testing the long run implications of the neoclassical growth model abstract the long run implications of the one factor neoclassical growth model are tested by investigating the cointegrating relations between the log of output consumption and investment and the real interest rate with the exceptions of austria and the united kingdom the evidence for the united states and to a lesser extent for canada japan and the federal republic of germany is favorable to the neoclassical growth model a simple extension to a multicountry setting proved however to be unsuccessful national outputs nor consumption series are driven by just one common stochastic trend

government spending the balance of trade and the terms of trade in british history abstract this paper investigates the relationship between government spending the balance of trade and the terms of trade using early british data a large open economy intertemporal framework in which ricardian equivalence holds predicts a larger effect of temporary government spending changes on the trade deficit than permanent ones further a pure switch between debt and taxes should have no effect on trade flows the results provide some support for these hypotheses although they are sensitive to sample period and the method of decomposition of government spending a negative relationship between government spending and the terms of trade is also found

financialisation income distribution and aggregate demand in the usa this paper investigates the effects of financialisation and functional income distribution on aggregate demand in the usa by estimating the effects of the increase in rentier income dividends and interest payments and housing and financial wealth on consumption and investment the redistribution of income in favour of profits suppresses consumption whereas the increase in the rentier income and wealth has positive effects a higher rentier income decreases investment without the wealth effects the overall effect of the changes in distribution on aggregate demand would have been negative thus a pro capital income distribution leads to a slightly negative effect on growth i e the usa economy is moderately wage led

stochastic trends and economic fluctuations in a small open economy in this paper we describe how restricted vector autoregressions can be employed to examine the sources of macroeconomic fluctuations we show how cointegration restrictions can be used to identify a var system with common stochastic trends subject to transitory and permanent changes in average growth and how we may investigate the system s responses to permanent shocks i e to innovations to the trends theoretical cointegration vectors are derived from a small open economy growth model for terms of trade real gdp real consumption and real investments applying these methods to swedish annual data 1875 1986 we find that permanent real supply shocks account for most of the fluctuations in gdp even in the short run

weak exogeneity and long run and contemporaneous identifying restrictions in vec models abstract this paper shows that under the king et al 1991 approach kpsw 1991 stochastic trends and economic fluctuations american economic review 81 819 840 to structural identification in vec models the structural shocks with transitory effects do not have a contemporaneous impact on the weakly exogenous variables this result is used to establish the conditions under which the kpsw and sims 1980 identification schemes macroeconomics and reality econometrica 48 1 48 are equivalent in a model of us consumption investment and private output

when do long run identifying restrictions give reliable results many recent articles have identified behavioral disturbances in vector autoregressions by imposing restrictions on the long run effects of shocks this article demonstrates that this approach will be unreliable unless the underlying economy satisfies three types of strong restrictions although many aspects of these issues have been raised before this article draws out and illustrates the implications for inferences under the long run scheme furthermore it provides strategies for dealing with the problems

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 long and short of money short run dynamics within a structural model empirical examinations into aggregate money demand functions generally incorporate a monetary aggregate as the dependent variable while this custom may be inefficient it does not create any new difficulties for estimating the demand function s long run parameters as money supply would equal money demand the short run estimates however are not as fortunate as the monetary aggregate is a measure of supply and not demand one needs to tease out the short run responses associated with money demand changes with those which are associated with monetary supply shocks the present article therefore proposes a more complete representation of monetary sector behaviour and in doing so finds significant support for the so called buffer stock money demand models

income distribution and current account imbalances we develop a three country stock flow consistent macroeconomic model to study the effects of changes in both personal and functional income distribution on national current account balances each country has a household sector and a non household corporate sector the household sector is divided into income deciles and consumer demand is characterized by upward looking status comparisons following the relative income hypothesis of consumption the strength of consumption emulation depends on country specific institutions the model is calibrated for the united states germany and china simulations suggest that a substantial part of the increase in household debt and the decrease in the current account in the united states since the early 1980s can be explained by the interplay of rising top end household income inequality and institutions on the other hand the weak domestic demand and increasing current account balances of germany and china since the mid 1990s are strongly related to shifts in the functional income distribution at the expense of the household sector

international competition income distribution and economic growth this paper shows that the neo keynesian case for wage led growth does not generally hold in an open economy model wage increases cause a loss of competitiveness that reduces the trade balance if the economy is relatively open to trade and price elasticities satisfy certain restrictions the worsening of the trade balance more than outweighs the increase in workers consumption thus reducing the growth rate the main theoretical innovation is a flexible markup pricing rule that allows changes in unit labor costs and exchange rates to affect profit margins implications for international relations and class conflict are discussed copyright 1989 by oxford university press

corporate credit stock price inflation and economic fluctuations this study analyses the empirical interaction between real corporate credit real income real stock prices the short term interest rate and inflation for the netherlands and the usa the framework is based on a five variable structural vector error correction model which identifies the permanent and temporary shocks within the system erratic shocks in the real amount of corporate credit and in stock prices could potentially have some impact on inflation in the case of the usa and on real output in the netherlands however the structural var analysis also shows that the above mentioned erratic shocks only explain a small proportion of the variation in inflation and economic activity and inflation objective shifts and supply side shocks are much more important determinants for economic fluctuations

what determines real exchange rates the nordic countries the model derived in this paper yields testable implications concerning the long run co movements of real exchange rates relative labor productivity the trade balance and terms of trade countries with relatively higher output growth trade deficits or improved terms of trade are found to have more appreciated real exchange rates with the main channel of transmission working through the relative price of nontraded goods exogenous terms of trade shocks are found to be the most important determinant of long run movements in the real exchange rate for denmark and norway while demand shocks account for most of the long run variance in the real exchange rate for finland and sweden

deficits and intergenerational welfare in open economies this paper deals with public debt in open economies extending diamond s overlapping generations model to a small open economy as well as an international equilibrium of two large economies it focuses on the intergenerational welfare redistributions caused by an increase in public debt triggered by a temporary government budget deficit and shows how these redistributions differ in open and closed economies the interplay between the deficits in the government budget and the current account is also analyzed it is shown how a single period with a government deficit can be followed by a sequence of periods with a deficit in the current account

international evidence on the sources of macroeconomic fluctuations abstract this paper examines the causes of macroeconomic fluctuations in five economies germany japan sweden the united kingdom and the united states using a bivariate var model for output and inflation the results demonstrate that both demand and supply shocks are important sources of business cycle fluctuations moreover at the business cycle frequency there are strong similarities between germany the united kingdom and the united states where more than 50 percent of the forecast error variance in both output and inflation are due to supply shocks on the other hand in japan and sweden over 90 percent of the error variance in output and less than 20 percent of the error variance of inflation are due to supply shocks

the current account in the macroeconomic adjustment process macroeconomic adjustments to changes in the economic environment are to a large extent conditioned by the intertemporal choices of economic agents when agents face an intertemporal budget constraint a decision to alter current indebtedness implies changes in future consumption possibilities and will be based on expectations of the entire future path of key variables and not only current variables a formal model to show how today s current account is a function of both current and future economic variables is presented the determination of the current account under classical assumptions of market clearing and continuous full employment is emphasized

fiscal policy and the real exchange rate under risk abstract this paper examines the effect of fiscal expansions on the real exchange rate in a small open economy where home and foreign assets are imperfect substitutes there is an hypothesis raised by sachs and wyplosz 1984 dornbusch and fischer 1986 and others that risk and imperfect substitutability of assets can explain why fiscal expansions sometimes create real depreciations unlike the standard mundell fleming result this paper examines the issue within an optimizing framework where risk and imperfect capital mobility are explicitly modeled the paper comes up with the conclusion that even when assets are imperfect substitutes and a fiscal expansion crowds out investment and consumption this crowding out is not full and the real exchange rate always appreciates

unemployment and the business cycle in a small open economy g m m estimation and testing with french data abstract what is a relevant model for the european business cycle in this paper the empirical performances of three models are compared a canonical walrasian r b c framework its extension to the case of a small open economy and a version of this model with search and wage bargaining on the labor market structural parameters of the models are estimated using g m m and their abilities to reproduce the french business cycle taken as representative of the european business cycle are tested only the small open economy with unemployment is able to generate theoretical moments that match their empirical counterparts

heterogeneity and output fluctuations in a dynamic menu cost economy when firms face menu costs the relation between their output and money is highly non linear at the aggregate level however this needs not be so in this paper we study the dynamic behaviour of a menu cost economy where firms are heterogeneous in the shocks they perceive and the demands and adjustment costs they face in this context we i generalize the caplin and spulber 1987 steady state monetary neutrality result ii show that uniqueness of equilibria depends not only on the degree of strategic complementarities but also on the degree of dispersion of firms positions in their price cycle iii characterize the path of output outside the steady state and show that as strategic complementarities become more important expansions become longer and smoother than contractions and iv show that the potential impact of monetary shocks is an increasing function of the distance of the economy from its steady state but that an uninformed policy maker will have no effect on output on average

setor agricola brasileiro uma aplicacao do modelo de tendencias e ciclos comuns no periodo de 1990 a 2005 the present study analyzes the behavior of agricultural gdp real exchange rate and the current account balance agricultural in brazil during the period of 1990 to 2005 cointegration techniques were used to identify a var system with common stochastic trends and to investigate the system responses to transitories and permanent shocks the tests had proven the existence of a common trend and two cycles between the variables variance decomposition indicates that transiotories shocks account form most of the short and long run fluctuations in agricultural gdp it was found that permanent shocks explain most of the variance of the exchange rate and of the current account balance mainly in the long run

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

empirical evidence on the insulation properties of fixed and flexible exchange rates abstract this paper investigates whether japanese output stability since the mid 1970s is attributable to the change in exchange rate regime or to the changing nature of underlying disturbances we decompose foreign and domestic influences on output movements using restrictions on the long run dynamics to identify the disturbances we find that the flexible exchange rate regime is more effective in insulating the economy from foreign disturbances than is the fixed rate regime however in the case of japan it is primarily the changing nature of the fundamental disturbances to the economy that is responsible for greater output stability since the mid 1970s

markov switching stochastic trends and economic fluctuations abstract i investigate cointegrating relationships such that even though the long run attractors are assumed to be linear the dynamics of the equilibrium errors depends on the business cycle i postulate a markov switching common stochastic trends model to study both the short run responses to permanent shocks and the effects of recessions in the long run growth i apply these findings to explore the short and long run asymmetric relationships among output consumption and investment

sources of fluctuations in relative prices evidence from high inflation countries casual analysis of six high inflation episodes indicates a strong positive relationship between movements in the relative price ratio measured by wpi cpi and the inflation rate the authors estimate a vector autoregression model in which relative price movements are driven by several fundamental disturbances fiscal monetary output and exchange rate identified using only long run restrictions based on a general equilibrium optimizing model analysis of the endogenous response of relative price changes to these disturbances suggests that output and monetary shocks are the most important driving forces although fiscal and exchange rate shocks are also influential in explaining relative price movements in some countries copyright 1993 by mit press

some consequences of temporal aggregation in empirical analysis i derive the generating mechanism of a temporally aggregated process when the disaggregated one belongs to the vector autoregressive integrated moving average class i then study the effects of temporal aggregation on a set of characteristics of usual interest such as exogeneity causality cointegration and common features an empirical example with canadian interest rates illustrates the main issues

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

simulation based tests of forward looking models under var learning dynamics in this paper we propose a simulation based technique to investigate the finite sample performance of likelihood ratio lr tests for the nonlinear restrictions that arise when a class of forward looking fl models typically used in monetary policy analysis is evaluated with vector autoregressive var models we consider one shot tests to evaluate the fl model under the rational expectations hypothesis and sequences of tests obtained under the adaptive learning hypothesis the analysis is based on a comparison between the unrestricted and restricted var likelihoods and the p values associated with the lr test statistics are computed by monte carlo simulation we also address the case where the variables of the fl model can be approximated as non stationary cointegrated processes application to the hybrid new keynesian phillips curve nkpc in the euro area shows that i the forward looking component of inflation dynamics is much larger than the backward looking component and ii the sequence of restrictions implied by the cointegrated nkpc under learning dynamics is not rejected over the monitoring period 1984 2005 copyright 2010 john wiley sons ltd

sticky prices as coordination failure this paper links the coordination failure and menu cost approaches to the microeconomic foundations of keynesian macroeconomics if a firm s desired price is increasing in others prices then the gain from price adjustment after a nominal shock is greater if others adjust this strategic complementarity leads to multiple equilibria in the degree of rigidity welfare may be much higher in the equilibria with less rigidity thus nominal rigidity arises from a failure to coordinate price changes jel e12 e30 keynesian macroeconomics waned in the 1970 s because economists grew disenchanted with its weak microeconomic foundations the central difficulty was that keynesian models were based on ad hoc rigidities in nominal wages and prices the 1980 s produced two approaches to reviving keynesian theory the menu cost literature n gregory mankiw 1985 george akerlof and janet yellen 1985 seeks to provide rigorous explanations for nominal rigidities these papers argue that small frictions in price setting are enough to produce large nominal rigidities in contrast the coordination failure literature russell cooper and andrew john 1988 abandons nominal rigidities and seeks alternative foundations for keynesian models the central idea is that many economic activities such as production e g john bryant 1983 trade e g peter diamond 1982 and investment e g nobuhiro kiyotaki 1988 exhibit synergism or strategic complementarity one agent s optimal level of activity depends positively on others activity strategic complementarity can lead to multiple equilibria with high activity equilibria superior to low activity equilibria thus an economy may be stuck in an underemployment equilibrium even though a superior equilibrium exists models with nominal rigidities and models with coordination failures are often presented as competing paradigms 1 this paper shows that this view is incorrect we take a step toward unifying the foundations of keynesian economics by showing that the two sets of ideas are highly complementary nominal rigidity arises from a failure to coordinate price changes this failure has the essential features of coordination failures in previous models flexibility in one firm s price increases the incentives for other firms to make their prices flexible this strategic complementarity leads to multiple equilibria in the degree of nominal rigidity equilibria with less rigidity more active price adjustment are often pareto superior to equilibria with more rigidity these results contribute to our understanding both of coordination failure and of nominal rigidity the range of keynesian phenomena explained by coordination failures is greatly expanded previous coordination failure models contain only real variables and thus ascribe no role to monetary policy or other determinants of nominal spending our results suggest that coordination failure is at the root of inefficient nonneutralities of money theories of nominal rigidities gain new empirical and policy im

current account dynamics and the terms of trade harberger laursen metzler two generations later this is a study of the current account dynamics resulting from the savings and investment dynamics in a small open economy which is subject to exogenous changes in its terms of trade and in world interest rates anticipated and unanticipated as well as temporary and permanent terms of trade changes have very different effects there is however a general tendency towards cycles in both savings and investment which gives rise to cycles in the current account it is shown that the classic harberger laursen metzler effect on saving of a terms of trade deterioration can have any sign for plausible parameter values both for temporary and permanent disturbances

atheoretical macroeconometrics a critique abstract the spurious nature of the restrictions used to identify many macroeconometric models has led some researchers to advocate a style of econometric inquiry that is less dependent on prior theoretical restrictions of the sort that were central to the approach of the cowles commission this development which we call atheoretical macroeconometrics is summarized and evaluated in the current paper it is contrasted with an updated version of the cowles commission approach we conclude that while some of the exercises of atheoretical macroeconometrics are valid those that have attracted the most attention and appear the most innovative exogeneity testing impulse response analysis and policy analysis using estimated vector autoregressions are based on incorrect analysis

menu costs and the neutrality of money a model of endogenous price adjustment under money growth is presented firms follow s s pricing policies and price revisions are imperfectly synchronized in the aggregate price stickiness disappears and money is neutral the connection between firm price adjustment and relative price variability in the presence of monetary growth is also investigated the results contrast with those obtained in models with exogenous fixed timing of price adjustment

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

monetary policy and long term interest rates in germany abstract in this paper we provide new empirical evidence on the relationship between short and long run interest rates for germany we find a positive correlation after a supply and demand shock and a negative correlation after a monetary policy shock this finding is consistent with the theory of ellingsen and soderstrom american economic review 2001 91 5 1594 1607

social mobility and redistributive politics just like economists voters have conflicting views about redistributive taxation because they estimate its incentive costs differently we model rational agents as trying to learn from their dynastic income mobility experience the relative importance of effort and predetermined factors in the generation of income inequality and therefore the magnitude of these incentive costs in the long run left wing dynasties believing less in individual effort and voting for more redistribution coexist with right wing dynasties this allows us to explain why individual mobility experience and not only current income matters for political attiitudes and how persistent differences in perceptions about social mobility can generate persistent differences in redistribution across countries

capital flows consumption booms and asset bubbles a behavioural alternative to the savings glut hypothesis bernanke 2005 hypothesized that a global savings glut was causing large trade imbalances however we show that the global savings rates did not show a robust upward trend during the relevant period moreover if there had been a global savings glut there should have been a large investment boom in the countries that imported capital instead those countries experienced consumption booms national asset bubbles explain the international imbalances the bubbles raised consumption resulting in large trade deficits in a sample of 18 oecd countries plus china movements in home prices alone explain half of the variation in trade deficits

are real wages and unemployment related in this paper we propose an alternative method for investigating the sources behind the behaviour of real wages and unemployment the model we study is a certain cointegrated var a so called common trends model which has become increasingly popular in the empirical growth business cycle literature this model leads us to emphasize the distinction between long run and short run relations using quarterly swedish data 1965 90 we find only weak evidence of a short run relation between real wages and unemployment as reported in traditional single equation error correction models there is even less evidence of a long run relation

are current accounts driven by competitiveness or asset prices a synthetic model and an empirical test this paper analyses the emergence of current account imbalances as a result of the co existence of trade flows and financial flows the literature has tended to view these factors in isolation many post kaleckian models as well as net saving approaches assume that financial flows will adjust to trade flows models focusing on financial crises feature a strong role for financial flows but ignore drivers of trade flows similarly empirical analyses either ignore drivers of financial flows or insufficiently capture determinants of trade flows the paper first proposes a simple macroeconomic framework of the current account which gives equal emphasis to trade flows determined by price competitiveness and financial flows determined by asset prices second we test a reduced form of the model for 28 oecd countries for the period 1971 2014 our results indicate that cost competitiveness as well as asset prices play a role in the determination of current accounts but asset prices have dominated in the last two decades

what drives us foreign borrowing evidence on external adjustment to transitory and permanent shocks the joint dynamics of us net output consumption and valuation adjusted foreign assets and liabilities characterized empirically following lettau and ludvigson 2004 is shown to be strikingly consistent with current account theory while us consumption is virtually insulated from transitory shocks these contribute considerably to the variation in net output and even more so in gross foreign positions arguably smoothing temporary variations in returns a single permanent shock naturally interpreted as a productivity shock raises consumption swiftly while causing net output to adjust only gradually this leads to persistent procyclical external deficits but interestingly moves gross assets and liabilities in the same direction

sources of international business fluctuations country specific shocks or worldwide shocks abstract this paper identifies sources of business fluctuations in a two country open economy model with the structural var method focusing on the relative importance of worldwide shocks and country specific shocks unlike previous studies which define country specific shocks as labor supply shocks this study explicitly identifies three kinds of permanent shocks worldwide shocks domestic country specific shocks and foreign country specific shocks with identifying restrictions derived from a theoretical model the main finding is that u s country specific shocks are the most important in explaining u s and foreign output fluctuations except in the short run

international business cycles the authors estimate a dynamic two country model in which economic fluctuations are driven by a worldwide supply shock country specific supply shocks and relative fiscal money and preference shocks identification is achieved using only long run restrictions based on a theoretical model the main results are 1 supply shocks particularly country specific ones are very important in generating international business cycles and 2 although the post 1973 flexible exchange rate period has been inherently more volatile there are no differences in transmission properties of economic disturbances across exchange rate regimes for the endogenous variables they focus on copyright 1993 by american economic association

a quantized approach to rational inattention abstract in this paper i propose a model of rational inattention where the choice variable is a deterministic function of the exogenous variables and still only a finite amount of information is being used this holds provided the choice variable is discrete rather than continuous that is the mapping from the realization of the exogenous variables to the endogenous ones is piece wise constant thus limited information is now a source of lumpiness in behavior rather than a source of noise the approach is applied to a simple static model of price setting where individual price setters face aggregate monetary shocks and idiosyncratic productivity shocks the effect of aggregate money shocks on output and prices is studied it is shown that as the variance of idiosyncratic shocks become large the aggregate log price level converges to a linear function of the aggregate money shock with a coefficient which is strictly between 0 and 1 consequently unanticipated aggregate money shocks have real effects on output in contrast to the sticky price model of caplin and spulber 1987 but these effects are smaller than in standard rational inattention models or in the lucas 1972 misperception model

government spending and the real exchange rate i study the effect of government spending on the real exchange rate in an open economy version of the sidrauski model with a time varying rate of time preference that introduces complementarity between consumption at different points in time i show that a balanced budget fiscal expansion causes a real depreciation and a current account surplus if the expansion falls on traded goods if the increase falls instead on nontraded goods both the stylized results of a real appreciation and a current account deficit and the perverse result of an appreciation and a surplus can occur

foundations for optimal inattention abstract this paper models an agent who has a limited capacity to pay attention to information and thus conditions her actions on a coarsening of the available information an optimally inattentive agent chooses both her coarsening and her actions by maximization of an underlying subjective expected utility preference relation net of a cognitive cost of attention the main result axiomatically characterizes the conditional choices of actions by an agent that are necessary and sufficient for her behavior to be seen as if it is the result of optimal inattention observing these choices permits unique identification of the agent s utility index the information to which she pays attention her attention cost and her prior whenever information is costly

the price stability oriented monetary policy of the ecb an assessment the definition of price stability adopted by the ecb has recently been criticized in the literature particularly for being unable to fully anchor inflation expectations and creating a deflation risk in the paper empirical evidence is provided against these claims despite the unfavourable macroeconomic conditions for the euro area since 2001 monetary policy management has lead to the setting of the policy rate at levels compatible with trend inflation the long run inflation forecast in the range 1 3 and therefore without affecting negatively the inflation outlook

the long run phillips curve a structural var investigation both cointegration methods and non cointegrated structural vars identified based on either long run restrictions or a combination of long run and sign restrictions are used in order to explore the long run trade off between inflation and the unemployment rate in the post wwii u s u k euro area canada and australia overall neither approach produces clear evidence of a non vertical trade off the extent of uncertainty surrounding the estimates is however substantial thus implying that a researcher holding alternative priors about what a reasonable slope of the long run trade off might be will likely not see her views falsified

limited information capacity as a source of inertia abstract we derive optimal time dependent adjustment rules from shannon s 1948 information theory in a continuous time lq prediction problem with a costly rate of information acquisition processing the optimal prediction evolves smoothly but jumps at an optimally chosen frequency when fresh information accrues a more volatile and persistent target raises the information rate required to maintain a sampling frequency this cost effect moderates and may even reverse the benefit effect on the value of information so optimal inertia is unresponsive to and nonmonotonic in the predictability of the environment conventional models with a fixed cost per observation imply no such cost effect so inertia rises quickly in the predictability of the environment

real exchange rate dynamics the role of elastic labor supply abstract empirical evidence suggests that the flexibility of labor supply is closely related to the dynamic adjustment of the real exchange rate this paper investigates this relationship in a two sector dependent economy model while the long run equilibrium real exchange rate is independent of the elasticity of labor supply our analysis confirms that the nature of the labor supply can be a crucially important determinant of its short run dynamics the extent to which this is so depends to some degree on the source of the underlying structural change that is driving the dynamics of the real exchange rate numerical simulations confirm that this mechanism may help explain the larger short run volatility and more rapid convergence typically associated with developing countries having less flexible labor markets

high yields the spread on german interest rates this paper is a first attempt at evaluating the determinants of the interest rate differentials on government bonds between high yielders namely italy spain and sweden and germany in particular we concentrate on daily frequencies where the relevance of economic fundamentals is rather limited and address the question of the relative importance of local and global factors in the determination of such spread we identify and measure three components of total yield differentials one due to expectations of exchange rate depreciation which we call the exchange rate factor another which reflects the market assessment of default risk and a last one due to the different taxation treatment of long term yields

net foreign asset positions and consumption dynamics in the international economy we examine the effect of non zero steady state foreign assets on consumption dynamics in response to productivity shocks in a two country dynamic general equilibrium model the model generates non zero steady state net foreign assets by allowing for different discount factors across countries as a consequence of discounting differences individual steady state consumption profiles are tilted upward or downward worldwide shocks to long run productivity levels lead to dynamics that are absent in standard symmetric models with equal discount factors we then compare the model results to those of a var in common trend representation for the u s versus the rest of the g7 in the data we find that permanent worldwide productivity shocks lead to net foreign asset and consumption dynamics that are broadly consistent with interpreting the u s as the relatively impatient model economy and are not consistent with symmetric models with equal discount factors

impulse response analysis of cointegrated systems abstract impulse response or dynamic multiplier analysis of vector autoregressive systems with cointegrated variables is considered the asymptotic distribution of the responses estimated with johansen s 1988 maximum likelihood procedure is derived the results are illustrated with an analysis of a west german money demand system the investigation shows that a direct interpretation of the cointegration relations may be difficult or misleading thereby the virtue of impulse response analysis for applied work is illustrated

social mobility and the demand for redistribution the poum hypothesis this paper examines the often stated idea that the poor do not support high levels of redistribution because of the hope that they or their offspring may make it up the income ladder this prospect of upward mobility poum hypothesis is shown to be fully compatible with rational expectations and fundamentally linked to concavity in the mobility process a steady state majority could even be simultaneously poorer than average in terms of current income and richer than average in terms of expected future incomes a e rst empirical assessment suggests on the other hand that in recent u s data the poum effect is probably dominated by the demand for social insurance in the future everyone will be world famous for e fteen minutes andy warhol 1968

some evolutionary foundations for price level rigidity this paper shows that price rigidity evolves in an economy populated by imperfectly rational agents who experiment with alternative rules of thumb in the model firms must set their prices in face of aggregate demand shocks their payoff depends on the level of aggregate demand as well as on their own price and their neighbor s price the latter assumption captures local interactions despite the fact that the rational expectations equilibrium ree is characterized by a simple pricing rule that firms can easily adopt the economy does not converge to the ree for all parameter values when the volatility of monetary innovations is low and interactions among firms are high the aggregate price level exhibits rigidity in that it does not fully react to contemporaneous aggregate demand shocks we discuss the role of the nature of experimentation and of path dependence driven by interactions in explaining these results

monopolistic competition and the effects of aggregate demand how important is monopolistic competition to an understanding of the effects of aggregate demand on output we ask the question at three levels can monopolistic competition by itself explain why aggregate demand movements affect output can it together with other imperfections generate effects of aggregate demand in a way that perfect competition cannot if so can it give an accurate account of the response of the economy to aggregate demand movements the answers are no yes and yes

stochastic trends and economic fluctuations in a large open economy abstract this study examines the role of stochastic trends in real exchange rates and foreign output in explaining economic fluctuations in the united states while many of the results are consistent with recent closed economy studies the evidence shows that external shocks have significant short run effects on economic fluctuations even in a large country a real appreciation of the dollar leads to permanent decreases in net exports and temporary decreases in output permanent shocks to real exchange rates have surprisingly large effects on output over the course of the normal business cycle

state dependent or time dependent pricing does it matter for recent u s inflation in the 1988 2004 micro data collected by the u s bureau of labor statistics for the cpi price changes are frequent every 4 7 months depending on the treatment of sale prices and large in absolute value on the order of 10 the size and timing of price changes varies considerably for a given item but the size and probability of a price change are unrelated to the time since the last price change movements in aggregate inflation reflect movements in the size of price changes rather than the fraction of items changing price due to offsetting movements in the fraction of price increases and decreases neither leading time dependent models taylor or calvo nor 1 st generation state dependent models match all of these facts some 2 nd generation state dependent models however appear broadly consistent with the empirical patterns

the common trend and transitory dynamics in real exchange rate fluctuations this study examines the behaviour of both common trend ct and transitory components of real exchange rate rer fluctuations under the current float the ct component is in most cases found to be sizeable albeit its relative importance can vary considerably across major currencies and its estimate can be sensitive to whether or not long run purchasing power parity ppp is imposed on the data further analysis suggests that both ct and transitory innovations are linked much more to interest rate changes than to productivity changes accordingly it is interest rate not productivity disturbances that drive the highly persistent rer

identification long run relations and fundamental innovations in a simple cointegrated system this paper examines the roles played by innovations identified from a simple four variable var characterized by cointegration using knowledge of cointegration rank and textbook relations that link macroeconomic aggregates we identify distinct real and nominal innovations that dictate the long run behavior of the model we also examine the explanatory power of transitory innovations that are orthogonal to these permanent shocks one of the permanent shocks displays all the characteristics of a technology or supply innovation while one of the transitory innovations identified by imposing short run price rigid ity is interpretable as a demand side impulse the permanent nominal shock bears the imprint of an innovation in aggregate inflation expectations historical decomposition and comparison with variables that are external to the model reveals the relative importance of the shocks at various episodes

sweden s relative economic performance lagging behind or staying on top the purpose of this papers is confined to illuminating the aspect has sewedish economic growth been slow relative to other industrialised countries in recent decades i e is sweden lagging behind this abstract was borrowed from another version of this item

swedish postwar business cycles generated abroad or at home the relative importance of foreign and domestic shocks for the swedish postwar business cycle is examined in a neoclassical stochastic growth model of a small open economy since recent research has shown that fiscal policy shocks may be important for business cycles i extend previous work in the literature by allowing for stochastic fiscal policy it is found that the introduction of fiscal policy improves the empirical fit of the model although not significantly so when hours worked are detrended with the hp filter the results suggest that domestic shocks are more important than foreign shocks for output fluctuations among the domestic shocks innovations in fiscal policy seem to have been more important than technology shocks during this period foreign shocks are very important for fluctuations in the real exchange rate and the current account

sources of real exchange rate fluctuations in the nordic countries in an attempt to move beyond the purchasing power parity hypothesis this paper addresses two issues the first concerns the causes of movements in real exchange rates in contrast to the typical result supply shocks are found to dominate the long run variance decompositions for each of the four nordic countries under study this suggests that productivity developments are the most important determinant of long run movements in real exchange rates a second topic is the relative importance of stationary and non stationary components of real exchange rates also in contrast to previous findings transitory shocks are more important than permanent shocks for three of the four countries

risk and capital accumulation in a small open economy this paper examines the dynamics of capital accumulation in a small open economy where home capital is risky and consumers are risk averse it is assumed that the economy participates in perfect international bond markets but that risky home capital is held by domestic residents only under these assumptions the rate of investment is no longer independent of the saving rate and they are positively related as a result a rise in savings does not increase foreign investment by the same amount but by less and in some situations the quantity of foreign assets may even decrease

technology shocks and robust sign restrictions in a euro area svar we use a model based identification strategy to estimate the impact of technology shocks on hours worked and employment in the euro area the sign restrictions applied in the vector autoregression var analysis are consistent with a large class of dynamic stochastic general equilibrium dsge models and are robust to parameter uncertainty the results are in line with the conventional real business cycle rbc interpretation that hours worked rise as a result of a positive technology shock by comparing the sign restrictions method to the long run restriction approach of gali quaterly journal of economics 1992 709 38 we show that the results do not depend on the stochastic specification of the hours worked series or the data sample but only on the identification scheme

aggregate employment dynamics building from microeconomic evidence this paper studies quarterly employment flows of approximately 10 000 u s manufacturing establishments the authors use establishments hours week to construct measures of the deviation between desired and actual employment and use these as the establishments main state variables the main findings are 1 microeconomic adjustment functions are nonlinear with plants adjusting disproportionately to large shortages 2 adjustments are often either large or nil suggesting the presence of nonconvexities in the adjustment cost technologies 3 the bulk of average employment fluctuations is accounted for by aggregate rather than reallocation shocks and 4 microeconomic nonlinearities amplify the impact of large aggregate shocks copyright 1997 by american economic association

the simple macroeconomics of profit sharing this paper is in the spirit of the temporary equilibrium approach to macroeconomics it basically extends that framework to cover a profit sharing system and then compares the macroeconomic characteristics with those of the more familiar wage system a first preliminary step is to demonstrate how a microeconomic model of monopolistic competition can be built up into a junior member of the keynesian macro family the methodology is to create from first principles including a careful formulation of a monopolistically competitive product market structurea natural underpinning for the standard aggregate demand specification the primary goal of the paper is to apply the integrated monopolistic competitionkeynesian type apparatus described above to investigate the macroeconomic properties of a profit sharing economy the existence of a consistent general framework covering both cases invites meaningful comparisons that indicate clearly why an economy based on profit sharing principles possesses natural immunity to stagflation by contrast the wage economya system we have largely accepted without critically examining its macroeconomic consequences is more prone to suffer from unemployment and inflation the policy implications for aggregate demand management in wage and share systems are analyzed and contrasted in writing this paper my philosophy has been to not shirk from using those reasonable parameterizations and functional forms which yield nice crisp results and permit me to focus sharply on the essential logic of basic issues it is certainly possible to present the main results in a somewhat more general formulation as the astute reader will appreciate but i fear only at some cost of distracting attention from those central features i wish to highlight

preferences for redistribution in the land of opportunities this paper explores how individual preferences for redistribution depend on future income prospects in addition to estimating the impact of individuals socioeconomic background and of their subjective perceptions of future mobility we employ panel data to construct dobjectivet measures of expected gains and losses from redistribution for different categories of individuals we find that such measures have considerable explanatory power and perform better than dgeneral mobilityt indexes we also find that preferences for redistribution respond to individual beliefs on what determines one s position in the social ladder ceteris paribus people who believe that the american society offers equal opportunities are more averse to redistribution d 2004 published by elsevier b v

rigid pricing and rationally inattentive consumer abstract this paper proposes a mechanism leading to rigid pricing as an optimal strategy it applies a framework of rational inattention to study the pricing strategies of a monopolistic seller facing a consumer with limited information capacity the consumer needs to process information about the realized price while the seller is perfectly attentive the seller chooses to price rigidly i e prices respond to changes in the unit input cost less than if the consumer was perfectly attentive the rigidity is sometimes manifested by discreteness of prices the seller charges a finite set of different prices even for a continuous range of unit input costs the seller does so to provide the consumer with easily observable prices which stimulates her to consume more and increases the seller s profit

hours per capita and productivity evidence from correlated unobserved components models recent studies debate the effect of a permanent productivity shock on hours per capita within a structural var context this paper examines the issue using a correlated unobserved components uc framework the estimates show that permanent shocks to productivity are negatively correlated with transitory shocks to hours this result is robust for non stationary or levels stationary specifications of hours model comparisons indicate that the data do not favor imposing var type restrictions on the uc models copyright 2008 john wiley sons ltd

bayesian counterfactual analysis of the sources of the great moderation we use counterfactual experiments to investigate the sources of the large volatility reduction in us real gdp growth in the 1980s contrary to an existing literature that conducts counterfactual experiments based on classical estimation and point estimates we consider bayesian analysis that provides a straightforward measure of estimation uncertainty for the counterfactual quantity of interest using blanchard and quah s 1989 structural var model of output growth and the unemployment rate we find strong statistical support for the idea that a counterfactual change in the size of structural shocks alone with no corresponding change in the propagation of these shocks would have produced the same overall volatility reduction as what actually occurred looking deeper we find evidence that a counterfactual change in the size of aggregate supply shocks alone would have generated a larger volatility reduction than a counterfactual change in the size of aggregate demand shocks alone we show that these results are consistent with a standard monetary var for which counterfactual analysis also suggests the importance of shocks in generating the volatility reduction but with the counterfactual change in monetary shocks alone generating a small reduction in volatility copyright 2007 john wiley sons ltd

a long run structural macroeconometric model of the uk a new modelling strategy that provides a practical approach to incorporating long run structural relationships suggested by economic theory in an otherwise unrestricted var model is applied to construct a small quarterly macroeconometric model of the uk estimated over 1965q1 1999q4 in nine variables domestic and foreign outputs prices and interest rates oil prices the nominal effective exchange rate and real money balances the aim is to develop a model with a transparent and theoretically coherent foundation tests of restrictions on the long run relations of the model are presented the dynamic properties of the model are discussed and monetary policy shocks identified

asset prices exchange rates and the current account this paper analyses the role of asset prices in comparison to other factors in particular exchange rates as a driver of the us trade balance it employs a bayesian structural var model that requires imposing only a minimum of economically meaningful sign restrictions we find that equity market shocks and housing price shocks have been major determinants of the us current account in the past accounting for up to 30 of the movements of the us trade balance at a horizon of 20 quarters by contrast shocks to the real exchange rate have been less relevant explaining about 9 and exerting a more temporary effect on the us trade balance our findings suggest that large exchange rate movements may not necessarily be the key element of an adjustment of today s large current account imbalances and that in particular relative global asset price changes could be a potent source of adjustment

optimal sticky prices under rational inattention this paper presents a model in which price setting firms decide what to pay attention to subject to a constraint on information flow when idiosyncratic conditions are more variable or more important than aggregate conditions firms pay more attention to idiosyncratic conditions than to aggregate conditions when we calibrate the model to match the large average absolute size of price changes observed in micro data prices react fast and by large amounts to idiosyncratic shocks but only slowly and by small amounts to nominal shocks nominal shocks have strong and persistent real effects we use the model to investigate how the optimal allocation of attention and the dynamics of prices depend on the firms environment jel e 3 e5 d8

applied cointegration analysis in the mirror of macroeconomic theory summary cointegration analyses of macroeconomic time series are often not based on fully specified theoretical models we use a theoretical model to scrutinize common procedures in applied cointegration analysis monte carlo experiments show that 1 some tests of the cointegration vectors do not work well on series generated by an equilibrium business cycle model 2 cointegration restrictions add little to forecasting 3 structural var models based on weak long run restrictions seem to work well the main disadvantages of cointegration analysis without strong links to economic theory are that it makes it hard to estimate and interpret the cointegration vectors

debt driven growth wealth distribution and demand in oecd countries the paper investigates the effects of changes in the distribution of income and in wealth on aggregate demand and its components we extend the bhaduri and marglin 1990 model to include personal income inequality as well as asset prices and debt this allows for an evaluation of the wage or profit led nature of demand regimes of the expenditure cascade argument frank et al 2010 and several hypotheses regarding the effects of wealth and debt our estimates are based on a panel of 18 oecd countries covering the period 1980 2013 for the full panel the average demand regime is found to be wage led we fail to find effects of personal inequality but do find strong effects of debt and property prices which have been the major drivers of aggregate demand in the decade prior to the 2007 crisis

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

long waves and short cycles in a model of endogenous financial fragility this paper presents a stock flow consistent macroeconomic model in which financial fragility in firm and household sectors evolves endogenously through the interaction between real and financial sectors changes in firms and households financial practices produce long waves the hopf bifurcation theorem is applied to clarify the conditions for the existence of limit cycles and simulations illustrate stable limit cycles the long waves are characterized by periodic economic crises following long expansions short cycles generated by the interaction between effective demand and labor market dynamics fluctuate around the long waves

fiscal policy and foreign debt abstract this paper shows that an expansionary fiscal policy may have the consequence of either increasing or decreasing the level of foreign debt in the context of a two sector small economy that produces traded and nontraded goods the long run effect of a fiscal expansion depends on a measure of the relative capital intensity of the two productive sectors in addition to the composition of private and public spending the short run effect of a transitory fiscal expansion is critically influenced by the extent to which investment reacts to current and prospective profits