what accounts for the changes in u s fiscal policy transmission using vector autoregressions on u s time series for 1957 79 and 1983 2004 we find government spending shocks to have stronger effects on output consumption and wages in the earlier period we try to account for this observation within a dsge model featuring price rigidities and limited asset market participation specifically we estimate the structural parameters of the model for both periods by matching impulse responses model based counterfactual experiments suggest that most of the changes in fiscal policy transmission are accounted for by increased asset market participation and the more active monetary policy of the volcker greenspan period

relative price variability and inflation uncertainty the uk case this study applies the time varying volatility model to uk gdp deflators and compares it with the traditional inflation uncertainty measurement of relative price variability the link between relative price variability and time varying volatility is studied and established moreover inflation uncertainty is found to be highly persistent in duration and plausibly asymmetric to previous shocks at both disaggregate and aggregate levels

nonseparable preferences frisch labor supply and the consumption multiplier of government spending one solution to a fiscal policy puzzle this paper proposes a theoretical explanation of the positive consumption multipliers of government spending often found in the data the explanation requires two ingredients first labor demand expands e g prices are sticky second general nonseparable preferences over consumption and leisure should be such that the two goods are substitutes that is frisch labor supply elasticity is lower than the constant consumption elasticity this implies that constant consumption labor supply shifts left existing empirical evidence on the relative magnitudes of the two elasticities supports this hypothesis the parametric conditions under which the result occurs are consistent with restrictions of concavity and noninferiority of consumption and leisure

a two factor cointegrated commodity price model with an application to spread option pricing in this paper we propose an easy to use yet comprehensive model for a system of cointegrated commodity prices while retaining the exponential affine structure of previous approaches our model allows for an arbitrary number of cointegration relationships we show that the cointegration component allows capturing well known features of commodity prices i e upward sloping contango and downward sloping backwardation term structures smaller volatilities for longer maturities and an upward sloping correlation term structure the model is calibrated to futures price data of ten commodities the results provide compelling evidence of cointegration in the data implications for the prices of futures and options written on common commodity spreads e g spark spread and crack spread are thoroughly investigated

stochastic convenience yield and the pricing of oil contingent claims this paper develops and empirically tests a two factor model for pricing financial and real assets contingent on the price of oil the factors are the spot price of oil and the instantaneous convenience yield the parameters of the model are estimated using weekly oil futures contract prices from january 1984 to november 1988 and the model s performance is assessed out of sample by valuing futures contracts over the period november 1988 to may 1989 finally the model is applied to determine the present values of one barrel of oil deliverable in one to ten years time

animal spirits in a monetary model abstract we integrate keynesian economics with general equilibrium theory in a new way we develop a simple graphical apparatus the is lm nac framework that can be used by policy makers to understand how policy affects the economy a new element the no arbitrage condition nac curve connects the interest rate to current and expected future values of the stock market and it explains how animal spirits influence economic activity our framework provides a rich new approach to policy analysis that explains the short run and long run effects of policy

debt deleveraging and the liquidity trap a fisher minsky koo approach in this paper we present a simple new keynesian style model of debt driven slumps that is situations in which an overhang of debt on the part of some agents who are forced into rapid deleveraging is depressing aggregate demand making some agents debt constrained is a surprisingly powerful assumption fisherian debt deflation the possibility of a liquidity trap the paradox of thrift a keynesiantype multiplier and a rationale for expansionary fiscal policy all emerge naturally from the model we argue that this approach sheds considerable light both on current economic difficulties and on historical episodes including japan s lost decade now in its 18th year and the great depression itself

diffusion of technical change and the decomposition of output into trend and cycle in this paper we argue that modelling the trend component in real gnp as a random walk is inconsistent with its interpretation as productivity growth as an alternative we specify the trend as an arima whose impulse response function follows an s shaped pattern reflecting the process of diffusion of technical change such an arima is employed to build and estimate an ucarima using usa postwar quarterly data we find that our model although more parsimonious fits the data equally well than the standard random walk plus ar 2 cycle moreover our model has a very low cycle trend variance ratio

new keynesian models durable goods and collateral constraints abstract econometric evidence suggests that in response to monetary policy shocks durable and non durable spending co move positively and durable spending exhibits a much larger sensitivity to the shocks a standard two sector new keynesian model with perfect financial markets is at odds with these facts the introduction of a borrowing constraint where durables play the role of collateral assets helps in reconciling the model with the empirical evidence

targeted transfers and the fiscal response to the great recession abstract between 2007 and 2009 government expenditures increased rapidly across the oecd countries while economic research on the impact of government purchases has flourished in the data most of the increase in expenditures was in government transfers after documenting this fact we argue that future research should focus on the positive impact of transfers towards this we present a model in which there is no representative agent and ricardian equivalence does not hold because of uncertainty imperfect credit markets and nominal rigidities targeted lump sum transfers are expansionary both because of a neoclassical wealth effect and because of a keynesian aggregate demand effect

electricity derivatives pricing with forward looking information in order to increase overall transparency on key operational information power transmission system operators publish an increasing amount of fundamental data including forecasts of electricity demand and available capacity we employ a fundamental model for electricity prices which lends itself well to integrating such forecasts while retaining ease of implementation and tractability to allow for analytic derivatives pricing formulae in an extensive futures pricing study the pricing performance of our model is shown to further improve based on the inclusion of electricity demand and capacity forecasts thus confirming the general importance of forward looking information for electricity derivatives pricing however we also find that the usefulness of integrating forecast data into the pricing approach is primarily limited to those periods during which electricity prices are highly sensitive to demand or available capacity whereas the impact is less visible when fuel prices are the primary underlying driver to prices instead

friedman s plucking model of business fluctuations tests and estimates of permanent and transitory components in milton friedman s model output cannot exceed a ceiling level but occasionally is plucked downward by recession implying fluctuations are asymmetric recessions transitory and recessions duration dependent though expansions are not the empirical literature lends support but formal modeling has been absent the econometric model presented here encompasses both plucking and symmetric fluctuations around a stochastic trend we find gdp is well characterized by the plucking model implied recessions correspond to nber reference cycles and no role for symmetric cycles decomposition of the unemployment rate reveals a corresponding asymmetry and timing paths of ceiling output and trend unemployment are presented

precautionary saving over the business cycle we study the macroeconomic implications of time varying precautionary savings within a general equilibrium model with borrowing constraints aggregate shocks and uninsurable idiosyncratic unemployment risk our framework generates limited cross sectional household heterogeneity as an equilibrium outcome thereby making it possible to analyse the role of precautionary saving over the business cycle in an analytically tractable way the time series behaviour of aggregate consumption generated by our model is closer to the data than that implied by the hand to mouth and representative agent models and it is comparable to that produced by the krusell and smith 1998 model

long term spread option valuation and hedging this paper investigates the valuation and hedging of spread options on two commodity prices which in the long run are in dynamic equilibrium i e cointegrated the spread exhibits properties different from its two underlying commodity prices and should therefore be modelled directly this approach offers significant advantages relative to the traditional two price methods since the correlation between two asset returns is notoriously hard to model in this paper we propose a two factor model for the spot spread and develop pricing and hedging formulae for options on spot and futures spreads two examples of spreads in energy markets the crack spread between heating oil and wti crude oil and the location spread between brent blend and wti crude oil are analyzed to illustrate the results

asset prices in a huggett economy this paper explores asset pricing in economies where there is no direct insurance against idiosyncratic risks but other assets can be used for self insurance subject to exogenously imposed borrowing limits we analyze an endowment economy based on huggett 1993 11 both with and without aggregate risk our main innovation is that we obtain full analytical tractability by studying the case with maximally tight borrowing constraints we illustrate by looking at riskless bonds equity and the term structure of interest rates and we show that the model can reproduce many features of observed asset prices when idiosyncratic risks are quantitatively reasonable

household balance sheet channels of monetary policy a back of the envelope calculation for the euro area abstract this paper formulates a back of the envelope approach to study the effects of monetary policy on household consumption expenditures we analyze several transmission mechanisms operating through direct partial equilibrium channels intertemporal substitution and net interest rate exposure and indirect general equilibrium channels net nominal exposure as well as wealth collateral and labor income channels the strength of these forces varies across households depending on their marginal propensities to consume their balance sheet composition the sensitivity of their own earnings to fluctuations in aggregate labor income and the responsiveness of aggregate earnings asset prices and inflation to monetary policy shocks we quantify all these channels in the euro area by combining micro data from the hfcs and the eu lfs with structural vars estimated on aggregate time series we find that the indirect labor income channel and the housing wealth effect are strong drivers of the aggregate consumption response to monetary policy and explain the cross country heterogeneity in these responses

the fiscal multiplier in a liquidity constrained new keynesian economy we study the effects of fiscal policy on the macroeconomy using a liquidity constrained new keynesian model in which government bonds are liquid and private financial assets are only partially liquid we find that the fiscal multipliers in this economic environment are large enough for fiscal policy to be highly effective in this model a bond financed fiscal expansion can stimulate output because higher public borrowing improves liquidity by increasing the proportion of liquid assets in private sector wealth

forward curves scarcity and price volatility in oil and natural gas markets the role of inventory in explaining the shape of the forward curve and spot price volatility in commodity markets is central in the theory of storage developed by kaldor kaldor n 1939 speculation and economic stability the review of economic studies 7 1 27 and working working h 1949 the theory of the price of storage american economic review 39 1254 1262 and has since been documented in a vast body of financial literature including the reference paper by fama and french fama e f and k r french 1987 commodity futures prices some evidence on forecast power premiums and the theory of storage journal of business 60 55 73 on metals the goal of this paper is twofold i validate in the case of oil and natural gas the use of the slope of the forward curve as a proxy for inventory the slope being defined in a way that filters out seasonality ii analyze directly for these two major commodities the relationship between inventory and price volatility in agreement with the theory of storage we find that i the negative correlation between price volatility and inventory is globally significant for crude oil ii this negative correlation prevails only during those periods of scarcity when the inventory is below the historical average and increases importantly during the winter periods for natural gas our results are illustrated by the analysis of a 15 year database of us oil and natural gas prices and inventory

soybean inventory and forward curve dynamics we present two results concerning soybean prices first we exhibit a simple relationship between stocks and price volatility the observation of an increasing price volatility with decreasing inventory is often mentioned in the literature but has so far been documented using a proxy for inventory see fama and french 1987 1988 litzenberger and rabinowitz 1995 instead we reconstruct a yearly quarterly and monthly database of worldwide soybean inventories using aggregate data from the united states brazil and argentina we show that under all time scales price volatility is an increasing linear function of inverse inventory which we term scarcity second we show how the addition of the factor scarcity in a state variable approach to the dynamics of the term structure of soybean forward prices improves the quality of the fit we document this property on a 25 year database of cbot futures contracts and show that the superior accuracy also affects long maturity futures contracts an important property for the valuation of long term origination contracts between producing countries and the agrifood industry

changes in the output euler equation and asset markets participation recent estimates of the output euler equation for the united states indicate that the elasticity of aggregate demand to interest rates is not significantly different from zero we first argue that this result may hide a structural break the estimated elasticity is a convolution of two coefficients with opposite signs across the samples 1965 1979 and 1982 2003 the sign of the coefficient in the earlier sample is inconsistent with standard economic theory and intuition we outline a model with limited asset markets participation that can generate this change in sign when asset market participation changes from low to high and provide institutional evidence for such a change in the united states in the late 70s and early 80s

public debt and redistribution with borrowing constraints we build a model with financial imperfections and heterogeneous agents and analyse the effects of two types of fiscal policy revenue neutral intratemporal redistribution and debt financed tax cuts which we interpret as intertemporal redistribution under flexible prices the two policies are either neutral or display effects that are at odds with the empirical evidence with sticky prices ricardian equivalence always fails a robin hood revenue neutral redistribution to borrowers is expansionary on aggregate activity a uniform debt financed tax cut has a positive present value multiplier on consumption stemming from intertemporal substitution by the savers who hold the public debt

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

a characterization of ramsey equilibrium abstract consider a perfect foresight equilibrium model with a single capital good a borrowing constraint and many infinitely lived households with fixed but different discount factors the steady state capital stock is held by the most patient household quart j econ 95 1980 375 382 econ j 38 1928 543 559 an example shows the total capital can exhibit an equilibrium cycle in contrast to the stability property of the one household case in the example only the most patient household saves and his income deceases in capital we give a condition implying income is increasing in capital and use it to show any equilibrium converges to the steady state

long term swings and seasonality in energy markets abstract this paper introduces a two factor continuous time model for commodity pricing under the assumption that prices revert to a stochastic mean level which shows smooth periodic fluctuations over long periods of time we represent the mean reversion price by a fourier series with a stochastic component we also consider a seasonal component in the price level an essential characteristic of many commodity prices which we represent again by a fourier series we obtain analytical pricing expressions for futures contracts using futures price data on natural gas we provide evidence on the presence of long term fluctuations and show how to estimate the long term component simultaneously with a seasonal component using the kalman filter we analyse the in sample and out of sample empirical performance of our pricing model with and without a seasonal component and compare it with schwartz and smith 2000 model our findings show the in sample and out of sample superiority of our model with seasonal fluctuations thereby providing a simple and powerful tool for portfolio management risk management and derivative pricing

the optimal composition of public spending in a deep recession abstract we study optimal fiscal policy in an economy plunged into a deep recession characterized by a liquidity trap and in which the government can allocate spending both to consumption and investment goods public investment increases the stock of public capital subject to a time to build constraint the zero lower bound on the nominal interest rate binds as a result of a large shock that increases households desire to save in the risk free asset pushing the natural rate of interest below zero under nominal rigidities and sub optimal monetary policy the shock leads to a large decline in private consumption and investment we show that the optimal response to such a shock is to temporarily raise public spending above the level that would be dictated by classical principles and to tilt its composition towards public investment this compositional shift lasts well after the natural rate has ceased to be negative our results suggest that the american recovery and reinvestment act of 2009 was insufficiently oriented towards public investment

household expenditure and the income tax rebates of 2001 using questions expressly added to the consumer expenditure survey we estimate the change in consumption expenditures caused by the 2001 federal income tax rebates and test the permanent income hypothesis we exploit the unique randomized timing of rebate receipt across households households spent 20 to 40 percent of their rebates on nondurable goods during the three month period in which their rebates arrived and roughly two thirds of their rebates cumulatively during this period and the subsequent three month period the implied effects on aggregate consumption demand are substantial consistent with liquidity constraints responses are larger for households with low liquid wealth or low income

seasonal stochastic volatility implications for the pricing of commodity options many commodity markets contain a strong seasonal component not only at the price level but also in volatility in this paper the importance of seasonal behavior in the volatility for the pricing of commodity options is analyzed we propose a seasonally varying long run mean variance process that is capable of capturing empirically observed patterns semi closed form option valuation formulas are derived we then empirically study the impact of the proposed seasonal stochastic volatility model on the pricing accuracy of natural gas futures options traded at the new york mercantile exchange nymex and corn futures options traded at the chicago board of trade cbot our results demonstrate that allowing stochastic volatility to fluctuate seasonally significantly reduces pricing errors for these contracts

the power of forward guidance revisited in recent years central banks have increasingly turned to forward guidance as a central tool of monetary policy especially as interest rates around the world have hit the zero lower bound standard monetary models imply that far future forward guidance is extremely powerful promises about far future interest rates have huge effects on current economic outcomes and these effects grow with the horizon of the forward guidance we show that the power of forward guidance is highly sensitive to the assumption of complete markets if agents face uninsurable income risk and borrowing constraints a precautionary savings effect tempers their responses to changes in future interest rates as a consequence forward guidance has substantially less power to stimulate the economy in addition we show that the business cycle dynamics of our incomplete markets model differ substantially from its complete market counterpart this contrasts with the well known results of krusell and smith 1998 we present approximate representations that can easily be incorporated into standard business cycle models

optimal monetary policy and financial stability in a non ricardian economy this paper develops a model with discontinuous asset market participation in which all agents are infinitely lived and non ricardian and where heterogeneity among market participants implies financial wealth effects on aggregate consumption derivation of a welfare based loss function shows that financial stability arises as an additional and independent target besides infl ation and output stability evaluation of optimal policy under discretion and commitment reveals that price stability may no longer be optimal even absent inefficient supply shocks some fluctuations in output and infl ation are optimal as long as they reduce financial instability ignoring the heterogeneity among market participants in this economy may lead monetary policy to induce substantially higher welfare losses

a new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the business cycle abstract this paper introduces a general procedure for decomposition of non stationary time series into a permanent and transitory component allowing both components to be stochastic the permanent component is shown to be a random walk with drift and the transitory or cyclical component is a stationary process with mean zero the decomposition methodology which depends only on past data and therefore is computable in real time is applied to the problem of measuring and dating business cycles in the portwar u s economy we find that measured expansions and contractions are of roughly equivalent duration and that our dating of cyclical episodes tends to lead the traditional nber dating and to a lesser extent the growth cycle chronology of zarnowitz and boschan 1977

inventories and asymmetric business cycle fluctuations in the uk a structural approach this paper investigates the movement of manufacturing inventories and production over the business cycle to arrive at an asymmetric structural equilibrium correction model initially cross correlation coefficients and deepness and steepness tests for skewness are utilized to present descriptive statistics of the time series cointegration analysis is performed on each disaggregate inventory by stage of production finished goods work in progress and raw materials with a set of explantory variables restricted cointegration vectors are added to the symmetric and non symmetric specifications of the structural equilibrium correction model these are compared by parameter constancy tests and one step ahead forecasts

the dynamic effects of aggregate demand and supply disturbances we interpret fluctuations in gnp and unemployment as due to two types of disturbances disturbances that have a permanent effect on output and disturbances that do not we interpret the first as supply disturbances the second as demand disturbances demand disturbances have a hump shaped mirror image effect on output and unemployment the effect of supply disturbances on output increases steadily over time peaking after two years and reaching a plateau after five years

finite horizons life cycle savings and time series evidence on consumption abstract this paper develops an explicitly aggregated life cycle model which allows for finite horizons and declining individual labor supply the model can generate a common upward trend in aggregate consumption labor income and nonhuman wealth without relinquishing hall s random walk at the micro level life cycle factors are shown to imply that consumption changes should be a predictable and b smoother than in the infinite horizon model econometric evidence using postwar u s data suggests that neither consumption s predictability nor its excess smoothness can be fully accounted for by life cycle considerations

inflation and output in new keynesian models with a transient interest rate peg a familiar result in the canonical dynamic new keynesian dnk model is that policymakers constrained by the zero bound can improve outcomes by promising to keep rates low after the zero bound is not binding we examine a general class of interest rate pegs in a variety of dnk models standard versions of the model produce counterintuitive reversals where the effect of the interest rate peg can switch from highly expansionary to highly contractionary for modest changes in the length of the interest rate peg this unusual behavior does not arise in sticky information models of the phillips curve

computing the market price of volatility risk in the energy commodity markets abstract in this paper we demonstrate the need for a negative market price of volatility risk to recover the difference between black scholes black f scholes m 1973 the pricing of options and corporate liabilities journal of political economy 81 637 654 black black f 1976 studies of stock price volatility changes in proceedings of the 1976 meetings of the business and economics statistics section american statistical association pp 177 181 implied volatility and realized term volatility initially using quasi monte carlo simulation we demonstrate numerically that a negative market price of volatility risk is the key risk premium in explaining the disparity between risk neutral and statistical volatility in both equity and commodity energy markets this is robust to multiple specifications that also incorporate jumps next using futures and options data from natural gas heating oil and crude oil contracts over a 10 year period we estimate the volatility risk premium and demonstrate that the premium is negative and significant for all three commodities additionally there appear distinct seasonality patterns for natural gas and heating oil where winter withdrawal months have higher volatility risk premiums computing such a negative market price of volatility risk highlights the importance of volatility risk in understanding priced volatility in these financial markets

spot and derivative pricing in the eex power market using spot and futures price data from the german eex power market we test the adequacy of various one factor and two factor models for electricity spot prices the models are compared along two different dimensions 1 we assess their ability to explain the major data characteristics and 2 the forecasting accuracy for expected future spot prices is analyzed we find that the regime switching models clearly outperform its competitors in almost all respects the best results are obtained using a two regime model with a gaussian distribution in the spike regime furthermore for short and medium term periods our results underpin the frequently stated hypothesis that electricity futures quotes are consistently greater than the expected future spot a situation which is denoted as contango

fiscal stimulus and the role of wage rigidity abstract in this paper we study the impact of an expansion in public spending in an economy characterized by limited asset market participation and sticky wages the flexible wage version of the model implies strong expansionary effects on output and consumption but also a counterfactual increase in real wages the introduction of sticky wages besides being a realistic addition solves this problem and preserves the expansionary effects on output and consumption moreover once we introduce segmentation in the labor market sticky wages are even essential to obtain expansionary effects

short term variations and long term dynamics in commodity prices in this article we develop a two factor model of commodity prices that allows meanreversion in short term prices and uncertainty in the equilibrium level to which prices revert although these two factors are not directly observable they may be estimated from spot and futures prices intuitively movements in prices for long maturity futures contracts provide information about the equilibrium price level and differences between the prices for the short and long term contracts provide information about short term variations in prices we show that although this model does not explicitly consider changes in convenience yields over time this short term long term model is equivalent to the stochastic convenience yield model developed in gibson and schwartz 1990 we estimate the parameters of the model using prices for oil futures contracts and apply the model to some hypothetical oil linked assets to demonstrate its use and some of its advantages over the gibson schwartz model

stochastic trends and economic fluctuations are business cycles mainly the result of permanent shocks to productivity this paper uses a long run restriction implied by a large class of real business cycle models identifying permanent productivity shocks as shocks to the common stochastic trend in output consumption and investment to provide new evidence on this question econometric tests indicate that this common stochastic trend cointegration implication is consistent with postwar u s data however in systems with nominal variables the estimates of this common stochastic trend indicate that permanent productivity shocks typically explain less than half of the business cycle variability in output consumption and investment copyright 1991 by american economic association

monetary fiscal policy interactions and fiscal stimulus abstract increases in government spending trigger substitution effects both inter and intra temporal and a wealth effect the ultimate impacts on the economy hinge on current and expected monetary and fiscal policy behavior studies that impose active monetary policy and passive fiscal policy typically find that government consumption crowds out private consumption higher future taxes create a strong negative wealth effect while the active monetary response increases the real interest rate this paper estimates markov switching policy rules for the united states and finds that monetary and fiscal policies fluctuate between active and passive behavior when the estimated joint policy process is imposed on a conventional new keynesian model government spending generates positive consumption multipliers in some policy regimes and in simulated data in which all policy regimes are realized the paper reports the model s predictions of the macroeconomic impacts of the american recovery and reinvestment act s implied path for government spending under alternative monetary fiscal policy combinations

rule of thumb consumers meet sticky wages it has been argued that rule of thumb consumers substantially alter the determinacy properties of simple interest rate rules and the dynamics of an otherwise standard new keynesian model in this paper we show that nominal wage stickiness helps re establishing standard results key findings are that wage stickiness i affects the shape of determinacy regions in the parameters space restoring the relevance of the taylor principle for the conduct of monetary policy ii implies that a rise in consumption in response to an innovation in government spending is not a robust feature of the model

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

asymmetric size dependent effects of the output gap on inflation us evidence from the last half a century this article examines asymmetric size and sign dependent effects of the output gap on the us quarterly inflation rate using data from the last half a century 1959q2 2013q1 consistent with previous studies it is found that the consumer price index is cointegrated with the unit labour cost and the price of oil a short run dynamic model is then estimated in which variations in the output gap are divided into three groups large positive large negative and small medium positive negative the results provide convincing evidence that only sufficiently large positive or negative variations of the output gap can significantly influence inflation put otherwise relatively small to medium changes in the output gap exert no significant impact on inflation and if not separated they can somewhat obscure the significant effects associated with large variations of the output gap this study can lead to greater consensus on the inflation output gap nexus the findings remain robust despite the use of differen

valuation of commodity futures and options under stochastic convenience yields interest rates and jump diffusions in the spot this paper investigates the effects of stochastic convenience yields stochastic interest rates and jumps in the spot price on the pricing of commodity futures forwards and futures options numerical examples show that one factor prices differ materially from the stochastic convenience yield two factor prices when convenience yield is considerably above its long term average the extension to a three factor model with stochastic interest rates leads to a different futures price but the forward price is unchanged the extension ofthe three factor model to include jumps in the spot price process does not affect forward or futures prices but it can have an impact on options prices the model is applied to price the present value of future cash flows from a real asset

estimating the impact of welfare programs on agricultural output evidence from india rural welfare programs are implemented for a variety of reasons however of key importance is to understand how government spending under such programs affects local agricultural output which is a key measure of economic activity in developing economies this article estimates the local multiplicative effects of transfer spending by the government using a novel data set of state level expenditure under rural welfare programs in india using government records as narrative evidence i use the motivation to implement new programs at the national level to construct changes in transfer spending that are largely exogenous to fluctuations in agricultural output at the state level i estimate local multipliers using this narrative shock series and find government transfers to be quite consequential for local economic activity

cross sectional versus time series estimation of term structure models empirical results for the dutch bond market abstract we compare time series and cross section estimates of the well known vasicek and cir term structure models for a dataset of daily bond prices and short term interest rates for the netherlands the main finding is the great similarity between the two models with respect to the cross sectional term structure parameter estimates and implied bond option values from a time series perspective we find that for some maturities the data reject the constant volatility vasicek model and indicate the presence of the cir volatility effects

credit crises precautionary savings and the liquidity trap we use a model a la bewly huggett ayagari to explore the eects of a credit crunch on consumer spending households borrow and lend to smooth idiosyncratic income shocks facing an exogenous borrowing constraint we look at the economy response after an unexpected permananent tightening of this constraint the interest rate drops sharply in the short run and then adjusts to a lower steady state level this is due to the fact that after the shock a large fraction of agents is far below their target holdings of precautionary savings and this generates a large temporary positive shock to net lending we then look at the eects on output here two opposing forces are present as households can deleverage in two ways by consuming less and by working more we show that under a reasonable parametrization the eect on consumer spending dominates and precautionary behavior generates a recession if we add nominal rigidities two things happen i supply side responses are muted and ii there is a lower bound on the interest rate adjustment these two elements tend to amplify the recession caused by the credit tightening

when is the government transfer multiplier large transfers to individuals were a larger part of the 2009 u s stimulus package than government purchases using a two agent new keynesian model this paper shows analytically that the multiplier on targeted transfers to financially constrained households is i larger than the purchase multiplier if the zero lower bound zlb binds and ii is more sensitive to the degree of monetary accommodation of inflation targeted transfers provide the same boost to demand as purchases but lower aggregate supply relative to purchases as those receiving transfers want to work less when the aggregate demand curve inverts such as when the zero lower bound binds the extra inflation from lower supply boosts the multiplier this result also holds quantitatively in a medium scale version of the model

comparison of solutions to the incomplete markets model with aggregate uncertainty abstract this paper compares numerical solutions to the model of krusell and smith 1998 income and wealth heterogeneity in the macroeconomy journal of political economy 106 867 896 generated by different algorithms the algorithms have very similar implications for the correlations between different variables larger differences are observed for i the unconditional means and standard deviations of individual variables ii the behavior of individual agents during particularly bad times iii the volatility of the per capita capital stock and iv the behavior of the higher order moments of the cross sectional distribution for example the two algorithms that differ the most from each other generate individual consumption series that have an average maximum difference of 1 63 11 4

home equity mobility and macroeconomic fluctuations how does a fall in house prices affect real activity this paper presents a business cycle model in which a decline in house prices reduces geographical mobility creating distortions in the labor market this happens because homeowners face declines in their home equity levels after which it becomes more difficult to provide the down payment required for a new mortgage loan unemployed homeowners therefore turn down job offers that would require them to move the model explains joint cyclical patterns in housing and labor market aggregates as well as the puzzling breakdown of the u s beveridge curve that occurred during 2009

the new keynesian transmission mechanism a heterogenous agent perspective we present a tractable heterogeneous agent version of the new keynesian model that allows us to study the interaction between inequality and monetary policy though formulated as a precautionary saving model a la huggett aiyagari its reduced form is a two agent model with a highly concentrated wealth distribution when prices are sticky and wages flexible as in the textbook representative agent model monetary policy affects the distribution of consumption but has no effect on output as workers choose not to change their hours worked in response to wage movements this highlights a transmission mechanism of the textbook model that we find implausible in response to a monetary stimulus the representative worker s labor supply is greatly affected by the profits she receives first the lower profits induced by higher wages raise labor supply through a wealth effect and secondly the mere presence of profits reduces the negative income effect of a wage rise when wages are rigid in contrast our model exhibits plausible responses of output and hours worked to monetary policy shocks

are low interest rates deflationary a paradox of perfect foresight analysis we argue that an influential neo fisherian analysis of the effects of low interest rates depends on using perfect foresight equilibrium analysis under circumstances where it is not plausible for people to hold expectations of that kind we propose an explicit cognitive process by which agents may form their expectations of future endogenous variables perfect foresight is justified by our analysis as a reasonable approximation in some cases but in the case of a commitment to maintain a low nominal interest rate for a long time our reflective equilibrium implies neither neo fisherian conclusions nor implausibly strong predicted effects of forward guidance

asset market participation monetary policy rules and the great inflation this paper argues that limited asset market participation is crucial in explaining u s macroeconomic performance and monetary policy before the 1980s and their changes thereafter in an otherwise conventional sticky price model standard aggregate demand logic is inverted at low enough asset market participation interest rate increases become expansionary passive monetary policy ensures equilibrium determinacy and maximizes welfare this suggests that federal reserve policy in the pre volcker era was better than conventional wisdom implies we provide empirical evidence consistent with this hypothesis and study the relative merits of changes in structure and shocks for reproducing the conquest of the great inflation and the great moderation

an examination of business cycle features in uk sectoral output this article examines business cycle features of uk gross domestic product gdp sectors with regard to trends cycles and growth the empirical study adopts the kalman filter to decompose these gdp sectors into trend and cycle components the general model of this study encompasses a number of alternative specifications about trend growth therefore accommodating diverse views on growth there is reasonable support in the results for a mean reverting stochastic growth model for the uk economy the characteristics in trends and cycles of uk gdp sectors are discussed focusing on their similarities and differences around business cycles

labor market reforms and the monetary policy environment abstract do labor market reforms initiated in periods of loose monetary policy yield different outcomes from those that were introduced in periods when monetary tightening prevailed the answer to this question is a firm yes we document the vital role of accommodative monetary policy for an increase in unemployment benefits spending on active labor market policies and labor market deregulation to boost growth and reduce unemployment it was found that if interest rates cannot be reduced then unemployment benefits should be lowered a more rigid labor market it was further found can deliver expansionary effects especially during the crisis period

temptation and forward guidance abstract motivated by the extensive experimental and empirical evidence on preference reversal in consumption choices we introduce temptation with self control preferences into a new keynesian model to study the effects of forward guidance in monetary policy and the related forward guidance puzzle in our set up the representative agent faces a trade off between the temptation for immediate satisfaction liquidate wealth with his long run best smooth consumption which he manages by exerting cognitive effort or self control for higher risk aversion in temptation than in commitment utility there is discounting in the linearized euler equation the latter makes the response of current real activity to the announcement of a future policy change declining in the forward guidance horizon which then helps solving the puzzle our framework delivers testable aggregate and policy implications that distinguish it from alternative microfoundations for discounting in the euler equation previously used to solve the puzzle

the savers spenders theory of fiscal policy the macroeconomic analysis of fiscal policy is usually based on one of two canonical models the barro ramsey model of infinitely lived families or the diamond samuelson model of overlapping generations this paper argues that neither model is satisfactory and suggests an alternative in the proposed model some consumers plan ahead for themselves and their descendants while others live paycheck to paycheck this model is easier to reconcile with the essential facts about consumer behavior and wealth accumulation and it yields some new and surprising conclusions about fiscal policy

unspanned stochastic volatility and the pricing of commodity derivatives commodity derivatives are becoming an increasingly important part of the global derivatives market here we develop a tractable stochastic volatility model for pricing commodity derivatives the model features unspanned stochastic volatility quasi analytical prices of options on futures contracts and dynamics of the futures curve in terms of a low dimensional affine state vector we estimate the model on nymex crude oil derivatives using an extensive panel data set of 45 517 futures prices and 233 104 option prices spanning 4082 business days we find strong evidence for two predominantly unspanned volatility factors jel g13

limited asset markets participation monetary policy and inverted aggregate demand logic abstract this paper incorporates limited asset markets participation in dynamic general equilibrium and develops a simple analytical framework for monetary policy analysis aggregate dynamics and stability properties of an otherwise standard business cycle model depend nonlinearly on the degree of asset market participation while moderate participation rates strengthen the role of monetary policy low enough participation causes an inversion of results dictated by conventional wisdom the slope of the is curve changes sign the taylor principle is inverted optimal welfare maximizing discretionary monetary policy requires a passive policy rule and the effects and propagation of shocks are changed however a targeting rule implementing optimal policy under commitment delivers equilibrium determinacy regardless of the degree of asset market participation our results may justify fed s behavior during the great inflation period

the new keynesian cross abstract the new keynesian nk cross is a graphical and analytical apparatus for heterogeneous agent hank models expressing key aggregate demand objects mpc and multipliers as functions of heterogeneity parameters it affords analytical insights into monetary fiscal and forward guidance multipliers and replicates the aggregate implications of quantitative hank the key parameter the constrained agents income elasticity to aggregate income depends on fiscal redistribution when it is larger smaller than one the effects of policies and shocks are amplified dampened with uninsurable idiosyncratic uncertainty this translates intertemporally through compounding discounting in the aggregate euler equation into further amplification dampening of future shocks

the power of forward guidance in a quantitative tank model abstract we quantify the macroeconomic effects of interest rate forward guidance in an estimated medium scale two agent new keynesian tank model although tank models can in principle dampen or amplify the power of forward guidance compared to a representative agent model our estimates indicate a dampening as there is sufficient countercyclical redistribution an interaction of forward guidance with asset purchases gives rise to non linear effects that depend on the horizon of the interest rate peg

seasonality and the valuation of commodity options price movements in many commodity markets exhibit significant seasonal patterns however given an observed futures price a deterministic seasonal component at the price level is not relevant for the pricing of commodity options in contrast this is not true for the seasonal pattern observed in the volatility of the commodity price analyzing an extensive sample of soybean corn heating oil and natural gas options we find that seasonality in volatility is an important aspect to consider when valuing these contracts the inclusion of an appropriate seasonality adjustment significantly reduces pricing errors in these markets and yields more improvement in valuation accuracy than increasing the number of stochastic factors

job uncertainty and deep recessions abstract we study a model where households are subject to uninsurable unemployment risk price setting is subject to nominal rigidities and the labor market is characterized by matching frictions and inflexible wages higher risk of job loss and worsening job finding prospects during unemployment depress goods demand because of a precautionary savings motive lower goods demand reduces job vacancies and the job finding rate producing an amplification mechanism due to endogenous countercyclical income risk amplification derives from the combination of incomplete financial markets and frictional goods and labor markets the model can account for key features of the great recession

volatility and price jumps in agricultural futures prices evidence from wheat options revised version published in american journal of agricultural economics vol 86 number 4 november 2004 1018 1031

the cyclical component of u s economic activity quarterly data on industrial production and deflated gross national product in the united states from 1947 through 1985 are decomposed into independent nonstationary trend and stationary cycle components using kalman filtering and smoothing techniques estimates of the model parameters imply that at least half of the quarterly innovation in u s economic activity can be attributed to a stationary cyclical component that persists over periods of time as long as five years this finding is inconsistent with the hypothesis that most of the apparent variation in u s economic activity can be attributed to a nonstationary trend component

the risk free rate in heterogeneous agent incomplete insurance economies abstract why has the average real risk free interest rate been less than one percent the question is motivated by the failure of a class of calibrated representative agent economies to explain the average return to equity and risk free debt i construct an economy where agents experience uninsurable idiosyncratic endowment shocks and smooth consumption by holding a risk free asset i calibrate the economy and characterize equilibria computationally with a borrowing constraint of one year s income the resulting risk free rate is more than one percent below the rate in the comparable representative agent economy

the relation between forward prices and futures prices abstract this paper consolidates the results of some recent work on the relation between forward prices and futures prices it develops a number of propositions characterizing the two prices these propositions contain several testable implications about the difference between forward and futures prices many of the propositions show that equilibrium forward and futures prices are equal to the values of particular assets even though they are not in themselves asset prices the paper then illustrates these results in the context of two valuation models and discusses the effects of taxes and other institutional factors

nominal inertia and shock persistence in uk business cycles a structural var methodology is used for uk data to identify and map out the effects of innovations in the money supply employment output wages and prices moreover bands of two standard errors are computed for the impulse response functions so that comment may be made on the significance of the dynamic responses of the variables to the simulated shocks this allows conclusions to be drawn on the persistence of shocks results suggest that output variation is largely determined by aggregate demand shocks over the business cycle frequency importantly evidence is also found of rigidities in the form of price inertia and nominal wage stickiness

filtering and forecasting commodity futures prices under an hmm framework abstract we propose a model for the evolution of arbitrage free futures prices under a regime switching framework the estimation of model parameters is carried out using the hidden markov filtering algorithms comprehensive numerical experiments on real financial market data are provided to illustrate the effectiveness of our algorithm in particular the model is calibrated with data from heating oil futures and its forecasting performance as well as statistical validity is investigated the proposed model is parsimonious self calibrating and can be very useful in predicting futures prices

long term unemployment and the great recession the role of composition duration dependence and nonparticipation we explore the role of composition duration dependence and labor force nonparticipation in accounting for the sharp increase in the incidence of long term unemployment ltu during the great recession we show that compositional shifts account for very little of the observed increase in ltu using panel data from the current population survey for 2002 7 we calibrate a matching model that allows for duration dependence in unemployment and transitions between employment unemployment and nonparticipation the calibrated model accounts for almost all of the increase in ltu and much of the observed outward shift in the beveridge curve between 2008 and 2013

unemployment in the great recession did the housing market crisis prevent the unemployed from moving to take jobs the labor market in the great recession and its aftermath is characterized by great difficulty in escaping unemployment i present two empirical analyses of a particular explanation for that difficulty that the housing market crisis has prevented the unemployed from selling their homes and moving to take new jobs first i examine post job loss mobility rates by home ownership status using data from the displaced workers survey second i examine mobility rates for unemployed homeowners and renters from the month to month cps match neither analysis provides any support for the idea that the housing market crisis has reduced mobility of the unemployed

the role of automatic stabilizers in the u s business cycle most countries have automatic rules in their tax and transfer systems that are partly intended to stabilize economic uctuations this paper measures how eective they are at lowering the volatility of u s economic activity we identify seven potential stabilizers in the data and include four theoretical channels through which they may operate in a business cycle model calibrated to the u s data the model is used to compare the volatility of output in the data with counterfactuals where some or all of the stabilizers are shut down our rst nding is that proportional taxes like sales property and corporate income taxes contribute little to stabilization our second

the dynamics of convenience and the brazilian soybean boom u s and brazilian soybeans are harvested on an alternating semiannual cycle that generates predictable dynamic behavior in the soybean futures market because corn and soybeans are storage substitutes their physical storage costs move together and can be isolated separately from crop specific marginal convenience yields along the futures price profile the kaldor working convenience yield hypothesis is tested for the international soybean market and storage risk is measured

sectoral shocks and business cycles a disaggregated analysis of output fluctuations in the uk in this paper we first show that it is possible to modify linear real business cycle models to allow for disaggregate industry specific factors in the generation of macroeconomic fluctuations we then try to determine the relative importance of aggregate and sectoral shocks by doing principal components analysis on the residuals from a var of output growth rates in 19 uk industrial sectors we find that a significant percentage of the innovations in sectoral output growths can be accounted for by a single unobserved component however since the model only sets an upper bound to the explanatory power of aggregate impulses the importance of using sectoral data to extract additional information to bear on the analysis of economic fluctuations is confirmed by our findings