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

winding number criterion for existence and uniqueness of equilibrium in linear rational expectations models abstract this paper develops a simple geometric criterion for the existence and uniqueness of equilibrium in linear rational expectations lre models the class of models considered is very general and includes models with infinitely many lags and or leads of endogenous variables i show that the criterion is tightly related to the familiar blanchard and kahn econometrica 48 5 1980 1305 hansen and sargent rational expectations and econometric practice 1981 and whiteman linear rational expectations models a user s guide 1983 conditions for the existence and uniqueness of equilibrium in lre models the new criterion can be used to extend the policy rule robustness analysis of onatski and stock macroeconomic dynamics 6 1 2002 85 from purely backward looking models to forward looking models

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

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

control functions and simultaneous equations methods economic models of agent s optimization problems or of interactions among agents often exhibit simultaneity it is well known that any function in which an explanatory variable is partly determined by the dependent variable of the function cannot be identified without additional information typically this additional information is provided by observable exogenous variables or functional structures here we focus on nonlinear simultaneous equations models with nonadditive disturbances nonlinear nonadditive specifications are a fundamental feature of economic models with unobserved heterogeneity including multidimensional models of consumer and producer choice models of nash equilibrium in industrial organization and many models of labor market behavior in linear models with additive disturbances there are many alternative approaches to addressing endogeneity in estimation twostage least squares instrumental variable and control function approaches are three such commonly adopted approaches in simple specifications of the linear simultaneous model all three approaches generate consistent often analytically identical estimators hausman 1987 for example however linear models with additive

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

a simple general equilibrium model of large excess reserves abstract in a general equilibrium macroeconomic model with a banking system that can hold large excess reserves and is subject to possibly binding capital constraints i study how the quantity of government provided monetary assets is related to the price level in steady state when the central bank does not pay interest on reserves the price level moves one for one with the monetary base if instead the central bank can pay interest on reserves at market rates the price level can decouple from the quantity of monetary assets in the economy a larger monetary base need not imply a higher price level however for large enough levels of reserves the capital constraint binds and the tight link between money and prices reemerges

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

cyclical effects of government s employment and goods purchases distinguishing between the goods purchase and employee compensation components of government spending is important shocks to government goods purchases and shocks to government employment have the opposite effects on private output private employment and private investment moreover with this distinction in place quantitative analysis reveals that government spending is no longer a significant driving source of the u s business cycle on the contrary the components of government spending are procyclical in the u s data primarily because of their positive responses to the output fluctuations generated by technology shocks copyright 1998 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

monetary policy with interest on reserves abstract i analyze monetary policy with interest on reserves and a large balance sheet i show that conventional theories do not determine inflation in this regime so i base the analysis on the fiscal theory of the price level i find that monetary policy can peg the nominal rate and determine expected inflation with sticky prices monetary policy can also affect real interest rates and output though higher interest rates raise output and then inflation the conventional sign requires a coordinated fiscal monetary policy contraction i show how conventional new keynesian models also imply strong monetary fiscal policy coordination to obtain the usual signs i address theoretical controversies a concluding section places our current regime in a broader historical context and opines on how optimal fiscal and monetary policy will evolve in the new regime

nominal targeting in an economy with government debt the fiscal policy environment central banks operate in can be radically different with respect to debt levels maturity structures and whether or not fiscal adjustments are spending or tax based despite this most analyses of monetary policy delegation schemes typically ignore the behavior of the fiscal policy maker this paper investigates whether delegating either nominal income or price level targets to a monetary authority yields social gains in an economy with government debt where the fiscal policymaker acting strategically may support or undermine the policies of the central bank we argue that the fiscal environment plays an important role in determining the performance of monetary policy the gains to price level targeting typically found in the literature can be overturned at empirically relevant debt to gdp ratios when debt stabilization is achieved through spending cuts in contrast these gains are retained if the fiscal authorities utilize taxes to respond to shocks and stabilize debt

matching markets with mixed ownership the case for a real life assignment mechanism we consider a common indivisible good allocation problem whose popular applications include on campus housing kidney exchange and school choice we show that the so called new house 4 nh4 mechanism which has been in use at mit since the 1980s is equivalent to a natural adaptation of the well known gale shapley gs mechanism we run two experiments comparing nh4 with the prominently advocated top trading cycles ttc mechanism and nh4 with gs we find that under nh4 the participation rate is significantly higher than under ttc based on a new ordinal test of efficiency nh4 is more likely to pareto dominate ttc

aging and deflation from a fiscal perspective negative correlations between inflation and demographic aging were observed across developed nations recently to understand the phenomenon from a politico economic perspective we embed the fiscal theory of the price level into an overlapping generations model in the model successive short lived governments choose income tax rates and bond issues considering the political influence of existing generations and the policy response of future governments the model sheds new light on the traditional debate about the burden of national debt because of price adjustments the accumulation of government debt does not become a burden on future generations our analysis reveals that the effects of aging depend on its causes aging is deflationary when caused by an increase in longevity but inflationary when caused by a decline in birth rate numerical simulation shows that aging over the past 40 years in japan generated deflation of about 0 6 percentage points annually

aggregate fluctuations as an information transmission mechanism a model is presented in which individuals attempt to track shocks with a capital like quantity that is costly to produce and to adjust the shocks have separate individual specific and economy wide components individuals do not have direct access to desired information about economy wide shocks the information is potentially available from the observation of endogenous aggregates but because the aggregates are endogenous there is an informational externality associated with them two polar cases are considered when the desired information is about economy wide real shocks as in townsend 1983 the externality is potentially completely internalized when the desired information is about purely nominal aggregates as in lucas 1973 1975 aggregate fluctuations are a necessary condition of equilibrium

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

keynesian government spending multipliers and spillovers in the euro area the global financial crisis has led to a renewed interest in discretionary fiscal stimulus advocates of discretionary measures emphasize that government spending can stimulate additional private spending the keynesian multiplier effect thus we investigate whether the spending package announced by euro area governments for 2009 and 2010 is likely to boost gdp by more than one for one because of modelling uncertainty it is essential that such policy evaluations be robust to alternative modelling assumptions and parameterizations we use five different empirical macroeconomic models with keynesian features such as price and wage rigidities to evaluate the impact of the fiscal stimulus four of them suggest that the planned increase in government spending will reduce private consumption and investment significantly only a model that largely ignores the forward looking behavioural response of consumers and firms implies crowding in of private spending we review a range of issues that may play a role in the recession of 2008 2009 implementation lags are found to reinforce crowding out and may even cause an initial contraction zero bound effects may lead the central bank to abstain from interest rate hikes and increase the gdp impact of government spending crowding in however requires an immediate anticipation of at least two years at the zero bound using a multi country model we find that spillovers between euro area countries are negligible or even negative because direct demand effects are offset by the indirect effect of a euro appreciation new keynesian dynamic stochastic general equilibrium dsge models provide a strong case for government savings packages announced with sufficient lead time spending cuts induce a significant short run stimulus and crowding in of private spending tobias cwik and volker wieland

food supply and inflation abstract the paper presents an analytic version of the latin american structuralist theory of inflation it emphasizes the difference between the productive sectors of the economy and draws attention to the fact that the inflationary process is closely linked to inconsistent claims for shares in income it describes a keynesian economy with two three sectors real desired wages are rigid money is passive it is shown that the structuralist hypotheses are capable of generating disequilibria that can lead to constantly rising prices without any built in mechanism to offset them steady inflation can only persist if workers allow their real wage to be kept below target as the workers try to catch on the model will blow up an accelerating inflation can be observed in many latin american countries during periods when wage settlements aimed at restoring inflation losses escaped the government control the paper also explores the implications of foreign trade it shows that under structuralist hypotheses external disequilibria cannot be corrected through exchange rate devaluations alone and it examines the stagflationary impacts of an increase in the price of imported intermediates

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

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

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

the new keynesian liquidity trap abstract many new keynesian models produce a deep recession with deflation at the zero bound these models also make unusual policy predictions useless government spending technical regress capital destruction and forward guidance can raise output moreover these predictions are larger as prices become less sticky and as changes are expected further in the future i show that these predictions are strongly affected by equilibrium selection for the same interest rate path equilibria that bound initial jumps predict mild inflation small output variation negative multipliers small effects of far off expectations and a smooth frictionless limit fiscal policy considerations suggest the latter equilibria

occbin a toolkit for solving dynamic models with occasionally binding constraints easily abstract the toolkit adapts a first order perturbation approach and applies it in a piecewise fashion to solve dynamic models with occasionally binding constraints our examples include a real business cycle model with a constraint on the level of investment and a new keynesian model subject to the zero lower bound on nominal interest rates compared with a high quality numerical solution the piecewise linear perturbation method can adequately capture key properties of the models we consider a key advantage of the piecewise linear perturbation method is its applicability to models with a large number of state variables

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

can fiscal spending stimulate private consumption abstract empirically government expenditure shocks seem to crowd in private consumption while neoclassical and new keynesian models predict crowding out we derive conditions under which a government in utility specification in a sticky price model helps to reconcile theory and evidence

cross asset speculation in stock markets in practice heterogeneously informed speculators combine private information about multiple stocks with information in prices taking into account how their trades influence the inferences of other speculators via prices we show how this speculation causes prices to be more correlated than asset fundamentals raising price volatility the covariance structure of asset fundamentals drives that of prices while the covariance structure of liquidity trade drives that of order flows we characterize how speculator profits vary with the distributions of information and liquidity trade across assets and speculators and relate the cross asset factor structure of order flows to that of returns

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

why does private consumption rise after a government spending shock recent empirical evidence suggests that private consumption is crowded in by government spending this outcome violates existing macroeconomic theory according to which the negative wealth effect brought about by a rise in public expenditure should decrease consumption

clearing up the fiscal multiplier morass bayesian prior predictive analysis of five nested dsge models suggests that model specifications and prior distributions tightly circumscribe the range of possible government spending multipliers multipliers are decomposed into wealth and substitution effects yielding uniform comparisons across models by constraining the multiplier to tight ranges model and prior selections bias results revealing less about fiscal effects in data than about the lenses through which researchers choose to interpret data when monetary policy actively targets inflation output multipliers can exceed one but investment multipliers are likely to be negative passive monetary policy produces consistently strong multipliers for output consumption and investment

the relevance or otherwise of the central bank s balance sheet abstract this paper explores the impacts on an economy of a central bank changing the size and composition of its balance sheet one of the ways in which such asset purchases could influence prices and demand is via portfolio balance effects we develop and calibrate a simple olg model in which risk averse households hold money and bonds to insure against risk central bank asset purchases have the potential to affect households choices by changing the composition and return of their asset portfolios we find that the effect is weak and that its size depends on how fiscal policy is conducted that is not to say that the big expansion of central bank balance sheets in recent years has been ineffective our finding is rather that the portfolio balance channel evaluated in an environment of normally functioning though nonetheless incomplete asset markets is weak that is not inconsistent with the evidence that large scale asset purchases by central banks since 2008 have had significant effects because those purchases were made when financial markets were to varying extents dysfunctional nonetheless our results are relevant to those purchases because they may be unwound in an environment where financial markets are no longer dysfunctional

stagnation income distribution and monopoly power the deceleration in the rate of industrial growth in the indian economy since the middlesixties initially interpreted by some as a temporary downward deviation from trend hasnow come to be generally accepted as reflecting long run tendencies towards stagnation several explanations for these tendencies have been offered bhagwati and desai 1970 and bhagwati and srinivasan 1975 have focused on inefficiencies and the misallocationof resources arising from industrial policies pursued by the government others chakravarty 1974 raj 1976 and vaidyanathan 1974 among them have emphasisedthe sluggishness of agricultural growth which is alleged to have retarded industrial growthby limiting markets and the supply of wage goods and raw materials a third view reflectedin srinivasan and narayana 1977 for example has put the blame on a slackening of invest ment demand due to lower public investment but does not explain why public investmentfell or why its fall restrained industrial growth finally there is the explanation put forthin bagchi 1970 1975 1982 in nayyar 1978 and in parts of mitra 1977 that inequali ties in income distribution have resulted in a limited demand for industrial goods reducedincentives for investment and therefore reduced growth this view seems to suggest apositive relation between growth and income equality which is opposed to the generallyaccepted idea derived from cambridge growth models that higher growth requires greaterinequality the purpose of this paper is to examine the last explanation by considering the inter action between growth and income distribution in an underdeveloped economy with thehelp of a simple macroeconomic model the model is a stylisation of the indian economy so that we will be able to use the model to assess the argument that a deceleration in therate of growth of the indian industrial economy could have been caused by an unequaldistribution of income the argument will not be made that this income distributional con straint is the binding constraint on industrial growth the model will merely examine theinternal consistency of the argument that a bad income distribution could explain stagnation in the sense of reduced growth and show that in the indian context as in other similarcontexts this argument can be put forward in explaining stagnation our argument is first presented with a highly simplified schematisation of the indianeconomy which we shall call the basic model the economy modelled produces only one

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

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

nonseparable preferences fiscal policy puzzles and inferior goods nonseparable preferences over consumption and leisure can generate an increase in private consumption in response to government spending as found in the data in a frictionless business cycle model however the conditions on preferences required for these result to obtain hold if and only if the consumption good is inferior similarly positive co movement of consumption and hours worked occurs if and only if either consumption or leisure is inferior

some fiscal calculus what is the impact of fiscal policy on the econ omy how large are the multipliers of govern ment spending and tax cuts this old question has recently received considerable attention in par ticular in the context of the american recovery and reinvestment act arra of 2009 i contribute to answering that question by calculating fiscal multipliers in a baseline neo classical growth model with endogenous labor supply and fiscal policy allowing for govern ment spending transfers government debt and distortionary taxes on labor and capital income the policy experiments are conducted holding transfers consumption taxes and capital income taxes fixed i e changes in taxation require changes in the distortionary labor tax the model is simple and fairly standard as an additional contribution i provide the model in an elegant and tractable form starting from a fairly general formulation and pointing out the key functional form properties for characterizing the dynamics the formulation of the model here or versions

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

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

the general equilibrium effects of fiscal policy estimates for the euro area abstract this paper describes a dynamic stochastic general equilibrium model featuring a fraction of non ricardian agents in order to estimate the effects of fiscal policy in the euro area the model takes into account distortionary taxation on labor and capital income and on consumption while expenditures are broken down into purchases of goods and services compensation of public employees and transfers to households a newly computed quarterly data set of fiscal variables is used our results point to the prevalence of mild keynesian effects of public expenditures in particular although innovations in fiscal policy variables tend to be rather persistent government purchases of goods and services and compensations for public employees have small and short lived expansionary effects on private consumption while innovations in transfers to households show a slightly more sizeable and lasting effect the effects are more significant on the revenue side decreases in labor income and consumption tax rates have sizeable effects on consumption and output while a reduction in capital income tax favors investment and output in the medium run finally our estimates suggest that fiscal policy variables contribute little to the cyclical variability of the main macro variables

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

the analytics of svars a unified framework to measure fiscal multipliers ticities implied by the identification schemes generate a large dispersion in the estimates of tax and spending multipliers second i estimate fiscal multipliers consistent with prior distributions of the elasticities computed by a variety of empirical strategies and by employing a simple dynamic stochastic general equilibrium model i document three findings for the u s for the period 1947 2010 first the impact tax multiplier is close to 0 second the impact spending multiplier ranges between 0 35 and 1 third there is a large uncertainty in the estimates of fiscal multipliers at longer horizons yet the probability that the spending multiplier is larger than the tax multiplier is above 0 65 for up to three years after policy interventions

rational expectations in stationary linear models linear time series models have come to dominate the macroeconomic literature on rational expectations and equilibrium business cycle theory but the explicit solution of such models has generally required strong restrictions upon the exogenous process of stochastic shocks e g temporal independence as well as upon the values of various demand and supply elasticities this paper exhibits a solution technique the method of z transforms which does not require one to impose such restrictions the value of this method is illustrated by applying it to completely characterize the symmetric stationary rational expectations equilibria of a naive linear model of land speculation this approach also permits systematic study of the informationally asymmetric equilibria of the model this paper develops a method for analyzing rational expectations re equilibria in linear economic models the methods i shall discuss usually enable one to determine whether or not a given model has a re equilibrium and if one exists to exhibit an explicit expression for the stochastic process of equilibrium prices the techniques apply to linear models driven by stationary processes of exogenous random shocks

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

equilibria under monetary and fiscal policy interactions in a portfolio choice model abstract this paper studies how the presence of income taxes changes the properties of general equilibrium models with monetary and fiscal policy interactions it is found that from a global perspective the only policy regime that leads to a unique equilibrium is one where fiscal policy is active i e the fiscal theory of the price level regime in sims 1994 from a local perspective there are three regimes in particular and relative to the previous literature following leeper 1991 a new third regime exists where a passive fiscal rule combined with a passive monetary rule can still deliver determinacy where the same area of the parameter space would lead to multiple solutions if taxes were lump sum to obtain the size of the new regime the paper characterizes analytically the extent to which tax cuts are self financing and how the distortionary tax laffer curve looks near the steady state in the new regime monetary and fiscal backstops are brought into play so as to rule out off equilibrium dynamics and inflation can temporarily increase in order to increase seigniorage revenues with this flexibility the monetary policy is consistent with the real debt remaining bounded and the arithmetic that follows is monetarist and unpleasant in the sense of sargent and wallace 1981

an experimental study on the incentives of the probabilistic serial mechanism we report an experiment on the probabilistic serial ps mechanism for allocating indivisible goods the ps mechanism a recently discovered alternative to the widely used random serial dictatorship mechanism has attractive fairness and efficiency properties if people report their preferences truthfully however the mechanism is not strategy proof so participants may not truthfully report their preferences we investigate misreporting in a set of simple applications of the ps mechanism we confront subjects with situations in which the theory suggests that there is an incentive or no incentive to misreport we find little misreporting in situations where misreporting is a nash equilibrium however we also find a significant degree of misreporting in situations where there is actually no benefit to doing so these findings suggest that the ps mechanism may have problems in terms of truthful elicitation

optimal simple and implementable monetary and fiscal rules welfare maximizing monetary and fiscal policy rules are studied in a model with sticky prices money and distortionary taxation the ramsey optimal policy is used as a point of comparison the main findings are the size of the inflation coefficient in the interest rate rule plays a minor role for welfare it matters only insofar as it affects the determinacy of equilibrium optimal monetary policy features a muted response to output interest rate rules that feature a positive response to output can lead to significant welfare losses the welfare gains from interest rate smoothing are negligible optimal fiscal policy is passive the optimal monetary and fiscal rule combination attains virtually the same level of welfare as the ramsey optimal policy

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

the effects of fiscal shocks on employment and the real wage we study the transmission of fiscal shocks in the labor market we employ a structural var and base identification on the restrictions that shocks to government consumption investment and employment must raise output and deficits these restrictions hold in both prototype real business cycle rbc and new keynesian models shocks to government consumption and investment increase real wages and employment contemporaneously both at state level and in the aggregate the dynamics in response to employment shocks are mixed increases in government employment raise the real wage and total employment in the aggregate however in one third of the states they reduce total employment

should a central bank transfer its profits to the treasury in this paper we show how two seemingly irrelevant accounting principles for central banks namely the choice of the unit of account for its balance sheet and the method of inventory valuation of foreign currency reserves can overstate or understate profits transferred to the treasury and how this can threaten the ability of central banks to control inflation we show the first point through monte carlo experiments calibrated for the venezuelan economy and the second point in an infinitely lived representative agent model that illustrates the problem of the joint determination of the level of central bank assets and the size of profits transferred to the treasury when the objective of the central bank is to eliminate the possibility of hyperinflation

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

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

forecasting the forecasts of others implications for asset pricing we develop a dynamic asset pricing model with heterogeneously informed agents unlike previous research we focus on the general case where differential information leads to the problem of forecasting the forecasts of others and to non trivial dynamics of higher order expectations in particular we prove that the model does not admit a finite number of state variables using numerical analysis we compare equilibria characterized by identical fundamentals but different information structure we demonstrate that the distribution of information has substantial impact on equilibrium prices and returns in particular we show that asymmetric information can generate momentum in returns and high trading volume

on fiscal multipliers estimates from a medium scale dsge model this paper contributes to the debate on fiscal multipliers in the context of a structural model i estimate a micro founded dynamic stochastic general equilibrium model that features a rich fiscal policy block and a transmission mechanism for government spending shocks using bayesian techniques for us data

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

can government purchases stimulate the economy this essay briefly reviews the state of knowledge about the government spending multiplier drawing on theoretical work aggregate empirical estimates from the united states as well as cross locality estimates i assess the likely range of multiplier values for the experiment most relevant to the stimulus package debate a temporary deficit financed increase in government purchases i conclude that the multiplier for this type of spending is probably between 0 8 and 1 5 jel e23 e62 h50

why do popular mechanisms lack efficiency in random environments we consider the problem of randomly assigning n indivisible objects to n agents recent research introduced a promising mechanism the probabilistic serial that has superior e ciency properties than the most common real life mechanism random priority on the other hand mechanisms based on gale s celebrated top trading cycles method have long dominated the indivisible goods literature with the exception of the present context thanks to their outstanding e ciency features we present an equivalence

the wage goods constraint on a developing economy theory and evidence abstract in a dual economy the traditional or agricultural sector generally has a relatively low supply response to prices if in addition the real wages of the modern or industrial sector are denominated at least partly in terms of the product of agriculture then agricultural output sets an upper bound on employment in industry such a constraint may be binding in the short run whenever the level of food production is low this is called the wage goods constraint this paper examines the analytics of a wage goods constraint in the framework of a two commodity model of a dual economy with surplus labor where unconstrained industrial output is demand determined the effects of either expansionary or redistributive policy may be quite different and sometimes perverse in a situation where the wage goods constraint is binding next data for the indian economy is used to test the hypothesis that the wage goods constraint was binding in the indian industrial sector between the years 1955 to 1980 the results indicate that this was the case for most of the period

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

has fiscal policy helped stabilize the postwar u s economy abstract in this paper i consider whether postwar fiscal policy has helped stabilize the u s economy i do this by adding to the stochastic growth model fiscal policy feedback rules estimated from postwar data these rules allow fiscal policies to respond to current and lagged output and labor hours i use the estimated policy rules to see if postwar fiscal policy reduces output volatility and or lengthens expansions and shortens recessions i find that fiscal policy in general provides little stability on either count i also find that the endogenous feedback links by themselves can provide some stabilization

incentives in the probabilistic serial mechanism abstract the probabilistic serial mechanism bogomolnaia and moulin 2001 9 is ordinally efficient but not strategy proof we study incentives in the probabilistic serial mechanism for large assignment problems we establish that for a fixed set of object types and an agent with a given expected utility function if there are sufficiently many copies of each object type then reporting ordinal preferences truthfully is a weakly dominant strategy for the agent regardless of the number of other agents and their preferences the non manipulability and the ordinal efficiency of the probabilistic serial mechanism support its implementation instead of random serial dictatorship in large assignment problems

solving generalized multivariate linear rational expectations models abstract we generalize the linear rational expectations solution method of whiteman 1983 to the multivariate case this facilitates the use of a generic exogenous driving process that must only satisfy covariance stationarity multivariate cross equation restrictions linking the wold representation of the exogenous process to the endogenous variables of the rational expectations model are obtained we argue that this approach offers important insights into rational expectations models we give two examples in the paper an asset pricing model with incomplete information and a monetary model with observationally equivalent monetary fiscal policy interactions we relate our solution methodology to other popular approaches to solving multivariate linear rational expectations models and provide user friendly code that executes our approach

fiscal policy in general equilibrium this paper studies four classic fiscal policy experiments within a quantitatively restricted neoclassical model the authors main findings are as follows 1 permanent changes in government purchases can lead to short run and long run output multipliers that exceed one 2 permanent changes in government purchases induce larger effects than temporary changes 3 the financing decision is quantitatively more important than the resource cost of changes in government purchases and 4 public investment has dramatic effects on private output and investment these findings stem from important dynamic interactions of capital and labor absent in earlier equilibrium analyses of fiscal policy copyright 1993 by american economic association

an experimental study of house allocation mechanisms we report an experiment on three house allocation mechanisms under complete information random serial dictatorship with squatting rights and two variants of the top trading cycles mechanism results show that the latter two are significantly more efficient than the former d 2004 elsevier b v all rights reserved

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

externality in labor supply and government spending standard business cycle models face difficulties generating i government spending multipliers exceeding unity and ii stabilizing effects of government size using a simple model with externality in labor supply we show that a sufficient degree of complementarity between aggregate and private labor supplies is key to reproducing these stylized facts

is there a fiscal free lunch in a liquidity trap this paper uses a dsge model to examine the eects of an expansion in government spending in a liquidity trap the spending multiplier can be much larger than in the normal situation if the liquidity trap is very persistent and scal stimulus can be rapidly implemented moreover the budgetary costs may be minimal as the large response of output boosts tax revenues allowing for something close to a scal free lunch however we caution that the multiplier may be much smaller under plausible implementation lags for many types of public spending and or if the liquidity trap lasts less than two years in addition because the marginal impact of scal expansion decreases in the scale of the outlay it is crucial to distinguish between average and marginal multipliers

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

how equilibrium prices reveal information in a time series model with disparately informed competitive traders abstract accommodating asymmetric information in a dynamic asset pricing model is technically challenging due to the problems associated with higher order expectations that is rational investors are forced into a situation where they must forecast the forecasts of other agents in a dynamic setting this problem telescopes into the infinite future and the dimension of the relevant state space approaches infinity by using the frequency domain approach of whiteman linear rational expectations models a user s guide university of minnesota press minneapolis 1983 and kasa forecasting the forecasts of others in the frequency domain rev econ dynam 3 2000 726 756 this paper demonstrates how information structures previously believed to preserve asymmetric information in equilibrium converge to a symmetric information rational expectations equilibrium the revealing aspect of the price process lies in the invertibility of the observed state space which makes it possible for agents to infer the economically fundamental shocks and thus eliminating the need to forecast the forecasts of others

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

a robust hansen sargent prediction formula this paper derives a formula for the optimal forecast of a discounted sum of future values of a random variable where optimal is defined in terms of the minimized h norm of the forecast error this problem reflects a preference for robustness in the presence of unstructured model uncertainty the paper shows that revisions of a robust forecast are more sensitive to new information and discusses the relevance of this result to previous findings of excess sensitivity of consumption and asset prices to new information 2001 elsevier science b v all rights reserved

habit formation in consumption a meta analysis abstract we examine 597 estimates of habit formation reported in 81 published studies the mean reported strength of habit formation equals 0 4 but the estimates vary widely both within and across studies we use bayesian and frequentist model averaging to assign a pattern to this variance while taking into account model uncertainty studies employing macro data report consistently larger estimates than micro studies 0 6 vs 0 1 on average the difference remains 0 5 when we control for 30 factors that reflect the context in which researchers obtain their estimates such as data frequency geographical coverage variable definition estimation approach and publication characteristics we also find that evidence for habits strengthens when researchers use lower data frequencies employ log linear approximation of the euler equation and utilize open economy dsge models moreover estimates of habits differ systematically across countries

implications of rational inattention abstract a constraint that actions can depend on observations only through a communication channel with finite shannon capacity is shown to be able to play a role very similar to that of a signal extraction problem or an adjustment cost in standard control problems the resulting theory looks enough like familiar dynamic rational expectations theories to suggest that it might be useful and practical while the implications for policy are different enough to be interesting

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