a reevaluation of the macroeconomic effects of positive trend inflation abstract to date most of the papers which have examined the effects of trend inflation on the properties of new keynesian model were based on relatively simple sticky prices dsge models and whose realism was sometimes questionable in this paper we re evaluate the macroeconomic effects of non zero trend inflation building on the model of ascari 2004 as one of the most cited papers in the literature on the effects of trend inflation we show that the omission of some important theoretical ingredients significantly distorts the results obtained to date we propose a refinement of this model by introducing two theoretical important ingredients namely investment adjustment costs and a roundabout production structure once we add these features to make the model more realistic as commonly for medium scale models we find that the standard new keynesian model without real frictions overestimates the short term macroeconomic effects of a positive trend inflation rate and underestimates those of the long term

monetary transmission through bank loans or bank liabilities interest in the transmission of monetary fluctuations to real output has dominated macroeconomics since at least the eighteenth century since then many observers have noted the tendency of a monetary expansion to be followed initially by an expansion of real output and later by an increase in prices while the reason for the long run price change is well understood understanding the short run impact of money on nominal output remains an active unresolved research topic most theoretical models explain the transmission of monetary fluctuations to real output as a consequence of sticky prices or expectations the stickiness is either due to informational imperfections or to contractual rigidities while the policy implications of the two types of stickiness differ both types of model predict a transitory response of real output to a shock in nominal money balances neither the informational imperfection nor the contractual rigidity story is completely compelling and both rely on the central role played by movements in real balances and perceived real interest rates yet for thirty five years following world war ii neither significant movements in the anticipated real rate nor large interest elasticities of spending were apparent despite this the empirical correlation of money and output fluctuations has been found in most time periods and countries consequently the need for alternative explanations of monetary transmission or a credible reverse causation story remains strong

the propagation of monetary policy shocks in a heterogeneous production economy abstract realistic heterogeneity in price rigidity interacts with heterogeneity in sectoral size and input output linkages in the transmission of monetary policy shocks quantitatively heterogeneity in price stickiness is the central driver for real effects input output linkages and consumption shares alter the identity of the most important sectors to the transmission reducing the number of sectors decreases monetary non neutrality with a similar impact response of inflation hence the initial response of inflation to monetary shocks is not sufficient to discriminate across models and ignoring heterogeneous consumption shares and input output linkages identifies the wrong sectors from which the real effects originate

real rigidities and the non neutrality of money rigidities in real prices are not sufficient to create rigidities in nominal prices and real effects of nominal shocks and by themselves small frictions in nominal adjustment such as costs of changing prices create only small non neutralities but this paper shows that substantial nominal rigidity can arise from a combination of real rigidities and small nominal frictions the paper shows the connection between real and nominal rigidity given the presence of nominal frictions both in general and for two specific sources of real rigidity one arising from goods market imperfections and the other from labour market imperfections

sectoral shocks and aggregate fluctuations abstract this paper presents a multisector dynamic general equilibrium model of business cycles with a distinctive feature aggregate fluctuations are driven by independent sectoral shocks the model hypothesizes that trade among sectors provides a strong synchronization mechanism for these shocks due to the limited but locally intense interaction that is characteristic of such input trade flows limited interaction characterized by a sparse intermediate input use matrix reduces substitution possibilities among intermediate inputs which strengthens comovement in sectoral value added and leads to a postponement of the law of large numbers in the variance of aggregate value added the chief virtue of this model is that reliance on implausible aggregate shocks is not necessary to capture the qualitative features of macroeconomic fluctuations building on horvath 1998 review of economic dynamics 1 781 808 which establishes the theoretical foundation for the relevance of limited interaction in the context of a stylized multisector model this paper specifies a more general multisector model calibrated to the us 2 digit standard industrial code economy simulations prove the model is able to match empirical reality as closely as standard one sector business cycle models without relying on aggregate shocks

the economics of small business finance the roles of private equity and debt markets in the financial growth cycle abstract this article examines the economics of financing small business in private equity and debt markets firms are viewed through a financial growth cycle paradigm in which different capital structures are optimal at different points in the cycle we show the sources of small business finance and how capital structure varies with firm size and age the interconnectedness of small firm finance is discussed along with the impact of the macroeconomic environment we also analyze a number of research and policy issues review the literature and suggest topics for future research

business cycles with staggered prices and international trade in intermediate inputs abstract international trade in intermediate inputs and increasingly in goods produced at multiple stages of processing has been widely studied in the real trade literature we assess the role of this feature of modern world trade in accounting for some stylized facts about international business cycles our model with staggered prices and trade in intermediates across four stages of processing does well in explaining the observed international correlations in aggregate quantities and it performs much better than a single stage model with no trade in intermediates the model in itself does not provide a full account of the cyclical behavior of the real exchange rate but compared to the single stage model it moves in the right direction

price dynamics and production lags this paper provides a new explanation of why inflation is sluggish in response to aggregate demand shocks and why aggregate output changes as result of such shocks we argue that these phenomena are related to lags between inputs and outputs in the production process production lags for short the broad intuition is that production activities in a modern economy are interconnected through complex input output relations with production lags within individual firms and that it takes considerable time for cost and price changes to penetrate the entire input output system our analysis provides a rationale for a prolonged inverse relation between inflation and unemployment the paper suggests that the interaction of inflation persistence and unemployment persistence may offer a possible explanation of high and prolonged european unemployment this abstract was borrowed from another version of this item

another look at sticky prices and output persistence abstract price rigidity is the key mechanism for propagating business cycles in traditional keynesian theory yet the new keynesian literature has failed to show that sticky prices by themselves can effectively propagate business cycles we show that price rigidity in fact can by itself give rise to a strong propagation mechanism in standard models provided that investment is also subject to a cash in advance constraint reasonable price stickiness can generate highly persistent hump shaped movements in output under either monetary or non monetary shocks hence whether or not price rigidity is responsible for output persistence is not a theoretical question but an empirical one

imperfect information and staggered price setting many keynesian macroeconomic models are based on the assumption that firms change prices at different times this paper presents an explanation for this staggered price setting the authors develop a model in which firms have imperfect knowledge of the current state of the economy and gain information by observing the prices set by others this gives each firm an incentive to set its price shortly after other firms set theirs staggering can be the equilibrium outcome in addition the information gains can make staggering socially optimal even though it increases aggregate fluctuations copyright 1988 by american economic association

sellers local currency pricing or buyers local currency pricing does it matter for international welfare analysis abstract we study international transmissions and welfare implications of monetary shocks in a two country world with multiple stages of production and multiple border crossings of intermediate goods this empirically relevant feature is important as it has opposite implications for two external spillover effects of a unilateral monetary expansion if all production and trade are assumed to occur in a single stage the conflict of interest terms of trade effect tends to dominate the common interest efficiency improvement effect for reasonable parameter values so that the international welfare effects would depend in general on the underlying assumptions about the currencies of price setting the stretch of production and trade across multiple stages of processing magnifies the efficiency improvement effect and dampens the terms of trade effect thus a monetary expansion can be mutually beneficial regardless of its source or the pricing assumptions

sectoral comovement monetary policy shocks and input output structure the comovement of output across the sector producing nondurables i e nondurable goods and services and the sector producing durables is well established in the monetary business cycle literature however standard sticky price models that incorporate sectoral heterogeneity in price stickiness i e sticky nondurables prices and flexible durables prices cannot generate this feature we argue that an input output i o structure provides a solution to this problem here we develop a two sector model with an i o structure which is calibrated to the u s economy in the model each sector s output affects those of the others by acting as an intermediate input this connection between the sectors provides a channel through which sectoral comovement is induced

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

the size distribution of innovating firms in the uk 1945 1983 a survey of 4 378 significant innovations shows that firms with fewer than 1 000 employees commercialized a much larger share than is indicated by their share of r and d expenditures innovations per employee have been consistently above average in firms with more than 10 000 employees and have become so in firms with fewer than 1 000 intersectoral variation in the size distribution of innovating firms can be explained as a function of r and d based technological opportunities and of technological ease of entry by user firms with principal activities outside the sector copyright 1987 by blackwell publishing ltd

the welfare cost of nominal wage contracting we use a dynamic general equilibrium model to obtain quantitative estimates of the welfare cost of nominal wage contracting we find that the welfare cost of such contracts can vary quite a lot depending on the degree of indexation the size and persistence of monetary shocks and the contract length the size and persistence of technology shocks do not affect the welfare cost significantly the elasticity of labour supply is important for the welfare cost if the labour supply elasticity is small the welfare cost of nominal wage contracts can be substantial

staggered price setting translog preferences and endogenous persistence abstract this paper generates persistent real effects of a monetary disturbance in the context of staggered price setters the model combines two related and reinforcing features a translog demand structure and a particular input output production structure these features offer a rationale why a firm when computing its own optimal contract price is influenced by the prices set in other overlapping contracts practically the two features interact in a positive manner and provide a way to generate significant endogenous persistence

do firms get the financing they want measuring credit rationing experienced by small businesses in the u s this paper measures the extent to which small businesses in the united states in the late 1980s were able to access the external credit finance they desired we argue that a comprehensive definition of credit rationing must account for both a creditworthy firms that apply for and are denied financing and b creditworthy firms that decide not to apply for desired external financing given expectations about how long it may take to obtain financing and the evolution of investment opportunities

sticky price models of the business cycle can the contract multiplier solve the persistence problem we construct a quantitative equilibrium model with firms setting prices in a staggered fashion and use it to ask whether monetary shocks can generate business cycle fluctuations these fluctuations include persistent movements in output along with the other defining features of business cycles like volatile investment and smooth consumption we assume that prices are exogenously sticky for a short time persistent output fluctuations require endogenous price stickiness in the sense that firms choose not to change prices much when they can do so we find that for a wide range of parameter values the amount of endogenous stickiness is small thus we find that in a standard quantitative model staggered price setting alone does not generate business cycle fluctuations

optimal monetary policy with international trade in intermediate inputs abstract this paper examines optimal monetary policy in a two country new keynesian model with international trade in intermediate inputs we derive the loss function of a cooperative monetary policymaker and find that the optimal monetary policy must target intermediate goods price inflation rates final goods price inflation rates final goods output gaps and relative price gaps we use the welfare loss under the optimal monetary policy as a benchmark to evaluate the welfare implications of three taylor type monetary policy rules a main finding is that the degree of price stickiness at the stage of intermediate goods production is a key factor to determine which policy rule should be followed specifically when the degree of price stickiness at the stage of intermediate goods production is high the policymaker should follow intermediate goods ppi based taylor rule whereas cpi based taylor rule should be followed when the degree of price stickiness at the stage of intermediate goods production is intermediate or low

the capital crunch neither a borrower nor a lender be the dramatic reduction in the growth rate of bank lending associated with the 1990 91 recession particularly in new england has evoked claims by many observers of a credit crunch however because of the difficulty in determining whether the observed slow credit growth is a demand or supply phenomenon convincing evidence of the practical importance of credit crunches for economic activity remains elusive we overcome this obstacle by examining a cross section of banks in new england that have experienced the same economic downturn effectively controlling for changes in demand we find empirical support for a capital crunch whereby poorly capitalized institutions shrink to satisfy capital requirements this alone is not a sufficient condition for a credit crunch however we find s6me additional evidence that the ca ital crunch may have limited credit availability in new england

banking crises and nonlinear linkages between credit and output in this article we analyse the asymmetric causality linkages between credit growth and output growth during banking crises we employ a recently developed procedure based on a bivariate markov switching model to test the hypotheses of independence causality and asymmetric causality between credit and output using a sample of 103 banking crises around the world we find that neither credit nor output takes precedence as a variable in calm and crisis periods although there is evidence of instantaneous interdependence between the banking and real sector during crises the results suggest that shocks propagate mostly within a year between the banking sector and the real economy the linear link between credit growth and output growth is also regime dependent

outsourcing r d and the pattern of intra metropolitan location the electronics industries of madrid the relationship between intra metropolitan location research and development r d and the outsourcing of production is analysed to determine differences in and the supportive character of intra metropolitan areas for high technology production madrid s electronics industries have shown a remarkable resilience in the face of extensive economic restructuring and the change in trade regimes that has accompanied continental integration much of the strength of the electronics sector may have been due to the metropolitan area s support for outsourcing and the creative specialisation that it facilitated the distribution of manufacturing establishments their local sourcing characteristics industrial district or agglomeration effects and the role of r d are evaluated to determine the intra metropolitan context of production extensive statistical analyses of the relationship between r d and productive performance with various indicators of capital costs revenues and scale are undertaken with estab

production chains and general equilibrium aggregate dynamics abstract recent empirical studies reveal that monetary shocks can cause persistent fluctuations in aggregate output in this paper we propose a mechanism to help generate such persistence our dynamic stochastic general equilibrium model features a vertical input output structure with staggered price contracts at each stage of production working through the input output relations and the timing of firms pricing decisions the model generates persistent fluctuations in aggregate output and the observed patterns of price dynamics following a monetary shock output responses are more persistent the greater the number of stages of production and the larger the share of intermediate inputs with a sufficient number of stages the persistence is arbitrarily large if the share of intermediate inputs is one at all but finitely many stages

credit and economic activity credit regimes and nonlinear propagation of shocks in this paper we examine empirically whether credit plays a role as a nonlinear propagator of shocks this propagation takes the form of a threshold vector autoregression in which a regime change occurs if credit conditions cross a critical threshold using nonlinear impulseresponse functions we evaluate the dynamics implied by the threshold model these suggest that shocks have a larger effect on output in the tight credit regime than is normally the case and that contractionary monetary shocks typically have a larger effect than expansionary shocks finally using a nonlinear version of historical decompositions we attempt to determine the relative contribution to output growth of shocks and the nonlinear structure

inflation debt and indexation these twelve essays cover topics on the frontier of indexation and practice an often proposed and debated tool of economic policy they range from highly theoretical discussions to practical experiences in brazil and europe rudiger dombush is ford international professor of economics at mit mario henrique simonsen is director of the postgraduate school of economics getulio vargas foundation rio de janeiro and former minister of finance and planning brazil

ruling out divergent speculative bubbles abstract the growth in the empirical literature on testing for divergent in mean speculative bubbles indicates that existing theoretical arguments for ruling out such price paths are not sufficiently compelling here we strengthen the case for ruling out explosive or implosive bubbles a priori by filling in two gaps first we demonstrate why divergent stochastic bubbles arising from purely extrinsic uncertainty as in blanchard 1979 cannot be equilibria in a monetary optimizing model second we show why existing arguments for ruling out implosive price bubbles are insufficient in some cases and we provide stronger arguments

inventories sticky prices and the persistence of output and inflation post war business cycle fluctuations of output and inflation are remarkably persistent many recent sticky price models however grossly underpredict this persistence we assess whether adding inventories to a standard sticky price model raises the persistence of output and inflation for this addition we consider a shopping cost model in the model consumers find shopping activities costly and the cost of shopping depends on the stock of goods available in this context producers manage inventories to smooth production and to affect the cost of shopping we find that the shopping cost model generates a persistence for output and inflation that matches the persistence observed in the post 1985 us data

loan commitments and monetary policy abstract in this paper we examine the impact of loan commitment agreements on the way in which monetary policy affects the economy we estimate a vector autoregressive var model and find evidence of a smaller impact of monetary policy on loans made under commitment agreements than on loans not made under commitment our conclusion is that loan commitments effectively protect borrowers from quantity credit rationing and thus force monetary policy to work mainly through interest rate channels

the effectiveness of quantitative easing evidence from japan abstract this study contributes to current research on quantitative easing we provide a novel analysis of the quantitative easing effectiveness as an unconventional monetary policy tool in japan over the last two decades the paper advances current research on quantitative easing by exploring quantitative easing through the prism of the monetary transmission mechanism we examine the response of japanese regional banks to the quantitative easing operations conducted by the bank of japan from the early 2000s till 2015 the analysis is performed within the framework of the bank lending channel under the unconventional monetary policy strategies we find that small sized regional banks underline the significant positive effect of quantitative easing on gross domestic product and inflation that works through the securities holdings and leverage preferences monetary authorities should pay particular attention to policies for such banks and banks with a high level of non performing loans deposit growth after a quantitative easing shock is only present in large sized banks with low npls holdings

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

estimating the new keynesian phillips curve a vertical production chain approach it has become customary to estimate the new keynesian phillips curve nkpc with gmm using a large instrument set that includes lags of variables that are ad hoc to the model researchers have also conventionally used real unit labor cost rulc as the proxy for real marginal cost even though it is difficult to support its significance this paper introduces a new proxy for the real marginal cost term as well as a new instrument set both of which are based on the micro foundations of the vertical chain of production i find that the new proxy based on input prices as opposed to wages provides a more robust and significant fit to the model instruments that are based on the vertical chain of production appear to be both more valid and relevant towards the model

prices output and hours an empirical analysis based on a sticky price model abstract i show that a simple sticky price model based on rotemberg 1982 is consistent with a variety of facts concerning the correlation of prices hours and output it is consistent with the negative correlation between forecastable movements in prices and output as well as the smaller negative correlation between forecastable movements in prices and hours it is also consistent with the positive correlations of unexpected movements in prices output and hours these patterns are harder to reconcile with the flexible price version of the model in particular they require that money respond differently to forecastable and to unforecastable real shocks

aggregation and irrelevance in multi sector models abstract this paper studies the ability of input output relationships to generate fluctuations in aggregate output in several multi sector models including that of long and plosser 1983 in these models the manufacture of each sector s output depends on other sectors for materials these interconnections provide a mechanism for transmission of shocks across sectors and over time we ask how aggregates from these multi sector models behave relative to single sector models we provide conditions under which the second moment properties of aggregates in these models are the same as their single sector counterparts we further demonstrate that a broad class of input output structures generate aggregates with identical second moment properties and that the input output structures in this class provide a poor amplification mechanism for sector shocks

the credit view financial announcements and interesr rate responses abstract proponents of the credit view have argued that aggregate commercial bank lending decisions have strong macro economic effects this view is in contrast to the monetarist view that it is sufficient to consider the liability side of the banking sector s balance sheet in analyzing the economic outlook in this paper we examine whether or not financial markets reacted to unexpected changes in aggregate commercial bank lending during much of the 1980s in contrast to the implications of the credit view no evidence of a significant reaction to such shocks is uncovered however there is evidence to suggest that unexpected commercial paper activity is important to financial markets but the sign of the association is the opposite of that predicted by the credit view

a test of a keynesian alternative to hercowitz s aggregate supply theory abstract hercowitz 1986 estimates aggregate output and hours equations which are derived from a new classical model of aggregate supply under an alternative interpretation his aggregate supply equation is in fact an is curve with one omitted variable while his hours equation is best interpreted as an okun s law relationship when the hercowitz equations are nested in more general formulations which incorporate these alternatives the new classical restrictions are rejected resoundingly

pricing production and persistence though built with increasingly precise microfoundations modern optimizing sticky price models have displayed a chronic inability to generate large and persistent real responses to monetary shocks as recently stressed by chari kehoe and mcgrattan 2000 this is an ironic finding since taylor 1980 and other researchers were motivated to study sticky price models in part by the objective of generating large and persistent business fluctuations we trace this lack of persistence to a standard view of the cyclical behavior of real marginal cost built into current sticky price macro models using a fully articulated general equilibrium model we show how an alternative view of real marginal cost can lead to substantial persistence this alternative view is based on three features of the supply side of the economy that we believe are realistic an important role for produced inputs variable capacity utilization and labor supply variability through changes in employment importantly these real flexibilities work together to dramatically reduce the elasticity of marginal cost with respect to output from levels much larger than unity in ckm to values much smaller than unity in our analysis these real flexibilities consequently reduce the extent of price adjustments by firms in time dependent pricing economies and the incentives for paying fixed costs of adjustment in state dependent pricing economies the structural features also lead the sticky price model to display volatility and comovement of factor inputs and factor prices that are more closely in line with conventional wisdom about business cycles and various empirical studies of the dynamic effects of monetary shocks federal reserve bank of philadelphia boston university nber and frb richmond this paper builds on earlier joint work with alexander l wolman on this topic we wish to thank brian boike for providing excellent research assistance and also to thank the referees and the editor for making numerous useful suggestions the views expressed in this article are those of the authors and do not necessarily represent those of the federal reserve bank of philadelphia the federal reserve bank of richmond or the federal reserve system

the transmission of monetary policy in a multisector economy this article constructs and estimates a sticky price dynamic stochastic general equilibrium model with heterogeneous production sectors firms in different sectors vary in their price rigidity production technology and the combination of material and investment inputs in particular firms buy inputs from all sectors using the actual input output matrix and capital flow table of the u s economy by relaxing the standard assumption of symmetry this model allows idiosyncratic sectoral dynamics in response to monetary policy shocks the model is estimated by the generalized method of moments using sectoral and aggregate u s time series

inflation targeting what inflation rate to target abstract in an economy with nominal rigidities in both an intermediate good sector and a finished good sector and thus with a natural distinction between cpi and ppi inflation rates a benevolent central bank faces a tradeoff between stabilizing the two measures of inflation a final output gap and unique to our model a real marginal cost gap in the intermediate sector so that optimal monetary policy is second best we discuss how to implement the optimal policy with minimal information requirement and evaluate the robustness of these simple rules when the central bank may not know the exact sources of shocks or nominal rigidities a main finding is that a simple hybrid rule under which the short term interest rate responds to cpi inflation and ppi inflation results in a welfare level close to the optimum whereas policy rules that ignore ppi inflation or ppi sector shocks can result in significant welfare losses

effects of the us monetary policy shocks during financial crises a threshold vector autoregression approach abstractthis article analyzes the impact of monetary policy during periods of low and high financial stress in the us economy using a threshold vector autoregression model there is evidence that expansionary monetary policy is effective during periods of high financial stress with larger responses having a higher proportionate effect on output the existence of a cost channel effect during periods of high financial stress implies the existence of a short run output inflation trade off during financial crises large expansionary monetary shocks also increase the likelihood of moving the economy out of a high financial stress regime

market structure and research intensity in high technological opportunity industries where the cost and uncertainty of r d are high and conditions favor speedy imitation by competitors concentration has a statistically significant and substantial positive impact on research intensity but its impact is clearly negative when r d cost and uncertainty are low and where high barriers to imitation exist a sample of 160 business unit observations for 1978 was drawn from the pims data base all the sample business units industries recently experienced major technological changes research intensity was measured by non government financed r d expenditures as a percentage of sales

a review of literature and hypotheses on new technology based firms abstract this paper examines the existing literature on new technology based firms in an attempt to understand how such companies contribute to the vitality of an economy and to see which variables are critical in enabling them to do so from recent research efforts we have drawn together a set of hypotheses and organized them around four central questions 1 what do new firms contribute to the economy 2 what factors contribute to the success of such enterprises 3 in what cultural contexts do new businesses succeed and 4 which government policies are effective in stimulating and supporting new companies we found that existing studies suggest 1 that new technology based firms contribute significantly to an economy in terms of exports employment taxes paid research and development and innovations 2 that the founders of these new businesses tend to have a strong entrepreneurial heritage a development rather research oriented background and a high need to achieve and are young and highly educated 3 that sector differences may be a more important influence on company location than are regional policies and 4 that no one government program has proven itself to be more than marginally successful in stimulating industrial innovation

how well does the is lm model fit postwar u s data postwar u s time series for money interest rates prices and gnp are characterized by a multivariate process driven by four exogenous disturbances those disturbances are identified so that they can be interpreted as the four main sources of fluctuations found in the is lm phillips curve model money supply money demand is and aggregate supply shocks the dynamic properties of the estimated model are analyzed and shown to match most of the stylized predictions of the model the estimated decomposition is also used to measure the relative importance of each shock to interpret some macroeconomic episodes and to study sources of permanent shocks to nominal variables

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

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

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

monetary policy in an era of global supply chains abstract we study the implications of global supply chains for the design of monetary policy using a small open economy new keynesian model with multiple stages of production within the family of simple monetary policy rules with commitment a rule that targets separate producer price inflation at different production stages in addition to output gap and real exchange rate is found to deliver a higher welfare level than alternative policy rules as an economy becomes more open measured by export share the optimal weight on the upstream inflation rises relative to that on the final stage inflation if we have to choose among aggregate price indicators targeting ppi inflation yields a smaller welfare loss than targeting cpi inflation alone as the production chain becomes longer the optimal weight on ppi inflation in the policy rule that targets both ppi and cpi inflation will also rise a trade cost shock such as a rise in the import tariff can alter the optimal weights on different inflation variables

intermediate goods and business cycles implications for productivity and welfare this paper presents an aggregate demand driven model of business cycles that provides a new explanation for the procyclicality of productivity and simultaneously predicts large welfare losses from monetary nonneutrality the key features of the model are an input output production structure imperfect competition countercyclical markups and for some results state dependent price rigidity true technical efficiency is procyclical even though production takes place with constant returns without technology shocks or technological externalities the paper has observable implications that distinguish it empirically from related work these implications are generally supported by data from u s manufacturing industries copyright 1995 by american economic association

the credit effects of monetary policy evidence using loan commitments in addition to the usual channels monetary policy may affect spending by changing the supply of bank loans and the creditworthiness of borrowers this paper tests for these credit effects using a contractual difference across commercial bank loans the author finds that bank loans not made under a commitment slow after tight policy while loans under commitment accelerate or are unchanged this divergence coincides with reports of tighter credit by lenders and by small firms suggesting the divergence reflects a reduction in the supply of credit to the firms without commitments rather than a reduction in their demand for loans

sticky price models of the business cycle can the roundabout production solve the persistence puzzle abstract this paper considers the persistence puzzle unveiled by chari et al 2000 our findings show that endogenously persistent output dynamics are not a puzzle for the standard sticky price model once roundabout production is taken into account we make this point using a new keynesian framework emphasizing an inertial mechanism called the multiplier for price stickiness in the spirit of basu 1995

interest rates and the channels of monetary transmission some sectoral estimates abstract we estimate a small sectoral var model of the uk macroeconomy this model is then used to simulate the effects of an exogenous monetary policy shock upon asset prices bank balance sheet variables and final target variables activity and prices for the personal and corporate sectors significant sectoral differences are found among the channels of monetary transmission in addition the use of sectoral data facilitates the identification of distinct money and credit channels in the transmission of monetary policy these results contrast with the ambiguous findings on the roles of money and credit in the literature to date

how important is the credit channel in the transmission of monetary policy in mexico abstractthis article empirically examines the importance of the credit channel of monetary policy in mexico for the period 2004 2013 we estimate a vector autoregressive var model to analyse the effects of a monetary policy shock on real output and we also use a threshold var model to investigate asymmetric effects of contractionary and expansionary policies the empirical results suggest that a contractionary monetary policy results in a fall in the supply of loans together with an increase in the spread between the lending and deposit rate to the extent that some borrowers are dependent on bank loans for credit the reduced supply of loans amplifies the effects of monetary policy on output associated with the traditional interest rate channel our results also suggest that the importance of the credit channel is larger for contractionary shocks than for expansionary shocks

the responses of prices at different stages of production to monetary policy shocks this paper examines the responses of prices at different stages of production to monetary policy shocks in aggregate price analysis the var of christiano et al 1996a 1996b is used to identify the policy shock as the federal funds rate innovation and trace out the responses of prices in disaggregate price analysis the adjustment of prices is examined by comparing inflation before and after a recent policy tightening identified by romer and romer 1989 1992 at early stages of production a monetary tightening causes input prices to fall more rapidly and by a larger amount than output prices

financial structure and aggregate economic activity an overview this paper surveys literature that explores the possible links between the financial system and aggregate economic behavior the survey is in two parts the first reviews the traditional work and the second discusses new research copyright 1988 by ohio state university press

the equilibrium and optimal timing of price changes this paper studies the welfare properties of the equilibrium timing of price changes staggered price setting has the advantage that it permits rapid adjustment to firm specific shocks but the disadvantages that it causes unwanted fluctuations in relative prices and that by creating price level inertia it can increase aggregate fluctuations because each firm ignores its contribution to these problems staggering can be a stable equilibrium even if it is highly inefficient in addition there can be multiple equilibria in the timing of prices changes indeed whenever there is an inefficient staggered equilibrium there is also an efficient equilibrium with synchronized price setting

a survey of new keynesian theories of aggregate supply and their relation to industrial organization i survey the recent literature on the phillips curve along the way i will try to relate this literature to topics of interest to industrial organization i will also point out the gaps in our understanding and places where more careful micro economic analysis would be helpful to macroeconomists in the conclusion i summarize what an industrial organization economist might take away from this literature

intermediate inputs and sectoral comovement in the business cycle abstract the post war us business cycle is characterized by positive comovement of employment and output across sectors it has been argued that multi sector growth models are inconsistent with this observation when changes in relative productivities are the main source of fluctuations we suggest that the input output structure of an economy in particular the pervasive use of intermediate inputs can induce positive comovement in sectoral employment and output following changes in relative productivities we calibrate a model of the us economy for the durable and nondurable goods producing sectors and show that sectoral employment and output move together if intermediate inputs are used in production the model is also consistent with the observation that the relative price of nondurable goods is procyclical

price flexibility in channels of distribution evidence from scanner data in this study we empirically examine the extent of price rigidity using a unique store level time series data set consisting of i actual retail transaction prices ii actual wholesale transaction prices which represent both the retailers costs and the prices received by manufacturers and iii a measure of manufacturers costs for 12 goods in two widely used consumer product categories we simultaneously examine the extent of price rigidity for each of the 12 products at both final goods and intermediate goods levels we study two notions of price rigidity employed in the existing literature i the frequency of price changes and ii the response of prices to exogenous cost changes we find that retail prices exhibit remarkable flexibility in terms of both notions of price rigidity i e they change frequently and they seem to respond quickly and fully to cost changes furthermore we find that retail prices respond not just to their direct costs but also to the upstream manufacturers costs which further reinforces the extent of the retail price flexibility at the intermediate goods level of the market in contrast we find relatively more evidence of rigidity in the response of manufacturers prices to cost changes this despite the fact that wholesale prices change frequently and therefore exhibit flexibility according to the first notion of price rigidity

what is new keynesian economics this research was supported by the national science foundation i am grateful to george williams for help with the data and to steven allen laurence ball olivier j blanchard timothy bresnahan charles calomiris dennis carlton robert chirinko russell cooper stanley fischer herschel grossman r glenn hubbard david laidler john leahy assar lindbeck n gregory mankiw david romer julio rotemberg dennis snower john taylor andrew weiss and two anonymous referees for comments on one or more earlier drafts i am also indebted to michael parkin and edmund s phelps for helping to establish the etymology of the phrase new keynesian

on inflation and output with costly price changes a simple unifying result this paper determines the real effects of credible disinflation when price setting is staggered the results are surprising a fairly quick disinflation causes a boom this finding suggests that nominal price rigidity alone does not explain why disinflation is costly in actual economies this abstract was borrowed from another version of this item

credit rationing and the monetary transmission mechanism according to alan blinder s 1987 model of credit rationing a tightening of monetary policy may have strong effects on the real sector when credit is already tight but weak effects when credit is initially plentiful p 343 the tighter the state of recent monetary policy the more likely it is that the economy s credit constraint will be binding and hence the greater will be the output effects of monetary policy this paper provides a test of the blinder proposition using postwar quarterly u s data and the results are then used to estimate the importance of credit rationing as a channel through which monetary policy influences the economy i consider three alternative criteria for determining when the economy is creditrationed the first criterion states that the economy is credit rationed if recent monetary policy as measured by one of two alternative monetary variables has been substantially tighter than average the second method draws on work by otto eckstein 1983 and allen sinai 1976 who developed estimates of periods of credit crunch based on a wide variety of indicators of credit market conditions the third and final approach is based on stephen king s 1986 estimates of the excess demand for commercial bank lending section i develops the specification of the tests section ii reports regressions and analyzes the implications for the monetary transmission mechanism and section iii presents conclusions

rare shocks vs non linearities what drives extreme events in the economy some empirical evidence abstract a small scale vector autoregression var is used to shed some light on the roles of extreme shocks and non linearities during stress events observed in the economy the model focuses on the link between credit financial markets and the real economy and is estimated on us quarterly data for the period 1984 2013 extreme shocks are accounted for by assuming t distributed reduced form shocks non linearity is allowed by the possibility of regime switch in the shock propagation mechanism strong evidence for fat tails in error distributions is found moreover the results suggest that accounting for extreme shocks rather than explicit modeling of non linearity contributes to the explanatory power of the model finally it is shown that the accuracy of density forecasts improves if non linearities and shock distributions with fat tails are considered

state dependent pricing and the general equilibrium dynamics of money and output economists have long suggested that nominal product prices are changed infrequently because of fixed costs in such a setting optimal price adjustment should depend on the state of the economy yet while widely discussed statedependent pricing has proved difficult to incorporate into macroeconomic models this paper develops a new tractable theoretical state dependent pricing framework we use it to study how optimal pricing depends on the persistence of monetary shocks the elasticities of labor supply and goods demand and the interest sensitivity of money demand

input and output inventories in general equilibrium we build and estimate a two sector goods and services dynamic stochastic general equilibrium model with two types of inventories materials input inventories facilitate the production of nished goods while nished goods output inventories yield utility services the model is estimated using bayesian methods the estimated model replicates the volatility and cyclicality of inventory investment and inventory to target ratios although inventories are an important element of the model s propagation mechanism shocks to inventory e ciency or management are not an important source of business cycles when the model is estimated over two subperiods pre and post 1984 changes in the volatility of inventory shocks or in structural parameters associated with inventories such as the input inventory to output ratio play a small role in reducing the volatility of output

locational and organizational determinants of r d employment in high technology firms felsenstein d and shachar a 1988 locational and organizational determinants of r d employment in high technology firms reg studies 22 477 486 a causal model is presented that predicts the relationship between the organizational structure and location of the high technology firm on the one hand and its r d employment intensity on the other the organizational structure of the firm is treated in two ways the intra organizational internal structure of the firm is analysed and found to be significantly and negatively related to the level of r d employment in the firm this is contrary to the hypothesisied direction of relationship variables representing the inter organizational environment of the firm however are found to be associated with r d employment intensity in the manner expected the results further show that r d employment intensity is positively associated with metropolitan location unmediated by the effects of firm size this suggests that small high technology firms due to their liab

further evidence on the credit view the case of finland the present paper provides further empirical evidence on the credit view i e bank credit availability has a positive impact on macroeconomic activity by investigating the case of finland the finnish economy suffered a severe recession in the early 1990s that was marked by widespread banking crisis and extensive government intervention using monthly data for the 1980 1996 period unrestricted and restricted vector autoregression var models with gdp money supply consumer prices bank credit and exports were estimated it is found that while money supply had the largest effect on economic output bank credit exhibited a fairly strong effect on output that exceeded price effects for the most part exports had little impact on fluctuations in gdp but did help to explain industrial output changes over time based on these results it is concluded that there is empirical support for the credit view in finland by implication government intervention in finland to restore safety and soundness during t

degrees of processing and changes in the cyclical behavior of prices in the united states 1869 1990 price indices for periods before the second world war place more weight on less processed products than do their postwar counterparts to an extent that exaggerates the change over time in the composition of aggregate output prices of less processed products are especially procyclical in levels and inflation rates thus comparisons between historical and postwar series can give biased measures of changes in the cyclical behavior of the aggregate price level also changes in the behavior of the aggregate price level must be distinguished from changes in the behavior of prices of given products subject to a given degree of processing

some evidence on the empirical significance of credit rationing this paper examines the credit rationing debate using detailed contract information on over one million commercial bank loans from 1977 to 1988 while commercial loan rates are sticky consistent with rationing this stickiness varies with loan contract terms in ways that are not predicted by equilibrium credit rationing theory in addition the proportion of new loans issued under commitment does not increase significantly when credit markets are tight despite the fact that borrowers without commitments can be rationed whereas commitment borrowers are contractually insulated from rationing overall the data suggest that equilibrium rationing is not a significant macroeconomic phenomenon

credit rationing and threshold effects in the relation between money and output the possibility that the effect of monetary policy on output may depend on whether credit conditions are tight or loose can be expressed as a non linearity in the relation between real money supply and output of which a simple case is a threshold effect in this case consistent with the credit rationing model of blinder 1987 the monetary variable has a more powerful effect if it is below some threshold than when it is above testing for the importance of this threshold is straightforward if the appropriate threshold value is known a priori but where the value is not known and must be chosen based on the sample the testing problem becomes more difficult we apply recently developed tests applicable in this situation to both us and canadian data and find substantial evidence of a threshold effect particularly in us data however the estimated threshold values are high copyright 1996 by john wiley sons ltd

credit rationing and effective supply failures the topic of this paper is among the oldest and most fundamental in monetary theory how and why does monetary policy affect real economic activity traditional answers hold that the central bank can manipulate aggregate demand by engineering expansions or contractions of the medium of exchange in its monetarist variant this story posits a direct link between something called m and aggregate spending in its keynesian variant the story holds that adjustments in asset prices brought about by a change in m lead to more spending especially on capital goods in either case short run stickiness of prices is needed to translate some of the changes in demand into movements of real output in recent years these conventional stories have become increasingly implausible as stiglitz and i blinder and stiglitz i 983 have argued elsewhere with money becoming more and more difficult to define it is becoming increasingly difficult to believe that the central bank can cause a recession by contriving a shortage of an arbitrary subset of assets called m put differently the point seems both simple and compelling if there are ready substitutes for money control of money will not give the authorities much leverage over the real economy hence this paper develops an explanation for how central bank policy affects