certain empirical regularities these include e g the excess variance of production vis a vis that of sales as well as the counter cyclicality and persistence of the inventory sales ratio we model the intertemporal decision making on production cash retention and dividends of a firm that is exposed to stochastic demand shocks in every period and faces constrained access to external sources of finance it is found that the presence of financing constraints can explain the excess variance of production in a model which otherwise would not deliver this result moreover as long as demand is positively serially correlated they also contribute to the counter cyclicality and persistence of the inventory sales ratio the paper suggests that financing constraints should not be discarded as a factor driving the cyclical behaviour of inventories