sentiments in svars this paper investigates the contribution of sentiments shocks to us fluctuations in a structural var setup with long medium and short run restrictions sentiments shocks are identified as shocks orthogonal to fundamentals that accounts for most of the variance of confidence we assess our identification procedure from simulation experiments and show that it performs pretty well from actual data we obtain that contrary to news shocks on total factor productivity sentiments shocks explain very little of quantities and prices sentiments shocks mostly appear as an idiosyncratic component of confidence these results are robust to various perturbations of the benchmark model

multipliers of unexpected increases in defense spending an empirical investigation abstract we show that unexpected increases in defense spending increase total factor productivity tfp and output and decrease investment in us quarterly data yet the output multiplier is zero when the tfp response is shut down we examine various explanations for this phenomenon and find that the rise in tfp is due to the presence of measurement error in quarterly data using artificial data generated from an rbc model with measurement error we demonstrate the suitability of our identification approach for recovering the true output multiplier in the presence of measurement error

the effectiveness of fiscal and monetary policy responses to twin crises we study how effective fiscal and monetary policy responses are during a twin crisis using the dataset provided by laeven and valencia 2008 we identify 57 episodes of twin crises following the methods proposed in baldacci et al 2009 and hutchison et al 2010 we construct the variables measuring the duration and output cost of a twin crisis we find that fiscal policy does not seem to be associated with the shortening of a twin crisis regarding monetary policy we find that monetary tightening is associated with the lengthening of a twin crisis duration consistent with the result in hutchison et al 2010 dealing with a sudden stop crisis in addition our results show that while a mild monetary expansion is effective in reducing a twin crisis duration over expansionary monetary policy loses its effectiveness

the impact of monetary policy on the exchange rate evidence from three small open economies this paper studies the impact effect of monetary policy shocks on the exchange rate in australia canada and new zealand during the 1990s shocks are identified by the reaction of three month market interest rates to policy announcements that were not themselves endogenous to economic news on the same day the main result is that a 100 basis point contractionary shock will appreciate the exchange rate by 2 3 percent on impact the association of interest rate hikes with depreciations that is sometimes observed during periods of exchange market pressure is mainly attributable to reverse causality

the quantitative importance of news shocks in estimated dsge models we estimate a dynamic stochastic general equilibrium dsge model with several frictions and both unanticipated and news shocks using quarterly u s data from 1954 to 2004 and bayesian methods we find that unanticipated shocks dominate news shocks in accounting for the unconditional variance of output consumption and investment growth interest rate and the relative price of investment the unanticipated shock to the marginal efficiency of investment is the dominant shock accounting for over 45 of the variance in output growth news shocks account for less than 15 of the variance in output growth within the set of news shocks nontechnology sources of news dominate technology news with wage markup news shocks accounting for about 60 of the variance share of both hours and inflation we find that in the estimated dsge model i the presence of endogenous countercyclical price and wage markups due to nominal frictions substantially diminishes the importance of news shocks relative to a model without these frictions and ii while there is little change in the estimated contributions of technology news when we restrict wealth effects on labor supply the contributions of nontechnology news shocks are relatively more sensitive

the instability of fixed exchange rate systems when raising the nominal interest rate is costly abstract this paper points to a vicious circle which may arise when a government tries to defend its currency by raising the nominal interest rate in a fixed exchange rate system we present a stylised model in which raising the nominal interest rate helps to maintain the parity but is costly for the government the speculators are aware that this cost gives incentives for the government to stop defending the parity which in turn reinforces the speculation against the currency we show that this mechanism can generate self fulfilling currency crises the outcome of which depends on the level of sacrifice that the government is ready to endure and the evolution of domestic economic conditions we provide some informal evidence showing that this model explains some features of the 1992 93 ems crisis

heterogeneous expectations adaptive learning and evolutionary dynamics this paper presents a linear self referential macroeconomic model with the possibility of multiple equilibria where agents have the choice of using one of two forecasting models one of minimum state variable form and the other of sunspot form to form expectations of current and future prices endogenous predictor selection is modeled as an evolutionary game where individuals choose among the forecasting models based on relative performance some nash solutions are not relevant as they are not stable under evolutionary or adaptive learning finally it is shown that the sunspot equilibrium is fragile against temporary shocks to information costs

stability properties for learning with heterogeneous expectations and multiple equilibria the bounded rationality literature has studied heterogeneous learning rules under models with a single equilibrium this paper examines learning with heterogeneous expectations in a simple macroeconomic model with multiple equilibria stability properties of this model are determined by the distribution of heterogeneity these results differ greatly from those which impose homogenous expectations a priori when the level of heterogeneity is allowed to vary stability conditions become more restrictive due to the stationarity requirements of the simpler more parsimonious updating rule finally i find that the two equilibria exchange stability when the mse of using this simpler updating rule is minimized

learning convergence and stability with multiple rational expectations equilibria abstract for a linear model with multiple rational expectations equilibria ree we discuss the set of possible ree solutions include i locally unique minimal state variable solutions taking an ar 1 form and ii continua of solutions which may depend on sunspots we analyze the convergence of econometric learning to the different ree there exist cases with more than one stable ar 1 solution it is also possible for a continuum of solutions to be stable but this property is not robust to overparametrization an application is developed and it is suggested that the exhibited phenomena may arise in applied macroeconomic models

news shocks in the data olympic games and their macroeconomic effects we examine the macroeconomic effects of bidding for the olympic games using panel data for 188 countries during the period 1950 2009 our findings confirm that economies react to news shocks investment consumption and output significantly increase 9 to 7 years before the actual event in bidding countries hosting countries also experience significant increases in investment consumption and output 5 to 2 years before the hosting of the games mapping the olympics into a macroeconomic model we show that we can match our empirical findings if we assume that an olympic bid represents news about increases in government investment

the fragility of sunspots and bubbles abstract expectational stability e stability is used to examine the multiplicity of solutions in a range of rational expectations models of interest including muth s inventory model and an overlapping generations model in these model it is found that sunspot and other rational bubble solutions are either e unstable or weakly but not strongly e stable

do high interest rates defend currencies during speculative attacks new evidence kraay kraay a 2003 do high interest rates defend currencies during speculative attacks journal of international economics 59 297 321 documents the lack of any systematic association between monetary policy and the outcome of a speculative attack this paper revisits kraay s work and modifies it by introducing an improved measure of monetary policy and an additional country specific fundamental short term corporate debt to capture balance sheet vulnerabilities emphasized by the recent currency crises literature the results show that for low levels of short term corporate debt raising interest rates lowers the probability of a successful attack this effect decreases and eventually reverses for higher levels of debt these findings contrast earlier empirical evidence and imply a fundamental reconsideration of the role of monetary policy during currency crises

experimental evidence on the persistence of output and inflation this article presents experimental evidence from a monetary sticky price economy in which output and inflation depend on expected future inflation rational inflation expectations do not allow for persistent deviations of output and inflation following a monetary shock in the experimental sessions however output and inflation display considerable persistence and regular cyclical patterns

popularity of reinforcement based and belief based learning models an evolutionary approach in an evolutionary model players from a given population meet randomly in pairs each instant to play a coordination game at each instant the learning model used is determined via some replicator dynamics that respects payoff fitness we allow for two such models a belief based best response model that uses a costly predictor and a costless reinforcement based one this generates dynamics over the choice of learning models and the consequent choices of endogenous variables we report conditions under which the long run outcomes are efficient or inefficient and they support the exclusive use of either of the models or their co existence

monetary news shocks we pursue an empirical strategy to identify a monetary news shock in the u s economy we use a monetary policy residual along with other variables in a vector autoregression var and identify a monetary news shock as the linear combination of reduced form innovations that is orthogonal to the current residual and that maximizes the sum of contributions to its forecast error variance over a finite horizon real gdp declines in a persistent manner after a positive monetary news shock this contraction in economic activity is accompanied by a fall in inflation and a rapid increase in the nominal interest rate

monetary policy and learning from the central bank s forecast abstract we examine the expectational stability e stability of rational expectations equilibrium ree in a standard new keynesian model in which private agents refer to the central bank s forecast in the process of adaptive learning to satisfy the e stability condition in this environment the central bank must respond more strongly to the expected inflation rate than the extent to which the taylor principle suggests however the central bank s strong reaction to the expected inflation rate raises the possibility of indeterminacy of the ree in considering these problems a robust policy requires responding to the current inflation rate to a certain degree

measuring the impact of fiscal policy in the face of anticipation a structural var approach empirical estimates of the impact of government spending shocks disagree on central issues such as the size of output multipliers and the responses of consumption and the real wage one explanation for the disagreement is that fiscal shocks are often anticipated due to misspecification of the information set anticipation effects may invalidate svar estimates of impulse responses we use economic theory to derive a fiscal svar estimator that is applicable when fiscal shocks are anticipated we study its properties and apply it to us data we fail to find evidence that anticipation effects overturn the existing findings from the fiscal svar literature despite years of intensive research the empirical literature on fiscal policy has yet to reach consensus on the macroeconomic impact of fiscal policy shocks disagreements concern central issues such as the size of output multipliers and the impact of government spending shocks on consumption and the real wage clearly such level of disagreement constrains our ability to give simple guidelines for the operation of one of the most important stabilisation policies a key empirical obstacle is the measurement of innovations to fiscal policy one strand of the literature employs structural vector autoregressive svar methods and achieves identification based on the presence of decision lags or sign restrictions

government spending and heterogeneous consumption dynamics abstract what is the effect of government spending on consumption neoclassical and new keynesian models deliver opposing predictions and empirical studies differ in their conclusions this paper takes a data driven approach and exploits information from over 200 variables via a bayesian factor augmented var model i use sign restrictions for identifying effects that both classes of models agree upon this approach imposes a minimal set of restrictions on the empirical model leaving the sign and magnitude of the effect of government spending on consumption free to be determined by the data i find that i government spending increases aggregate consumption ii the estimated spending multiplier is close to 2 iii there exists heterogeneity even within durable nondurable and service consumption variables which is undocumented in the literature finally i show that my identified structural shocks are not predictable by economic agents and are uncorrelated with traditional monetary policy shocks suggesting that these effects are not confounded by monetary policy

investment specific news shocks and u s business cycles we provide robust evidence that news shocks about future investment specific technology ist constitute a significant force behind u s business cycles positive ist news shocks induce comovement that is raise output consumption investment and hours these shocks account for 70 of the business cycle variation in output hours and consumption and 60 of the variation in investment and have played an important role in 9 of the last 10 u s recessions our findings provide strong support for shifting focus to ist news shocks when investigating the role of news in driving u s business cycles

delaying the inevitable interest rate defense and balance of payments crises the classical model of balance of payments crises implicitly assumes that the central bank sits passively as international reserves dwindle in practice however central banks typically defend pegs aggressively by raising short term interest rates this paper analyzes the feasibility and optimality of raising interest rates to delay a potential bop crisis interest rate policy works through two distinct channels by raising demand for domestic interest bearing liquid assets higher interest rates tend to delay the crisis higher interest rates however increase public debt service and imply higher future inflation which tends to bring forward the crisis we show that under certain conditions it is feasible to delay the crisis but raising interest rates beyond a certain point may actually hasten the crisis a similar nonmonotonic relationship emerges between welfare and the increase in interest rates it is thus optimal to engage in some active interest rate defense but only up to a certain point i

episodes of war and peace in an estimated open economy model we analyze the effects of world wars on the macroeconomic dynamics of the u s france germany and the uk by means of an estimated open economy model the model allows wars to affect the economy through capital depreciation sovereign default a military draft household preferences and spillovers on other exogenous processes productivity investment trade policy variables if the bulk of fluctuations during war episodes can be explained by the rise in government spending in the u s other factors are crucial in other countries we also discuss the size and state dependence of public spending multipliers and a counterfactual welfare exercise

catalysing private capital flows do imf programmes work as commitment devices in this article we examine whether imf programmes influence the ability of developing country issuers to tap international bond markets and if they improve spreads paid on the bonds issued we find that fund programmes do not provide a uniformly favourable signalling effect instead the evidence is most consistent with a positive effect of imf programmes when they are viewed as likely to lead to policy reform and when undertaken before economic fundamentals have deteriorated significantly the size of the fund s programme matters but the credibility of a joint commitment by the country and the imf appears to be critical enhancing its members access to international capital markets is widely regarded as an important objective of the international monetary fund imf or fund though the objective is not an explicitly stated purpose in the fund s articles of agreements the flow of international capital is essential to such stated purposes as the stability of the international monetary system efficient trade and productive resource use and to providing confidence when a member country experiences difficulties with its balance of payments 1 the fund s interest in private international capital flows has moreover increased over the last decade reflecting this evolution the fund s former managing

on non uniqueness in rational expectations models an attempt at perspective abstract many macroeconomic models involving rational expectations give rise to an infinity of solution paths even when the models are linear in all variables some writers have suggested that this non uniqueness constitutes a serious weakness for the rational expectations hypothesis one purpose of the present paper is to argue that the non uniqueness in question is not properly attributable to the rationality hypothesis but instead is a general feature of dynamic models involving expectations it is also argued that there typically exists in a very wide class of linear rational expectations models a single solution that excludes bubble or bootstrap effects one that occur only because they are arbitrarily expected to occur a systematic procedure for obtaining solutions free from such effects is introduced and discussed in addition this procedure is used to interpret and reconsider several prominent examples with solution multiplicities including ones developed by fischer black and john b taylor

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

liquidity constraints and the substitutability between private and government consumption the role of military and non military spending i introduction using data for a number of economies we investigate i the relationship between private consumption and two types of government spending military and non military and ii the severity of liquidity constraints because of their importance for macroeconomic modeling in theory and practice 1 both issues have been the subjects of considerable theoretical and empirical investigation on the issue of liquidity constraints the most influential research has relied on hall s 1978 euler equation approach to the permanent income hypothesis in an attempt to reconcile hall s and flavin s 1981 methodologies hayashi 1982 modified hall s martingale result to allow for the possibility that a subset of consumers are liquidity constrained and showed that liquidity constraints can result in consumption s excess sensitivity to current income campbell and mankiw 1989 1990 1991 and jappelli and pagano 1989 have applied hayashi s methodology using data from the u s and several other oecd countries on the substitutability issue aschauer 1985 has modified hall s euler equation to allow for substitutability between government spending and private consumption and found that the two are substitutes for the u s karras 1994 however using a similar approach and data for 30 countries concludes that private and government consumption are better described as complementary or unrelated liquidity constraints and substitutability have been combined in studies by graham and himarios 1991 cushing 1992 and graham 1993 using u s data and by evans and karras 1996 for a number of countries a crucial limitation of most of these studies is the use of aggregate government consumption data which counterintuitively imposes a common substitutability parameter on all components of government spending 2 using recently available time series data for a large number of countries the present paper relaxes this restriction by decomposing government consumption into military and non military components enabling us to separately identify their relationship to private consumption the allocation of government consumption between military and non military functions has varied greatly across countries the appendix reports the average size of military and non military government shares in gdp as well as the military non military ratio by country over the 1970 1989 period average military expenditure as a fraction of gdp for example has ranged in our sample from 0 11 in mexico to 12 30 in jordan similarly the fraction of government consumption absorbed by military expenditure has ranged from 1 09 in mauritius to 66 82 in poland this sizable variability is promising in terms of cross sectional identification power but it also suggests that the estimated parameters must not be assumed to be common across countries the estimated model is derived in section ii which combines liquidity constraints and substitutability by nesting the approaches of hayashi 1982 and aschauer 1985 in the same section we discuss data sources and the estimation strategy which permits the estimated parameters to vary by country in a way that helps determine how they are influenced by country specific factors section iii estimates the model for a panel of the 66 countries for which annual data on all series are available for the 1970 1989 period the paper s main conclusions are given in section iv ii methodology and data we assume that consumers in economy i at time t derive utility from effective consumption c sup which we define as 1 mathematical expression omitted where c is private consumption g sup m and g sup nm are the military and non military components of government consumption the parameters theta sup m and theta sup nm measure the degree of substitutability between c and g sup m and c and g sup nm respectively

macroeconomic effects from government purchases and taxes for u s annual data that include world war ii the estimated multiplier for temporary defense spending is 0 4 0 5 contemporaneously and 0 6 0 7 over 2 years if the change in defense spending is permanent gauged by ramey s defense news variable the multipliers are higher by 0 1 0 2 since all estimated multipliers are significantly less than 1 greater spending crowds out other components of gdp particularly investment the lack of good instruments prevents estimation of reliable multipliers for nondefense purchases multipliers in the literature of two or more likely reflect reverse causation from gdp to nondefense purchases increases in average marginal income tax rates measured by a newly constructed time series have significantly negative effects on gdp when interpreted as a tax multiplier the magnitude is around 1 1 the combination of the estimated spending and tax multipliers implies that the balanced budget multiplier for defense spending is negative we have some evidence that tax changes affect gdp mainly through substitution effects rather than wealth effects

using stock returns to identify government spending shocks this article explores a new approach to identifying government spending shocks which avoids many of the shortcomings of existing approaches the new approach is to identify government spending shocks with statistical innovations to the accumulated excess returns of large us military contractors this strategy is used to estimate the dynamic responses of output hours consumption and real wages to a government spending shock we find that positive government spending shocks are associated with increases in output hours and consumption real wages initially decline after a government spending shock and then rise after a year we estimate the government spending multiplier associated with increases in military spending to be about 1 5 over a horizon of 5 years

when can changes in expectations cause business cycle fluctuations in neo classical settings abstract it is often argued that changes in expectation are an important driving force of the business cycle however it is well known that changes in expectations cannot generate positive co movement between consumption investment and employment in the most standard neo classical business cycle models this gives rise to the question of whether changes in expectation can cause business cycle fluctuations in any neo classical setting or whether such a phenomenon is inherently related to market imperfections this paper offers a systematic exploration of this issue our finding is that expectation driven business cycle fluctuations can arise in neo classical models when one allows for a sufficiently rich description of the production technology however such a structure is rarely allowed or explored in macro models in particular we identify a multi sector setting and a setting with a costly distribution system in which expectation driven business cycles can arise

mood swings and business cycles evidence from sign restrictions this paper provides new evidence that bouts of optimism and pessimism are an important source of u s business cycles using the identification schemes based on sign restrictions we document that identified optimism and pessimism shocks account for about 30 of u s business cycle fluctuations in hours and output in addition our empirical findings are consistent with the intensive and extensive margin adjustments in the u s labor market over business cycles providing further support to optimism shocks being an important source of u s business cycles the identified optimism shocks are at least partially rational as total factor productivity is found to rise 8 12 quarters after an initial bout of optimism while this later finding is consistent with some previous findings in the news shock literature we cannot rule out that such episodes reflect self fulfilling beliefs

an exploration of the eductive justifications of the rational expectations hypothesis this paper examines justifications of the rational expectations hypothesis that rely on the analysis of the agents mental forecasting educing activity which involves forecasting the forecasts of others etc the corresponding concept of eductive learning stability based on the game theoretical concept of rationalizability is primarily used within the classical muth model conditions for coordination of beliefs are interpreted and discussed they are robust to the introduction of noise more generally eductive stability fits economic intuition on coordination stability increases when the industry product differentiation increases and when decisions are sequential and observable copyright 1992 by american economic association

fiscal foresight and information flows news or foresight about future economic fundamentals can create rational expectations equilibria with non fundamental representations that pose substantial challenges to econometric efforts to recover the structural shocks to which economic agents react using tax policies as a leading example of foresight simple theory makes transparent the economic behavior and information structures that generate non fundamental equilibria econometric analyses that fail to model foresight will obtain biased estimates of output multipliers for taxes biases are quantitatively important when two canonical theoretical models are taken as data generating processes both the nature of equilibria and the inferences about the effects of anticipated tax changes hinge critically on hypothesized information flows different methods for extracting or hypothesizing the information flows are discussed and shown to be alternative techniques for resolving a non uniqueness problem endemic to moving average representations

fiscal stimulus with learning by doing using a bayesian svar analysis we document that an increase in government purchases raises private consumption the real wage and total factor productivity tfp while reducing inflation each of these facts is hard to reconcile with both neoclassical and new keynesian models we extend a standard new keynesian model to allow for skill accumulation through past work experience following chang gomes and schorfheide 2002 an increase in government spending increases hours and induces skill accumulation and higher measured tfp and real wages in subsequent periods future marginal costs fall lowering future expected inflation and through the monetary policy rule the real interest rate consumption increases as a result

government spending entry and the consumption crowding in puzzle this article documents empirically that net firm entry robustly rises after a u s government spending expansion we use this new finding to test the empirical validity of various model features that have been proposed to generate consumption crowding in after positive expenditure shocks endogenous entry models typically fail to generate the observed joint increase in consumption and entry model features that dampen the wealth effect such as rule of thumb households or complementarity between labor and consumption in preferences tend to reduce entry we show that utility or productivity enhancing public spending can reconcile the model with our documented fact and performs well empirically

on the robustness of bubbles in linear re models the authors analyze the expectational stability e stability of the different solutions of a linear rational expectations model in which the endogenous variable depends on expectations of its current and future values formed in the past and also on its own lagged value it is shown that continuum of bubble solutions cannot be strongly e stable in contrast for certain parameter values a particular solution that would normally be identified as a bubble solution can be strongly e stable the results are applied to a macroeconomic model with real balance effects copyright 1992 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

factor hoarding and the propagation of business cycles shocks this paper analyzes the role of variable capital utilization rates in propagating shocks over the business cycle to this end we formulate and estimate an equilibrium business cycle model in which cyclical capital utilization rates are viewed as a form of factor hoarding we find that variable capital utilization rates substantially magnify and propagate the impact of shocks to agents environments the strength of these propagation effects is evident in the dynamic response functions of various economy wide aggregates to shocks in agents environments in the statistics that we construct to summarize the strength of the propagation mechanisms in the model and in the volatility of exogenous technology shocks needed to explain the observed variability in aggregate u s output other authors have argued that standard real business cycle rbc models fail to account for certain features of the data because they do not embody quantitatively important propagation mechanisms these features include the observed positive serial correlation in the growth rate of output the shape of the spectrum of the growth rate of real output and the correlation between the forecastable component of real output and various other economic aggregates allowing for variable capital utilization rates substantially improves the ability of the model to account for these features of the data

a new keynesian model with heterogeneous expectations abstract within a new keynesian model we incorporate bounded rationality at the individual agent level and we determine restrictions on expectations operators sufficient to imply aggregate is and as relations of the same functional form as those under rationality this result provides dual implications the strong nature of the restrictions required to achieve aggregation serve as a caution to researchers imposing heterogeneous expectations at an aggregate level may be ill advised on the other hand accepting the necessary restrictions provides for tractable analysis of expectations heterogeneity as an example we consider a case where a fraction of agents are rational and the remainder are adaptive and find specifications that are determinate under rationality may possess multiple equilibria in case of expectations heterogeneity

monetary policy with heterogeneous and misspecified expectations in the recent literature on monetary policy and learning it has been suggested that private sector s expectations should play a role in the policy rule implemented by the central bank as they could improve the ability of the policymaker to stabilize the economy private sector s expectations in these studies are often taken to be homogeneous and rational at least in the limit of a learning process in this paper instead we consider the case in which private agents are heterogeneous in their expectations formation mechanisms and hold heterogeneous expectations in equilibrium we investigate the impact of this heterogeneity in expectations on central bank s policy implementation and on the ensuing economic outcomes and the general result that emerges is that the central bank should disregard inaccurate private sector expectations and solely base its policy on the accurate ones

a fiscal theory of currency crises an exchange rate crisis is caused when the fiscal authority lets the present value of primary surpluses inclusive of seigniorage deviate from the value of government debt at the pegged exchange rate in the absence of long term government bonds the exchange rate collapse must be instantaneous with long term government bonds the collapse can be delayed at the discretion of the monetary authority fiscal policy is responsible for the inevitability of a crisis while monetary policy determines its characteristics that is the timing of the crisis and the magnitude of exchange rate depreciation

fundamentalists vs chartists learning and predictor choice dynamics abstract in a simple forward looking univariate model of price determination we investigate the evolution of expectations dynamics in the presence of two types of agents fundamentalists and chartists in particular we combine evolutionary selection among heterogeneous classes of models through predictor choice dynamics based on a logit model with adaptive learning in the form of parameters updating within each class of rules we find that for different parameterizations it can happen that fundamentalists drive chartists completely out of the market or vice versa and also that heterogeneous equilibria in which fundamentalists and chartists coexist are possible interestingly though only equilibria in which fundamentalists outperform chartists turn out to be adaptively learnable by agents

adaptive learning endogenous uncertainty and asymmetric dynamics abstract i present a simple model where forecasting confidence affects aggregate demand it is shown that this model has similar stability properties under statistical and evolutionary learning as a model without a confidence affect from this setup i introduce expectational business cycles where output fluctuates due to learning heterogeneous forecasting models and random changes in the efficient forecasting model agents use one of two forecasting models to forecast future variables while heterogeneity is dictated via an evolutionary process increased uncertainty due to a shock to the structure of the economy may result in a sudden decrease in output as agents learn the equilibrium output slowly increases to its equilibrium value expectational business cycles tend to arrive faster last longer and are more severe as agents possess less information

how does government spending news affect interest rates evidence from the united states abstract this study analyzes the effects of news shocks to u s government spending on interest rates especially long term interest rates and investigates the role of agents expectations in the propagation of government spending to interest rates using large bayesian vector autoregressive models with sufficient information we find that news about increases in government spending induce significant increases in both short and long term interest rates while the effects of government spending surprise shocks on interest rates are mixed and ambiguous government spending news shocks in the baseline model account for around 10 of the variance in forecast errors in long term interest rates which is much more important than government spending itself using empirical dynamic term structural models we further decompose increases in long term interest rates into changes in expectations of future monetary policy and changes in term premiums we find that an increase in the long term interest rate after a positive government spending news shock mainly reflects higher expected future short term interest rates which demonstrates the importance of the coordination between fiscal and monetary policy communication

what are the effects of fiscal policy shocks we propose and apply a new approach for analyzing the effects of fiscal policy using vector autoregressions specifically we use sign restrictions to identify a government revenue shock as well as a government spending shock while controlling for a generic business cycle shock and a monetary policy shock we explicitly allow for the possibility of announcement effects i e that a current fiscal policy shock changes fiscal policy variables in the future but not at present we construct the impulse responses to three linear combinations of these fiscal shocks corresponding to the three scenarios of deficit spending deficit financed tax cuts and a balanced budget spending expansion we apply the method to us quarterly data from 1955 to 2000 we find that deficit financed tax cuts work best among these three scenarios to improve gdp with a maximal present value multiplier of five dollars of total additional gdp per each dollar of the total cut in government revenue 5 years after the shock copyright 2009 john wiley sons ltd

news shocks and business cycles abstract this paper proposes and implements a novel structural var approach to the identification of news shocks about future technology the news shock is identified as the shock orthogonal to the innovation in current utilization adjusted tfp that best explains variation in future tfp a favorable news shock leads to an increase in consumption and decreases in output hours and investment on impact more suggestive of standard dsge models than of recent extensions designed to generate news driven business cycles though news shocks account for a significant fraction of output fluctuations at medium frequencies they contribute little to our understanding of recessions

are government spending multipliers greater during periods of slack evidence from 20th century historical data a key question that has arisen during recent debates is whether government spending multipliers are larger during periods of slack some researchers and policymakers have argued that while government spending multipliers are estimated to be modest on average they might become greater during times when resources are underutilized auerbach and gorodnichenko 2012 forthcoming henceforth ag test this hypothesis and find larger multipliers dur

currency crises with the threat of an interest rate defence while virtually all currency crisis models recognise that the decision to abandon a peg depends on how tenaciously policy makers defend it this is seldom modelled explicitly we add the threat of an interest rate defence to the global game model of morris and shin american economic review 88 1998 with an endogenous defence actions of speculators may become strategic substitutes instead of the usual complements nevertheless our generalised model remains tractable and has a unique threshold equilibrium it provides additional insights for instance the threat of an interest rate defence makes speculation riskier and this may be sufficient to keep speculators out when fundamentals are still relatively strong

the shifting scully curve international evidence from 1871 to 2016 scully curves estimating growth maximizing public sector size are constructed using panel data covering 17 industrialized nations from 1870 2016 results suggest that government expenditure to gdp

expectational stability and the multiple equilibria problem in linear rational expectations models linear models involving expectations of future endogenous variables generally have multiple rational expectations equilibria this paper investigates the stability of solutions in the disequilibrium sense of whether given a small deviation of expectations functions from some rational expectations equilibrium the system returns to that solution under a natural revision rule weak and strong local stability are distinguished stability conditions are calculated for a simple general linear model and applied to two macroeconomic examples in some cases there is a unique stable equilibrium in other cases a continuum of equilibria forms a weakly but not strongly stable class

an interest rate defense of a fixed exchange rate defending a government s exchange rate commitment with active interest rate policy is not an option in first generation models of speculative attacks in those models the interest rate is the passive reflection of currency depreciation expectations in this paper we show how to adapt the first generation framework to allow for an interest rate defense it is shown that increasing domestic currency interest rate before the attack makes domestic assets more attractive according to an asset substitution effect but weakens the domestic currency by increasing the government s fiscal liabilities as a result an interest rate defense can be successful only conditional on sound fiscal policy

monetary policy and the exchange rate during the asian crisis identification through heteroscedasticity abstract this paper examines whether a monetary policy tightening i e an increase in the domestic interest rate was successful in defending the exchange rate from speculative pressures during the asian financial crisis we estimate a bivariate vecm for four asian countries and improve upon existing studies in two important ways first by using a long data span we are able to compare the effects of an interest rate rise on the nominal exchange rate during tranquil and turbulent periods second we take into account the endogeneity of interest rates and identify the system by exploiting the heteroscedasticity properties of the relevant time series following rigobon identification through heteroscedasticity review of economics and statistics in press we find that while tight monetary policy helped to defend the exchange rate during tranquil periods it had the opposite effect during the asian crisis

economic costs of alternative monetary policy responses to speculative currency attacks abstract the outcome of a speculative attack on the foreign exchange rate can be classified into three cases i immediate depreciation of the nominal exchange rate ii successful defense or iii failed defense this paper explores which of these outcomes yields the lowest cost in terms of output and unemployment in the short and medium run ex ante the outcome of a speculative attack is uncertain therefore the appropriate response of monetary authorities to a speculative attack depends on the cost of an immediate depreciation compared with that of the expected outcome of a currency defense our empirical analysis focuses on a sample of 73 emerging and developing countries over the 1960 2011 period our results indicate that an immediate depreciation is the policy response that is associated with a lower expected output loss and unemployment in the short run and it tends to be expansionary in the medium run a defense if successful entails insignificant costs in the short run but unlike an immediate depreciation a successful defense is not expansionary in the medium run if a defense fails large output losses and an increase in unemployment ensue at least in the short run

what do british historical data tell us about government spending multipliers british data from the early 1700s through world war i reflect the results of numerous high quality natural experiments of government spending britain frequently participated in wars increasing military spending massively wartime distortions were relatively limited because the government generally adopted tax smoothing policy and rarely implemented interventions government spending multiplier estimates are low or negative and significantly below unity this paper finds no evidence that the multiplier was higher in the slack state than in the normal state jel e32 e62

fiscal imbalances and the dynamics of currency crises abstract this paper analyzes links between the fiscal theory of the price level ftpl and the first generation models after krugman journal of money credit and banking 11 1979 311 325 exploring the idea that a synthesis between the two can become a new framework to analyze the fiscal dimension of currency crises working in a simple synthetic framework we show how external nominal shocks can cause a fiscal imbalance and undermine currency stability resolve two well known paradoxes of the first generation model discuss the role of seigniorage revenues and illustrate how fiscal and interest rate policies interact to determine the magnitude and the timing of speculative attacks and devaluations

do high interest rates defend currencies during speculative attacks abstract do high interest rates defend currencies during speculative attacks or do they have the perverse effect of increasing the probability of a devaluation of the currency under attack drawing on evidence from a large sample of speculative attacks in developed and developing economies this paper argues that the answer to both questions is no in particular this paper documents a striking lack of any systematic association whatsoever between interest rates and the outcome of speculative attacks the lack of clear empirical evidence on the effects of high interest rates during speculative attacks mirrors the theoretical ambiguities on this issue

anticipated growth and business cycles in matching models in a business cycle model that incorporates a standard matching framework employment increases in response to news shocks even though the wealth effect associated with the increase in expected productivity reduces labor force participation the reason is that the matching friction induces entrepreneurs to increase investment in new projects and vacancies early if there is underinvestment in new projects in the competitive equilibrium then the efficiency gains associated with an increase in employment make it possible that consumption employment output as well as the investment in new and existing projects jointly increase long before the actual increase in productivity materializes if there is no underinvestment then investment in existing projects decreases but total investment consumption employment and output still jointly increase

chronicle of a war foretold the macroeconomic effects of anticipated defence spending shocks we identify us defense news shocks as shocks that best explain future movements in defense spending over a ve year horizon and are orthogonal to current defense spending our identied shocks are strongly correlated with the ramey 2011 news shocks but explain a larger share of macroeconomic uctuations and have signicant demand eects fiscal news induces signicant and persistent increases in output consumption investment hours and the interest rate standard dsge models fail to produce such a pattern we propose a sticky price model with distortionary taxation variable capital utilization capital adjustment costs and rule of thumb consumers that replicates the empirical ndings

catalytic finance when does it work in a model of debt crisis caused partly by creditor coordination failure we show that bailouts that reduce ex post inefficiency will sometimes enhance the incentives for governments to take costly adjustment effort this model helps us understand a debate about the role of the imf in catalyzing lending to developing countries

currency crises and monetary policy a study on advanced and emerging economies the studies regarding the appropriate monetary policy response in defending the domestic currency following a currency crisis do not gather around a robust answer this study tries to emphasize the notion that there is no single policy applicable for all currency crises happened and happening in the global world the approach of the study is presenting empirical evidence by focusing separately on the advanced and emerging economies and proving that the monetary policy response for the emerging economies should be different from the advanced economies depending mainly on the vulnerabilities of these economies preceding and during the crisis periods the study includes twenty four economies in which fifteen of them are emerging and nine of them are advanced for the crisis periods between 1986 and 2009 the main finding of the study is that the tight monetary policy is effective in the advanced economies and detrimental in the emerging economies faced financial turbulence the monetary policy has no significance in recent crisis episodes both for advanced and emerging economies advanced economies besides having more independent central banking lower country riskiness and almost no default history mainly have second generation model weaknesses which cause the increased interest rates to be successful in stabilizing the exchange rates for the emerging economies the third generation model weaknesses play a major role together with the first generation model vulnerabilities thus the major policy implication follows that the policy makers should take into account the economic fragilities during the crisis in implementing the monetary policy

the modern history of exchange rate arrangements a reinterpretation we develop a novel system of reclassifying historical exchange rate regimes one key difference between our study and previous classifications is that we employ monthly data on market determined parallel exchange rates going back to 1946 for 153 countries our approach differs from the imf official classification which we show to be only a little better than random it also differs radically from all previous attempts at historical reclassification our classification points to a rethinking of economic performance under alternative exchange rate regimes indeed the breakup of bretton woods had less impact on exchange rate regimes than is popularly believed