the impact of uncertainty shocks in emerging economies abstract a recent strand of research proposes that sudden jumps in uncertainty generate rapid drops and recoveries in real macroeconomic variables that drive the business cycle using an empirical model we find substantial heterogeneity in reactions to these shocks across countries in comparison to the u s and other developed countries emerging economies suffer much more severe falls in investment and private consumption following an exogenous uncertainty shock take significantly longer to recover and do not experience a subsequent overshoot in activity we provide evidence that the dynamics of investment and consumption are correlated with the depth of financial markets we control for the potential role of a credit channel and estimate that it can account for up to one half of the increased fall in investment generated by uncertainty shocks among emerging economies with less developed financial markets in this context monetary and fiscal policy actions that alleviate the impact of credit constraints facing firms may reduce the impact of uncertainty shocks in these economies

targeting inflation by constant interest rate forecasts this paper reviews the concept of constant interest rate inflation forecast cir targeting it stresses the time inconsistent nature of cir targeting and provides a new method for constructing cir forecasts consistently in the context of models with forward looking variables a dynamic new keynesian model with forward looking price setting is used as an illustration suggesting that the main reason for choosing a relatively long forecast targeting horizon lies in the monetary authorities objective to smooth interest rate movements as greater nominal and real stabilization is achieved at a relatively short inflation forecast targeting horizon

global factors and emerging market spreads this paper shows that a large fraction of the variability of emerging market bond spreads is explained by the evolution of global factors such as risk appetite as reflected in the spread of high yield corporate bonds in developed markets global liquidity measured by the international interest rates and contagion from systemic events like the russian default this link has remained relatively stable over the history of the emerging market class is robust to the inclusion of country specific factors and helps provide accurate long run predictions overall the results highlight the critical role played by exogenous factors in the evolution of the borrowing cost faced by emerging economies

on the sources of aggregate fluctuations in emerging economies recent research on macroeconomic fluctuations in emerging economies has advocated introducing a stochastic productivity trend or allowing for interest rate shocks and financial frictions we estimate a model that encompasses these two approaches shedding light on their relative merits and on how financial frictions affect the transmission of shocks the model accounts for aggregate fluctuations by assigning a dominant role to financial frictions in amplifying conventional temporary productivity shocks whereas trend shocks play a minor role a link between spreads and expected future productivity emerges as essential for a reasonable approximation to the data

on corporate borrowing credit spreads and economic activity in emerging economies an empirical investigation abstract we document a considerable increase in foreign financing by the corporate sector in emerging economies emes since the early 2000s mainly in the form of bond issuance and claim that it has opened up an important channel by which external financial factors can drive economic activity in these economies such claim is substantiated by a strong negative relationship between economic activity and an external financial indicator that we construct for several emes using micro level data on spreads of bonds issued by emes corporations in foreign capital markets three salient features characterize such a negative relationship first the financial indicator has considerable predictive power on future economic activity in these economies even after controlling for other potential drivers of business cycles such as movements in sovereign spreads and global financial risk among others second on average an identified adverse shock to the financial indicator generates a large and protracted fall of real output growth in these economies and up to 14 of its forecast error variance is associated to this shock lastly fluctuations in this indicator also respond strongly to shocks in global financial risk emanating from world capital markets thereby implying that changes in corporate spreads also serve as a powerful propagating mechanism of the effect of changes in global investors risk appetite in emerging markets

bond finance bank credit and aggregate fluctuations in an open economy corporate sectors in emerging markets have noticeably increased their reliance on foreign financing presumably reflecting low global interest rates the evidence also shows a rebalancing from bank loans towards bonds to study these developments we develop a dynamic open economy model where these modes of finance are determined endogenously the model replicates the stylized facts following a drop in world interest rates in particular rebalancing towards bonds occurs because bank credit becomes relatively more expensive reflecting the scarcity of bank equity more generally the model is suitable for studying interactions between modes of finance and the macroeconomy

identifying the effects of a lender of last resort on financial markets lessons from the founding of the fed abstract we use the founding of the federal reserve to identify the effects of a lender of last resort we examine stock return and interest rate volatility during september and october when markets were vulnerable because of financial stringency from the harvest stock volatility fell by 40 and interest rate volatility by more than 70 following the monetary regime change the drop is insignificant if major panic years are omitted from the analysis however because business cycle downturns occurred in the same year as financial crises our results suggest that the existence of the federal reserve reduced liquidity risk

price changes in the euro area and the united states some facts from individual consumer price data prices of goods and services do not adjust immediately in response to changing demand and supply conditions this paper characterizes the average frequency and size of price changes in the euro area and its member countries investigates the determinants of the probability of price changes and compares the evidence for the euro area with available u s results the facts documented in this paper are based on evidence from individual price data recorded at the store level in all euro area countries except ireland and greece that is in datasets covering austria belgium finland france germany italy luxembourg the netherlands portugal and spain which together account for around 97 percent of euro area gdp the data used are the monthly price records underlying the computation of national consumer price indices and harmonized consumer price indices these data cover a large number of products selected on the basis of extensive household budget surveys

the monetary policy of the european central bank the first six years of ecb monetary policy are examined using a general framework that allows central bankers to weight differently positive and negative deviations of inflation output and the interest rate from their reference values the empirical analysis on synthetic euro area data suggests that the objective of price stability is symmetric whereas the objectives of real activity and interest rate stabilizations are not output contractions imply larger policy responses than output expansions of the same size while movements in the interest rate are larger when the level of the interest rate is relatively high the hypothesis of m3 growth rate targeting is rejected

the asymmetry of the new keynesian phillips curve in the euro area abstract using a two stage quantile regression framework we uncover significant asymmetries across quantiles for all coefficients in an otherwise standard new keynesian phillips curve nkpc for the euro area a pure nkpc specification accurately captures inflation dynamics at high inflation quantiles

openness and optimal monetary policy abstract we show that the composition of international trade has important implications for the optimal volatility of the exchange rate above and beyond the size of trade flows using an analytically tractable small open economy model we characterize the impact of the trade composition on the policy trade off and on the role played by the exchange rate in correcting for price misalignments contrary to models where openness can be summarized by the degree of home bias we find that openness can be a poor proxy of the welfare impact of alternative monetary policies using input output data for 25 countries we document substantial differences in the import and non tradable content of final demand components and in the role played by imported inputs in domestic production the estimates are used in a richer small open economy dsge model to quantify the loss from an exchange rate peg relative to the ramsey policy conditional on the composition of imports we find that the main determinant of the losses is the share of non traded goods in final demand

empirical evidence on inflation expectations in the new keynesian phillips curve abstract we review the main identification strategies and empirical evidence on the role of expectations in the new keynesian phillips curve paying particular attention to the issue of weak identi

credit market imperfections labor markets and leverage dynamics in emerging economies abstract emerging economies emes have different credit and labor market structures relative to advanced economies we document that economies with larger self employment shares tend to exhibit less countercyclical leverage dynamics we build a model where formal credit markets input credit relationships and the structure of labor markets interact that 1 captures a comprehensive set of eme business cycle regularities and 2 rationalizes our new fact the interaction between firms net worth interfirm input credit and self employment underlying our framework is critical for explaining our fact and is supported by the data

do surges in international capital inflows influence the likelihood of banking crises this article asks whether capital inflows bonanzas increase the probability of banking crises and whether this occurs through a lending boom mechanism results indicate that bonanzas more than triple the odds of a crisis raising its probability to 14 from an unconditional probability of 4 this effect exists in the absence of a lending boom and is found in both net and gross inflows bonanzas this effect is driven by portfolio equity and debt flows while the effect of debt is channelled through excessive lending the effect of portfolio equity flows is present even in the absence of a lending boom

estimation of hybrid phillips curve a source of conflicting empirical results author affiliation hae shin hwang hshwang tamu eduwoong kim kw bok or kr1 introductionthe new keynesian phillips curve nkpc models are based on the microeconomic foundation that introduces nominal rigidities into the forward looking optimizing behavior of monopolistically competitive firms the baseline model specifies the inflation as a function of forward looking expectations of inflation and marginal costs as the underlying driving force gali and gertler henceforth identified as gg 1999 extend the baseline model by introducing two types of firms forward looking and backward looking firms the resulting model is a hybrid model that includes past inflation and expected inflation in addition to the marginal cost as the driving force the presence of the past inflation in the model helps to explain the persistence of inflation main interests in the empirical analysis of gg s model are the degree of price rigidity the relative roles of forward and backward looking behavior and the relevance of the marginal cost as the driving force instead of a more conventional measure of the output gap the model is typically estimated in a structural form sf or in a closed form cf using the generalized methods of moments gmm the inflation rate is usually measured by the rate of change in either the gdp deflator or the non farm business nfb deflator the two inflation rates show very similar time paths with a high correlation coefficient and the sf and the cf equations are alternative expressions of the same theoretical model therefore one would expect that the estimates of underlying parameters and the tests of hypotheses will be similar regardless of the choice of the inflation measure and the estimation equation however recent empirical studies show contradicting conclusions gg and gali gertler and lopez salido henceforth referred to as ggls5 2005 find the dominance of forward looking behavior and significance of the marginal cost as the driving force while rudd and whelan henceforth referred to as rw7 2007 find the results that contradict the conclusions of gg and ggls5 the source of conflicting results cannot be easily identified from the studies of these authors because of the differences in their data sets and their different choices of three factors estimation equation sf or cf measurement of inflation gdp or nfb and instrumental variables see table 1 for the list of instrumental variables that are used in each study gg draw their conclusion from the estimation of sf equations sf gdp and sf nfb and ggls5 draw their conclusion from the estimation of equations with gdp deflator sf gdp and cf gdp while rw7 estimate the cf equation with the nfb deflator cf nfb table 1 set of instrumental variables table omitted see article image to examine the effects of the different choices of these factors we estimated their models on a common data set that covers the period extending from 1960 i to 2003 iv 1 we find that conclusions in previous studies are indeed sensitive to the choices of the equation inflation measure and instrumental variables 2 for example rw7 report an insignificant effect of the marginal cost in their cf nfb model however if the gdp deflator is used instead the marginal cost becomes highly significant and their conclusion would have been reversed conversely ggls5 report a highly significant effect of the marginal cost in their sf gdp model but it becomes insignificant if nfb is used in their estimation equation gg s conclusion of a predominance of forward looking behavior of the firms in their sf gdp model would have been also reversed if they estimated a cf equation cf gdp with the same set of instrumental variables choices of instrumental variables also play a critical role gg s finding of significant marginal cost in their sf gdp model is reversed if rw7 s instrumental variables are used

monetary policy choices in emerging market economies the case of high productivity growth we develop a general equilibrium model of an emerging market economy where productivity growth differentials between tradable and non tradable sectors result in an equilibrium appreciation of the real exchange rate the so called balassa samuelson effect the paper explores the dynamic properties of this economy and the welfare implications of alternative policy rules we show that the real exchange rate appreciation limits the range of policy rules that with a given probability keep inflation and exchange rate within predetermined numerical targets we also find that the b s effect raises by an order of magnitude the welfare loss associated with policy rules that prescribe active exchange rate management

sharing a ride on the commodities roller coaster common factors in business cycles of emerging economies fluctuations in commodity prices are an important driver of business cycles in small emerging market economies emes this paper documents how these fluctuations correlate strongly with the business cycle in emes a commodity sector is then embedded into a multi country emes business cycle model where exogenous fluctuations in commodity prices follow a common dynamic factor structure and coexist with other driving forces the estimated model assigns to commodity shocks 42 percent of the variance in income of which a considerable part is linked to the common factor a further amplification mechanism is a spillover effect from commodity prices to risk premia

the new keynesian phillips curve revisited abstract several authors have questioned the evidence claimed by gali and gertler 1999 and gali et al 2001 that a hybrid version of the new keynesian phillips curve approximates european and us inflation dynamics quite well we re examine the evidence using the vector autoregressive framework and likelihood based methods paying particular attention to the stationary and nonstationary and possibly cointegrated nature of variables involved our results show that the exact as well as the inexact form of the hybrid nkpc are clearly at odds with the european data on the other hand gali and gertler 1999 finding that the inexact hybrid nkpc is a good first approximation to the us inflation dynamics seems less at odds with the data however the assumption of the model that the stochastic term forms a sequence of innovations may be problematic as we find indication of autocorrelation in the estimated residuals the exact form of the hybrid nkpc is firmly rejected by the us data

openness imperfect exchange rate pass through and monetary policy abstract this paper analyses the implications of imperfect exchange rate pass through for optimal monetary policy in a linearised open economy dynamic general equilibrium model calibrated to euro area data imperfect exchange rate pass through is modelled by assuming sticky import price behaviour the degree of domestic and import price stickiness is estimated by reproducing the empirical identified impulse response of a monetary policy and exchange rate shock conditional on the response of output net trade and the exchange rate it is shown that a central bank that wants to minimise the resource costs of staggered price setting will aim at minimising a weighted average of domestic and import price inflation

external shocks u s monetary policy and macroeconomic fluctuations in emerging markets estimated structural vars show that external shocks are an important source of macroeconomic fluctuations in emerging markets furthermore u s monetary policy shocks affect interest rates and the exchange rate in a typical emerging market quickly and strongly the price level and real output in a typical emerging market respond to u s monetary policy shocks by more than the price level and real output in the u s itself these findings are consistent with the idea that when the u s sneezes emerging markets catch a cold at the same time u s monetary policy shocks are not important for emerging markets relative to other kinds of external shocks

returns to scale market power and the nature of price rigidity in new keynesian models with self fulfilling expectations increasing returns to scale and firms market power are two potential sources of sunspot expectations in neoclassical models we show that in new keynesian models returns to scale and market power can have fundamentally different implications for broad macroeconomic issues including self fulfilling expectations depending on the nature of price rigidity our findings suggest that the design of stabilization monetary policy can depend on precise knowledge about the economy s real and nominal features therefore a clear understanding of the specific economic environment and its relevance to monetary policymaking for ensuring macroeconomic stability can be an integrated part of monetary policy practice

the central bank as shaper and observer of events the case of the yield spread the yield spread has commonly been employed as a successful predictor of economic growth and recessions although its marginal predictive power has decreased since the 1990s notably the yield spread s declining power to predict us economic activity coincided with its growing power to predict us interest rate changes in my view these phenomena are inevitably linked and share one cause the central bank intended to enhance both its transparency and credibility through greater information disclosure this disclosure improved interest rate predictability but might also have crowded out useful private information formerly in the yield spread that helped predict economic activity

sticky inflation and the real effects of exchange rate based stabilization abstract this paper tests the empirical validity of the forward looking pricing hypothesis using data from four exchange rate based stabilization erbs episodes it finds that backward looking components of inflation play an important role in inflation dynamics in some cases exceeding the importance of forward looking components the paper then shows that the presence of empirically relevant degrees of inflation stickiness increases the size of the real exchange rate appreciation predicted by an imperfect credibility model of erbs the 12 real appreciation predicted by the sticky inflation model is a 70 improvement over the predictions of the fully forward looking pricing setup but as in other erbs models still falls short of matching the real appreciations observed in practice

tobin s imperfect asset substitution in optimizing general equilibrium in this paper we present a dynamic optimizing model that allows explicitly for imperfect substitutability between different financial assets this is specified in a manner which captures tobin s 1969 view that an expansion of one asset s supply affects both the yield on that asset and the spread or risk premium between returns on that asset and alternative assets our estimates of this model on u s data confirm that some of the observed deviations of long term rates from the expectations theory of the term structure can be traced to movements in the relative stocks of financial assets the richer aggregate demand and asset specifications imply that there exists an additional channel of monetary policy our results suggest that central bank operations exercise a modest influence on the relative prices of alternative financial securities and so exert an extra effect on long term yields and aggregate demand separate from their effect on the expected path of short term rates

is inflation sticky abstract new keynesian sticky price models predict that monetary policy can affect real variables however they also predict that inflation can be reduced without depressing output or employment in fact bringing down inflation is costly presenting a challenge to the new keynesian model two departures from the new keynesian model predict costly disinflation one assumes sticky inflation rather than sticky prices while the other assumes less than perfectly rational expectations taking into account information from surveys of inflation expectations i find the evidence suggests that inflation is not sticky and that inflation expectations are less than perfectly rational

the role of shocks and institutions in the rise of european unemployment the aggregate evidence two key facts about european unemployment must be explained the rise in unemployment since the 1960s and the heterogeneity of individual country experiences while adverse shocks can potentially explain much of the rise in unemployment there is insufficient heterogeneity in these shocks to explain cross country differences alternatively while explanations focusing on labour market institutions explain current heterogeneity well many of these institutions pre date the rise in unemployment based on a panel of institutions and shocks for 20 oecd nations since 1960 we find that the interaction between shocks and institutions is crucial to explaining both stylised facts

time varying volatility and the dynamic behavior of the term structure in this paper the authors consider a framework in which the cross sectional and time series behavior of the yield curve can be studied simultaneously they examine the relationship between the yield curve and the time varying conditional volatility of the treasury bill market the authors demonstrate that different shaped yield curves can result given different combinations of volatility and expectations about future spot rates moreover adjusting the forward rate for the volatility related forward premium can improve its performance as a predictor for the future spot rate copyright 1993 by ohio state university press

do expected future marginal costs drive inflation dynamics abstract this article discusses a more general interpretation of the two step minimum distance estimation procedure proposed in sbordone 2002 the estimator is again applied to a version of the new keynesian phillips curve where inflation dynamics are driven by the expected evolution of marginal costs the article clarifies econometric issues addresses concerns about uncertainty and model misspecification raised in recent studies and assesses the robustness of previous results while confirming the importance of forward looking terms in accounting for inflation dynamics it suggests how the methodology can be applied to extend the analysis of inflation to a multivariate setting

the adjustment of expectations to a change in regime a study of the founding of the federal reserve the founding of the federal reserve system in 1914 led to a substantial change in the behavior of nominal interest rates the authors examine the timing of this change and the speed with which it was effected they then use data on the term structure of interest rates to determine how expectations responded their results indicate that the change in policy regime was rapid and that individuals quickly understood the new environment they were facing copyright 1987 by american economic association

good bye financial repression hello financial crash some unintended consequences of financial liberalization in latin america are analyzed in this paper intrinsic imperfectious in financial markets and the policy dilemmas they pose are reviewed first the stylized facts of southern cone experiments in financial liberization are then presented alternative ways of organlzing domestic capital markets under latin american conditions are discussed and an eclectic reform mongering program is proposed

inflation price dispersion and market integration through the lens of a monetary search model monetary search theory implies that the real effects of inflation via its impact on price dispersion depend on the level of search costs and thus on the level of market integration for less integrated markets the inflation price dispersion nexus is predicted to be asymmetrically v shaped which results in an optimal inflation rate above zero for highly integrated markets with low search costs however the impact of inflation on price dispersion should only be small using price data of the european union member states this paper is the first that tests and confirms these predictions of monetary search theory

understanding the gains from wage flexibility the exchange rate connection we study the gains from increased wage exibility and their dependence on exchange rate policy using a small open economy model with staggered price and wage setting two results stand out i the impact of wage adjustments on employment is smaller the more the central bank seeks to stabilize the exchange rate and ii an increase in wage exibility often reduces welfare and more likely so in economies under an exchange rate peg or an exchange rate focused monetary policy our ndings call into question the common view that wage exibility is particularly desirable in a currency union

sticky prices in the euro area a summary of new micro evidence this paper summarises the vast evidence on micro price setting recently obtained for euro area countries we consider studies with micro data on consumer and producer prices as well as survey information the main findings are 1 prices in the euro area are sticky and stickier than in the us 2 downward price rigidity is only slightly more marked than upward price rigidity 3 heterogeneity and asymmetries are observed in price setting and 4 the relevance of theories that explain price stickiness such as implicit or explicit contracts marginal costs and coordination failure is confirmed whereas menu costs pricing thresholds and costly information explanations are judged much less relevant by firms jel c25 d40 e31

price setting in the euro area some stylized facts from individual producer price data this paper summarizes the microevidence on the setting of producer prices in the euro area the main findings are i 21 of producer prices are adjusted each month ii producer prices are changed more frequently and by smaller amounts than consumer prices even after controlling for product characteristics iii price decreases are relatively frequent iv inflation correlates positively with the difference between the frequency of price increases and decreases and v there is substantial variation in price flexibility across sectors which can be explained in part by differences in the cost structure the degree of competition and the level of sectoral inflation

robotization and labour dislocation in the manufacturing sectors of oecd countries a panel var approach robots are the most important innovation which has affected the production process in the last three decades thanks to the latest advances in technology they have been able to perform an ever inc

the effect of money shocks on interest rates in the presence of conditional heteroskedasticity most current empirical work finds no evidence that money shocks lower interest rates we show that these nonresults are mainly due to a failure to model the conditional heteroskedasticity of interest rates autoregressive conditional heteroskedasticity arch models find a significant liquidity effect where ordinary least squares ols models do not the existence of a liquidity effect is found using different models and sample periods when arch models are used in estimation but never when ols is employed

identifying the global transmission of the 2007 2009 financial crisis in a gvar model abstract the paper analyses and compares the role that the tightening in liquidity conditions and the collapse in risk appetite played for the global transmission of the financial crisis dealing with identification and the large dimensionality of the empirical exercise with a global var approach the findings highlight the diversity of the transmission process while liquidity shocks have had a more severe impact on advanced economies it was mainly the decline in risk appetite that affected emerging market economies the tightening of financial conditions was a key transmission channel for advanced economies whereas for emerging markets it was mainly the real side of the economy that suffered moreover there are some striking differences also within types of economies with europe being more adversely affected by the fall in risk appetite than other advanced economies

customer markets and the welfare effects of monetary policy a customer market model in which firms and customers form long term relations is developed and integrated into the canonical new keynesian framework this leads to two important differences compared to the standard model first the purely forward looking phillips curve is replaced by a hybrid variant where current inflation also depends on past inflation second the welfare cost of inflation is much lower which leads to an optimal monetary policy where relatively more weight is put on output gap stabilization than previously found in the literature

european inflation and the new keynesian phillips curve author affiliation sandeep mazumder mazumds wfu edu acknowledgment i wish to thank the anonymous referees for their valuable comments and suggestions that helped shape this manuscript 1 introductionon june 1 1998 the european central bank came into being with the goal of maintaining price stability in the euro zone 1 the ability to describe inflation as accurately as possible has long been a key goal that macroeconomists pursue and in light of the introduction of the euro currency in the late 1990s this topic is particularly pertinent in europe to this end recent research has devoted a great deal of time to the new keynesian phillips curve nkpc a model that examines price setting behavior based on nominal rigidities founded on the work of authors such as taylor 1980 and calvo 1983 this model has not been without controversy but even so it remains a workhorse of macroeconomics perhaps attributable to the lack of a better alternative in particular the model is thought to have first seen genuine empirical success when gali and gertler 1999 estimated the nkpc using u s data and found that the model describes changes in u s prices considerably well indeed gali gertler and lopez salido 2001 conduct a similar exercise using european inflation data and find that the nkpc is even more applicable to the euro area than for the united states over the period from the 1970s to the latter 1990s one of the key innovations of these articles is that the labor income share equivalently real unit labor costs is used as the proxy for real marginal cost in the nkpc as opposed to previously used proxies such as detrended real output following in the same vein as gali gertler and lopez salido 2001 others have also found that the nkpc can be accurately used to describe inflation in europe for example rumler 2007 estimates the labor share nkpc for nine euro area countries and finds evidence in favor of the model while jondeau and bihan 2005 argue that the labor share nkpc may describe european inflation dynamics well depending on the number of leads or lags that one is willing to include into the model similarly leith and malley 2005 use the nkpc to find greater evidence of price stickiness in europe as compared to the united states where the proxy for real marginal cost is labor s share of income while some authors have questioned the empirical performance of the nkpc in europe when using different econometric techniques such as bardsen jansen and nymoen 2004 paloviita 2005 lawless and whelan 2007 boug cappelen and swensen 2010 a more obvious problem remains with the approach of gali gertler and lopez salido 2001 to estimating the nkpc for europe that has not received much attention in the literature that is the labor income share cannot be used to proxy for real marginal cost in the nkpc if we are to address the cyclicality of real marginal cost in a manner in keeping with predictions from basic microeconomic theory namely we believe that marginal cost is likely to be procyclical over the business cycle whereas the labor income share in fact moves countercyclically furthermore the labor share proxy of real marginal cost is founded on the assumption that labor input can be freely adjusted at a fixed real wage rate the problem with this assumption is that it ignores the notion of labor adjustment costs which is something that cannot reasonably be discounted specifically one can think of labor as being the product of the number of workers in an economy and the respective number of hours that they work seminal work by oi 1962 has argued that employment is not perfectly flexible in the short run something that the derivation of the labor share marginal cost proxy does not take into account this article reconsiders the derivation of a proxy for real marginal cost in a similar manner to that done in gali and gertler 1999 and gali gertler and lopez salido 2001 with the crucial difference that we account for the existence of labor adjustment costs

sticky price models and the natural rate hypothesis abstract a major criticism of standard specifications of price adjustment in models for monetary policy analysis is that they violate the natural rate hypothesis by allowing output to differ from potential in steady state in this paper we estimate a dynamic optimizing business cycle model whose price setting behavior satisfies the natural rate hypothesis the price adjustment specifications we consider are the sticky information specification of mankiw and reis sticky information versus sticky prices a proposal to replace the new keynesian phillips curve quarterly journal of economics 117 1295 1328 and the indexed contracts of christiano et al nominal rigidities and the dynamic effects of a shock to monetary policy journal of political economy 113 1 45 our empirical estimates of the real side of the economy are similar whichever price adjustment specification is chosen consequently the alternative model specifications deliver similar estimates of the u s output gap series but the empirical behavior of the gap series differs substantially from standard gap estimates

monetary policy and short term interest rates an efficient markets rational expectations approach this paper is an application of efficient markets rational expectations theory to analyze empirically the relationship of money supply growth and short term interest rates a hotly debated issue in the literature this approach has the advantage over earlier research on this subject in that it imposes a theoretical structure that allows easier interpretation of the empirical results as well as more powerful statistical tests the empirical results uniformly do not support the proposition that increases in money growth are correlated with declines in short rates the relationship between money supply growth and nominal interest rates is a hotly debated issue in the literature one view associated with keynesian structural macromodels has an increase in money growth leading at least in the short and medium runs to a decline in interest rates 2 an alternative view associated with milton friedman 6 7 indicates that interest rates might rise in response to higher money growth because there is a rise in inflationary expectations and hence a rise in interest rates through a fisher 5 effect

the new wave of private capital inflows push or pull abstract this paper studies the determinants and sustainability of the widespread private capital inflows to middle income countries after 1989 the key question is whether these flows are mostly pulled by attractive domestic conditions or pushed by unfavorable conditions in developed countries an analytical model focusing on country risk is developed and used empirically it is argued that the observed improvement in country creditworthiness is mostly due to the decline in international interest rates and that therefore its importance as a proximate cause does not support the pull interpretation all things considered in most countries the key answer that emerges is push

sticky price and limited participation models of money a comparison abstract we provide new evidence that models of the monetary transmission mechanism should be consistent with at least the following facts after a contractionary monetary policy shock the aggregate price level responds very little aggregate output falls interest rates initially rise real wages decline by a modest amount and profits fall we compare the ability of sticky price and limited participation models with frictionless labor markets to account for these facts the key failing of the sticky price model lies in its counterfactual implications for profits the limited participation model can account for all the above facts but only if one is willing to assume a high labor supply elasticity 2 percent and a high markup 40 percent the shortcomings of both models reflect the absence of labor market frictions such as wage contracts or factor hoarding which dampen movements in the marginal cost of production after a monetary policy shock 1997 elsevier science b v

competitive equilibria with limited enforcement we show how to decentralize constrained efficient allocations that arise from enforcement constraints between sovereign nations in a pure exchange economy these allocations can be decentralized with private agents acting competitively and taking as given government default decisions on foreign debt in an economy with capital these allocations can be decentralized if the government can tax capital income as well as default on foreign debt the tax on capital income is needed to make private agents internalize a subtle externality the decisions of the government can arise as an equilibrium of a dynamic game between governments

has the inflation process changed does it change inflation has been low in many countries for at least a decade but have inflation processes changed in ways that would help make low inflation permanent using both aggregate and disaggregated inflation data we find that the means of inflation processes have become smaller over the past two decades and that allowing for these changes in the mean their persistence has not declined much changes in monetary policy frameworks and recessions appear to have contributed to a reduction in the mean of inflation but do not appear to have a meaningful impact on persistence and there is some evidence that the shifts in inflation expectations are the proximate cause of the changes in the mean of inflation these findings suggest that policy makers should focus on maintaining credibility and carefully monitoring inflation expectations for any indication that they are rising stephen g cecchetti and guy debelle

global credit supply shocks and exchange rate regimes abstract the recent global financial crisis has re emphasized the need for better understanding the relation between the type of exchange rate regime err in place and the effects of global credit supply shocks recent advances in the measurement of such shocks and their large realizations in the recent financial crisis produce a suitable quasi natural experiment for studying this relation toward this end i use err classification data for a panel of 40 emerging market economies emes to establish the following main findings output responds significantly more adversely to contractionary global credit supply shocks in the fixed err than in the non fixed err deleveraging and the fall in imports are much more severe in the fixed err and the lack of exchange rate depreciation in the fixed err is accompanied by a stronger fall in exports these results are broadly consistent with predictions from models which include both the expenditure switching channel and the balance sheet channel of exchange rate depreciation where the latter channel effectively becomes expansionary rather than contractionary as commonly thought owing to favorable effects of the expenditure switching channel on balance sheets asset side

estimating the linear quadratic inventory model maximum likelihood versus generalized method of moments abstract we compare generalized method of moments gmm and maximum likelihood ml estimators of the parameters of a linear quadratic inventory model using nondurable manufacturing data and monte carlo simulations data based gmm estimates for five normalizations vary widely generally rejecting the model the ml estimate generally supports the model monte carlo experiments reveal that the gmm estimates are often biased apparently due to poor instruments statistically insignificant economically implausible and dynamically unstable the ml estimates are generally unbiased even in misspecified models statistically significant economically plausible and dynamically stable asymptotic standard errors for ml are 3 to 15 times smaller than for gmm

european inflation dynamics abstract we provide evidence on the fit of the new phillips curve npc for the euro area over the period 1970 1998 and use it as a tool to compare the characteristics of european inflation dynamics with those observed in the u s we also analyze the factors underlying inflation inertia by examining the cyclical behavior of marginal costs as well as that of its two main components namely labor productivity and real wages some of the findings can be summarized as follows a the npc fits euro area data very well possibly better than u s data b the degree of price stickiness implied by the estimates is substantial but in line with survey evidence and u s estimates c inflation dynamics in the euro area appear to have a stronger forward looking component i e less inertia than in the u s d labor market frictions as manifested in the behavior of the wage markup appear to have played a key role in shaping the behavior of marginal costs and consequently inflation in europe

limits of arbitrage theory and evidence from the mortgage backed securities market limits of arbitrage theories hypothesize that the marginal investor in a particular asset market is a specialized arbitrageur rather than a diversified representative investor we examine the mortgage backed securities mbs market in this light we show that the risk of homeowner prepayment which is a wash in the aggregate is priced in the mbs market the covariance of prepayment risk with aggregate wealth implies the wrong sign to match the observed prices of prepayment risk the price of risk is better explained by a kernel based on mbs market wide specific risk consistent with the specialized arbitrageur hypothesis a number of recent limits of arbitrage theories predict that the distressed liquidation of assets by hedge funds results in a large drop in asset prices see for example shleifer and vishny 1997 kyle and xiong 2001 gromb and vayanos 2002 geanakoplos 2003 or he and krishnamurthy 2006 these theories are often referenced in explaining episodes of market illiquidity and falling asset prices such as the events during the fall of 1998 in traditional asset pricing theory the marginal investor in every asset market is the same broadly diversified representative investor thus a hedge fund liquidating 200 billion of mortgage backed securities finds a large pool of ready buyers comparable to the entire capital market and the liquidation does not affect expected returns because the representative investor acts quickly to eliminate excess returns according to the limits of arbitrage theory on the other hand the marginal investor in a particular asset market is an investor who specializes in that market in this case liquidations can have large effects on prices given that the relevant set of buyers is a smaller specialized pool of investors

dynamic pricing and imperfect common knowledge abstract introducing private information into the dynamic pricing decision of firms by adding an idiosyncratic component to marginal cost can help explain two stylised facts about price changes aggregate inflation responds gradually and with inertia to shocks at the same time as individual price changes can be large the inertial behaviour of inflation is driven by privately informed firms strategically herding on the public information contained in the observations of lagged aggregate variables the model also matches the average duration between price changes found in the data and it nests the standard new keynesian phillips curve as a special case to solve the model the paper derives an algorithm for solving a class of dynamic models with higher order expectations

why do emerging economies borrow short term the authors argue that emerging economies borrow short term due to the high risk premium charged by international capital markets on long term debt they first present a model where the debt maturity structure is the outcome of a risk sharing problem between the government and bondholders by issuing long term debt the government lowers the probability of a liquidity crisis transferring risk to bondholders in equilibrium this risk is reflected in a higher risk premium and borrowing cost therefore the government faces a tradeoff between safer long term borrowing and cheaper short term debt second the authors construct a new database of sovereign bond prices and issuance they show that emerging economies pay a positive term premium a higher risk premium on long term bonds than on short term bonds during crises the term premium increases with issuance shifting toward shorter maturities this suggests that changes in bondholders risk aversion are important to understand emerging market crises

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

integrating sticky prices and sticky information abstract understanding the relationship between nominal and real variables most notably inflation and cyclical output is one of the fundamental questions of economics toward this understanding we develop a model that integrates sticky prices and sticky information a dual stickiness model we find that both rigidities are present in u s data we also show that the dual stickiness model s closest competitor is the hybrid new keynesian model for both models current inflation depends in part on last period s inflation the former model achieves this dependence endogenously through the interaction of the two rigidities rather than through backward looking behavior u s data support the dual stickiness model over the hybrid model because lagged expectations terms appear in the former s inflation euler equation finally we show that it is quantitatively important to distinguish between the two by simulating a dynamic equilibrium model under each of the two inflation equations

financial panics the seasonality of the nominal interest rate and the founding of the fed after the founding of the fed in 1914 the frequency of financial panics and the size of the seasonal movements in nominal interest ratesboth declined substantially this paper establishes that the fed by carrying out the seasonal open market policy that eliminated the seasonal in nominal interest rates caused the decrease in the frequency of panics since seasonal movements are anticipated and financial panics are probably real events the results show that an anticipated monetary policy had real effects on the economy copyright 1986 by american economic association

is forward looking inflation targeting destabilizing the role of policy s response to current output under endogenous investment we show that with endogenous investment virtually all monetary policy rules that set a nominal interest rate in response solely to expected future inflation induce real indeterminacy in models with i staggered prices ii staggered prices and staggered wages and iii staggered prices staggered wages and firm specific capital in i policy s response to current output can help significantly in ensuring determinacy with an infinite labor supply elasticity but little with empirically plausible labor supply elasticity in ii responding to output always helps a great deal though under low price stickiness and without capital adjustment cost it may call for a moderate response to output in order to ensure determinacy for a wide range of response to inflation in iii even a tiny response to output can always render equilibrium determinate for a wide range of response to inflation

competitiveness through disinflation an assessment of the french macroeconomic strategy france olivier jean blanchard and pierre alain muet over most of the last decade france has followed increasingly rigorous policies the hard franc approach has meant that external competitiveness is no longer sought through devaluation instead the new policy is to achieve a lower inflation rate than abroad in principle the competitiveness through disinflation approach should work and eventually bring down the unemployment rate which has remained broadly unchanged at a high level for many years while maintaining external balance this article investigates whether the policy is working inflation is lower than in germany profits have steadily increased and trade balance has been reestablished but unemployment is higher than in 1983 the policy has been more successful at bringing down inflation than at returning the economy to lower unemployment the adjustment process has been protracted credibility effects have not been fulfilled but nor however have fears that the drastic change of policy might prove unusually disruptive it simply turns out that the policy is working very slowly it would take an improbable 30 accumulated competitiveness gain to bring unemployment down by 3 which does not seem acceptable to france s trading partners

identifying the influences of nominal and real rigidities in aggregate price setting behavior we formulate a generalized price setting framework that incorporates staggered contracts of multiple durations and that enables us to directly identify the influences of nominal vs real rigidities we estimate this framework using macroeconomic data for germany 1975 1998 and for the u s 1983 2003 in each case we find that the data are well characterized by nominal contracts with an average duration of about two to three quarters we also find that new contracts exhibit very low sensitivity to marginal cost corresponding to a relatively high degree of real rigidity finally our results indicate that backward looking price setting behavior such as indexation to lagged inflation is not needed in explaining the aggregate data at least in an environment with a stable monetary policy regime and a transparent and credible inflation objective

robustness of the estimates of the hybrid new keynesian phillips curve abstract gali and gertler 1999 inflation dynamics a structural econometric approach journal of monetary eonomics 44 2 195 222 developed a hybrid variant of the new keynesian phillips curve that relates inflation to real marginal cost expected future inflation and lagged inflation gmm estimates of the model suggest that forward looking behavior is dominant the coefficient on expected future inflation substantially exceeds the coefficient on lagged inflation while the latter differs significantly from zero it is quantitatively modest several authors have suggested that our results are the product of specification bias or suspect estimation methods here we show that these claims are incorrect and that our results are robust to a variety of estimation procedures including gmm estimation of the closed form and nonlinear instrumental variables also as we discuss many others have obtained very similar results to ours using a systems approach including fiml techniques hence the conclusions of gg and others regarding the importance of forward looking behavior remain robust

investigating the effects of monetary regime shifts the case of the federal reserve and the shrinking risk premium abstract in this paper we use mishkin s efficient markets framework journal of finance 37 1982 63 72 to show that the founding of the federal reserve led to a greater than 50 reduction in the size of the risk term premium a 6 month instrument pays over a 3 month one and that this reduction coincides with the significant reduction in the uncertainty of interest rates that took place during the same period this result demonstrates a major impact this unparalleled us monetary regime shift had on financial markets and provides further confirmation of the importance of accounting for major institutional and policy changes when investigating the sources of changing intertemporal macroeconomic relationships