debt dynamics in europe a network general equilibrium gvar approach in this work we investigate the dynamic interdependencies among the eu12 economies using a competitive general equilibrium network system representation additionally using bayesian techniques we estimate the autoregressive scheme that characterizes the equilibrium price system of the network while characterizing each economy node in the universe of our network in terms of its degree of pervasiveness in this context we unveil the dominant s unit s in our model and estimate the dynamic linkages between the economies nodes lastly in terms of robustness analysis we compare the findings of the degree pervasiveness of each economy against other popular quantitative methods in the literature according to our findings the economy of germany acts as weakly dominant entity in the eu12 economy meanwhile all shocks die out in the short run without any long lasting effect

will business cycles in the euro area converge a critical survey of empirical research this survey of business cycle synchronization in the european monetary union focuses on two issues have business cycles become more similar and which factors drive business cycle synchronization we conclude that business cycles in the euro area have gone through periods of both convergence and divergence still there is quite some evidence that during the 1990s business cycle synchronization in the euro area has increased higher trade intensity is found to lead to more synchronization but the point estimates vary widely the evidence for other factors affecting business cycle synchronization is very mixed

evolution of international stock and bond market integration influence of the european monetary union abstract this paper examines the dynamic relationship between daily stock and government bond returns of selected countries over the past decade to infer the state and progress of inter financial market integration we proceed to empirically investigate the influence of the european monetary union emu on time variations in inter stock bond market integration segmentation dynamics using a two step procedure first we document the downward trends in time varying conditional correlations between stock and bond market returns in european countries japan and the us second we investigate the causality and determinants of this interdependent relationship in particular whether the various macroeconomic convergence criteria associated with the emu have played a significant role we find that real economic integration and the reduction in currency risk have generally had the desired effect on financial integration but monetary policy integration may have created uncertain investor sentiments on the economic future of the emu thereby stimulating a flight to quality phenomenon

testing for indeterminacy an application to u s monetary policy reply this paper considers a prototypical new keynesian model in which the equilibrium is undetermined if monetary policy is passive the likelihood based estimation of dynamic equilibrium models is extended to allow for indeterminacies and sunspot fluctuations we construct posterior weights for the determinacy and indeterminacy region of the parameter space and estimates for the propagation of fundamental and sunspot shocks according to the estimated model u s monetary policy post 1982 is consistent with determinacy whereas the pre volcker policy is not we find that before 1979 indeterminacy substantially altered the propagation of shocks

oil and the macroeconomy since world war ii all but one of the u s recessions since world war ii have been preceded typically with a lag of around three fourths of a year by a dramatic increase in the price of crude petroleum this does not mean that oil shocks caused these recessions evidence is presented however that even over the period 1948 72 this correlation is statistically significant and nonspurious supporting the proposition that oil shocks were a contributing factor in at least some of the u s recessions prior to 1972 by extension energy price increases may account for much of post opec macroeconomic performance

dynamic stock market covariances in the eurozone abstract this paper examines the short term dynamics macroeconomic sensitivities and longer term trends in the variances and covariances of national equity market index daily returns for eleven countries in the euro currency zone we modify colacito engle and ghysel s mixed data sampling dynamic conditional correlation garch model to include a new scalar measure for the degree of correlatedness in time varying correlation matrices we also explore the robustness of the findings with a less model dependent realized covariance estimator we find a secular trend toward higher correlation during our sample period and significant linkages between macroeconomic and market wide variables and dynamic correlation one notable finding is that average correlation between these markets is lower when their average gdp growth rate is lower or when more of them have negative gdp growth

one money one market the effect of common currencies on trade currency unions their dramatic effect on international trade a gravity model is used to assess the separate effects of exchange rate volatility and currency unions on international trade the panel data bilateral observations for five years during 1970 90 covering 186 countries includes 300 observations in which both countries use the same currency i find a large positive effect of a currency union on international trade and a small negative effect of exchange rate volatility even after controlling for a host of features including the endogenous nature of the exchange rate regime these effects statistically significant imply that two countries sharing the same currency trade three times as much as they would with different currencies currency unions like the european emu may thus lead to a large increase in international trade with all that that entails andrew rose

a real model of the world business cycle abstract in this paper a stochastic two country log linear infinite horizon model is used to analyze the generation and transmission of economic fluctuations across countries it is argued that following a country specific supply disturbance production interdependence and unitary elasticities in consumption and production are sufficient to generate comovements in aggregate economic activity investment and trade that are persistent over time and positively correlated across countries however the empirical analysis carried out for the usa japan germany and uk for the 1960 82 period suggests that common shocks rather than trade links are responsible for this pattern of comovements

national versus sectoral shocks new evidence for the manufacturing sector in european countries abstract using data for european countries from 1976 to 1998 this paper shows that the relative importance of country specific shocks versus common sectoral shocks has reduced considerably during the most recent years probably as a result of more intense policy co ordination

endogenous business cycles with financial frictions this paper uncovers a series of belief shocks that drive the u s economy from both financial markets data and a financial accelerator model with self fulfiling prophecies indeterminacy in the eco

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

the european union the euro and equity market integration abstract we use industry valuation differentials across european countries to study the impact of membership in the european union as well as the eurozone on both economic and financial integration in integrated markets discount rates and expected growth opportunities should be similar within one industry irrespective of the country implying narrowing valuation differentials as countries become more integrated our analysis of the 1990 2007 period shows that membership in the eu significantly lowered discount rate and expected earnings growth differentials across countries in contrast the adoption of the euro was not associated with increased integration our results do not change when the sample is extended to include the recent crisis period

sources of output fluctuations in the united states during the inter war and post war years abstract this paper attempts to decompose the sources of fluctuations in industry output into 1 an aggregate national shock 2 industry group specific shocks and 3 idiosyncratic factors the empirical methodology is the engle watson dynamic mimic model the work is motivated as an attempt to compare empirically aggregate single factor theories of the cycle with real business cycle theories emphasizing technology shocks disaggregate data from the inter war and post war periods are examined conclusions on the relative importance of the various shocks seem to be dependent on the period being considered the single index theory of the cycle seems more appropriate for the inter war period

international business cycles world region and country specific factors the paper investigates the common dynamic properties of business cycle fluctuations across countries regions and the world we employ a bayesian dynamic latent factor model to estimate common components in macroeconomic aggregates output consumption and investment in a 60 country sample covering seven regions of the world the results indicate that a common world factor is an important source of volatility for aggregates in most countries providing evidence for a world business cycle we find that region specific factors play only a minor role in explaining fluctuations in economic activity we also document similarities and differences across regions countries and aggregates jel f41 e32 c11 c32

business cycle transmission from the us to germany a structural factor approach abstract this paper investigates the transmission of us macroeconomic shocks to germany using a large dimensional structural dynamic factor model this framework allows us to investigate many transmission channels simultaneously including new channels such as stock markets foreign direct investment bank lending and the confidence channel we find that us shocks affect the us and germany largely symmetrically trade seems to be the most relevant transmission channel monetary policy reactions to strong price movements seem to play a role as well no clear conclusion can be drawn yet on the role of financial markets and the confidence channel negative domestic influences apparently more than offset positive us influences in the german economy between 1995 and 2000 but the us recession in 2001 appeared to be the main culprit in the german slump

co movement of public spending in the g7 abstract the size of government in the g7 countries in the last fifty years follows a common pattern see the left panel of fig 1 below it grows in the first three decades and then turns flat at the beginning of the nineties for all countries alike we highlight this common pattern in a dynamic factor model and argue that a satisfactory explanation for it would be desirable

consumption sentiment and economic news this paper investigates the influence of economic news on consumer sentiment and examines whether news shocks changes in coverage that would not be expected from incoming data on economic fundamentals have aggregate effects using monthly u s data and a structural vector autoregression i find that 1 sentiment is affected by news shocks 2 after filtering out effects of news shocks shocks to sentiment still have positive effects on consumer spending and 3 news shocks influence both spending and unemployment in significant though transitory ways these results are consistent with other evidence of a role of nonfundamental factors in aggregate fluctuations jel e21 e32 d12

the mystery of the vanishing benefits an introduction to impact evaluation this article provides an introduction to the concepts and methods of impact evaluation the author provides an intuitive explanation in the context of a concrete application the article takes the form of a short story about a fictional character s on the job training in evaluation ms speedy analyst is an economist in the ministry of finance in the fictional country of labas in the process of figuring out how to evaluate a human resource program targeted to the poor ms analyst learns the strengths and weaknesses of the main methods of ex post impact evaluation

long term global market correlations the correlation structure of the world equity markets varied considerably over the past 150 years and was high during periods of economic integration we decompose diversification benefits into two parts one component due to variation in the average correlation across markets and a another component due to the variation in the investment opportunity set from this we infer that periods of globalization have both benefits and drawbacks for international investors globalization expands the opportunity set but as a result the benefits from diversification rely increasingly on investment in emerging markets

business cycles synchronicity and income levels has globalisation brought us closer than ever research on business cycle linkages shows a tendency to model countries of relatively the same income levels jointly however the issue of whether these countries move along the same business cycles has not been formally investigated in the literature in this paper we take this approach and investigate whether each group of countries follows its own dynamics and is therefore subjected to the same business cycle and whether these cycles are independent of each other across income groups results indicate that high income per capita countries hics tend to be guided by stronger similarity in business cycles than countries in the middle mics and low income lics groups in search for an explanation of the business cycles synchronicity observed panel data analysis was explored the results from the robust fixed effects estimation show neither trade openness nor shocks to consumption underlie international business cycle synchronization but rather shocks to oil prices

what is the value of agricultural economics research the output of agricultural economics research is information much of it aimed at designing or improving institutions bayesian decision theory and economic surplus analysis have been suggested as possible approaches to evaluate that information this article takes a critical look at the strengths and weaknesses of combining those approaches for empirical evaluation of agricultural economics research it presents three case studies utilizing prior and posterior probabilities elicited from key decision makers direct application of the probabilities to a simple set of states and actions is best suited to situations involving a single policy making center or a consensus decision making process most economists feel their work has value but few can say how much economists have made significant contributions to our understanding of the value of technology oriented research but have devoted little attention to assessing the benefits of social science research ssr including agricultural economics research aer as accountability concerns have increased federal and state officials increasingly ask for evidence of research impacts many professional associations in the production sciences have drawn on quantitative estimates provided by economists to bolster their claims that research in their areas is a good investment social sciences make do with anecdotal evidence a nascent literature on evaluating social science research including agricultural economics includes studies by gardner

are correlations of stock returns justified by subsequent changes in national outputs abstract in an integrated world capital market the same pricing kernel is applicable to all securities we apply this idea to the stock returns of different countries we investigate the underlying determinants of cross country stock return correlations first we determine for a given measured degree of commonality of country outputs what should be the degree of correlation of national stock returns we propose a framework that contains a statistical model for output and an intertemporal financial market model for stock returns we then attempt to match the correlations generated by the model with measured correlations our results show that under the hypothesis of market segmentation the model correlations are much smaller than observed correlations however assuming world markets are integrated our model correlations can be matched with observed correlations

spotting sunspots some evidence in support of models with self fulfilling prophecies abstract this paper adds financial assests to roger farmer s business cycle model with increasing returns and self fulfilling beliefs by using information from the financial markets in conjunction with the structure of the model we can uncover from financial data the belief shocks that drive the model specifically we assume that belief shocks drive both economic fluctuations and asset returns the financial market information allows us to identify these shocks we use our methods to generate dynamic simulations of the model and show that it has incremental predictive power for key us time series

common currency common market does the common currency promote goods market integration within the emu we argue that such an effect is likely but that the mechanism typically proposed lower costs of arbitrage because of increased price transparency is likely to be of minor importance instead we sketch a duopoly model which stresses that lower possibility of future real exchange rate variability lowers the option value of being able to price discriminate the euro would promote market integration because it is less valuable for firms to segment markets in addition we argue that fairness concerns and less risk associated with third party arbitrage

advanced economies and emerging markets dissecting the drivers of business cycle synchronization abstract what are the divers of business cycle synchronization within and between advanced and emerging economies at the sector level this question is addressed by analysing international co movements of value added growth in a multi sector dynamic factor model the model contains a world factor region factors sector factors country factors and idiosyncratic components the model is estimated using bayesian methods for 9 disaggregated sectors in 5 developed economies g5 and 19 emerging economies for the 1972 2009 period the results suggest that while there exists a common regional business cycle in the g5 fluctuations in sectoral value added growth are dominated by country specific factors in the emerging markets despite that the international factor the sum of world and sector factors is more important than the region factor suggesting that the emerging markets are more synchronized with the g5 a simple regression shows that i the world factor would be more important the larger the share of agriculture in output ii in more open economies the sector factor is more important in explaining sectoral value added growth fluctuations iii the region factors is more important the richer and the less volatile the economy finally a comparison of the variance of sectoral value added growth accounted for by each factor from the pre to the post globalization period shows convergence of the business cycles within the g5 and em respectively the changes in the contribution of the world sector and region factor are due to changes in the importance of those factors within sectors however for the emerging markets the fall in the importance of the country factors is dominated by changes in the structural composition of the economies therefore the evolution of the structural composition in the emerging markets could be an important driver for more synchronized business cycles at the regional and international level

determinants of business cycle comovement a robust analysis abstract this paper investigates the determinants of business cycle comovement between countries our dataset includes over 100 countries both developed and developing we search for variables that are robust in explaining comovement using the approach of leamer amer econom rev 73 1983 31 variables considered are i bilateral trade between countries ii total trade in each country iii sectoral structure iv similarity in export and import baskets v factor endowments and vi gravity variables we find that bilateral trade is robust however two variables that the literature has argued are important for business cycles industrial structure and currency unions are found not to be robust

did sunspot forces cause the great depression abstract we apply a dynamic general equilibrium model to the period of the u s great depression in particular we examine a modification of the real business cycle model in which the possibility of indeterminacy of equilibria arises in other words agents self fulfilling expectations can serve as a primary impulse behind fluctuations we find that the model driven only by these measured sunspot shocks can explain well the entire depression era that is the decline from 1929 to 1932 the subsequent slow recovery and the recession that occurred in 1937 1938

impact assessment of policy oriented international agricultural research evidence and insights from case studies summary assessing the impact of policy oriented research is fraught with methodological difficulties ranging from attributing influence on policy change to constructing an appropriate counterfactual the six case studies in this special section address these challenges in the context of international agricultural research methodological and analytical lessons are drawn about the uptake and influence of policy oriented research on policy change and about the conduct of cost benefit analysis for such research the authors of the studies effectively used a key informant approach to document uptake and influence for policy reforms that were believed to have incorporated well defined outputs from policy research

the euro and corporate valuations in this paper we study the changes in corporate valuations induced by the adoption of the euro as the common currency in europe we use corporate level data from seventeen european countries of which eleven adopted the euro we show that the introduction of the euro has increased tobin s q ratios by 17 1 in the euro area countries that previously had weak currencies part of the increase in corporate valuations is explained by the decrease in interest rates and by the decrease in the cost of equity the increases in tobin s q are larger for firms that would be harmed by currency devaluations the author 2008 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oxfordjournals org oxford university press

the role of international factors in the business cycle a multi country study abstract empirical research has been conducted on the various theories of the business cycle over many countries however very little research has attempted to undertake a multi country disaggregate investigation into the sources of output change this paper decomposes fluctuations in industry output in a particular country into 1 a nation specific shock 2 an industry specific shock 3 a common shock and 4 an idiosyncratic factor using a dynamic factor analysis state space approach the paper finds that the industry specific impulse explains a significant but small part of the variance of the forecast error this provides limited support for the disaggregated real business cycle paradigm

an inquiry into the sources of macroeconomic fluctuations abstract this paper attempts to decompose the sources of fluctuations in quarterly employment by industry and region into 1 an aggregate national shock 2 region specific shocks 3 industry specific shocks and 4 idiosyncratic factors the empirical analysis is motivated by a dynamic theory of the business cycle the empirical methodology is the engle watson dynamic mimic model implemented via the em algorithm the work is motivated as an attempt to compare empirically aggregate single factor theories of the cycle with real business cycle theories emphasizing industrial or regional shocks

the g7 business cycle in a globalized world abstract using a factor structural var for 14 countries out of the g20 group we document that output innovations originating outside the g7 account for shares of 10 to almost 25 percent in the business cycle fluctuations of g7 gdp growth using auxiliary regressions we additionally find that these innovations contribute noticeably relative to g7 output innovations to short term fluctuations in important other national g7 variables such as employment the current account balance inflation and inflation volatility and in global macroeconomic indicators like the oil price world stock market returns and exchange rate volatility the results indicate that in a globalized world spillovers from emerging markets and industrial countries other than the g7 play a relevant role for major aspects of the g7 and world business cycle

measuring european financial integration in this paper we present a set of specific measures to quantify the state and evolution of financial integration in the euro area five key markets are considered namely the money corporate bond government bond credit and equity markets building upon the law of one price we have developed two types of indicators that can be broadly categorized as price based and news based measures we have complemented these measures by a number of quantity based indicators mainly related to the evolution of the home bias results indicate that the unsecured money market is fully integrated while integration is reasonably high in the government and corporate bond markets as well as in the equity markets the credit market is among the least integrated especially in the short term segment

the immediate challenges for the european central bank immediate challenges for the ecb issues in formulating a single monetary policy this paper discusses a number of issues that the newly constituted board of the ecb will face early on conducting a european monetary policy will be very different from living under the protective umbrella of the bundesbank we discuss voting on the ecb board and argue that the ability to communicate with the public will be critical for the success of the new institution we also ask how a single monetary policy a common change in the interest rate controlled by the ecb is transmitted to the economy of each member country we show that the monetary process differs significantly inside emu initially at least the cost of a disinflation episode could fall disproportionately on a few member countries those with both a financial structure that spreads a monetary contraction widely and a wage price structure that is relatively inflexible this process moreover is sure to evolve in part as a result of financial industry restructuring already under way but in part accentuated by the common money furthermore as the lucas principle suggests the wage price process itself will adapt to the changing focus of european monetary policy rudi dornbusch carlo favero and francesco giavazzi

financial integration specialization and systemic risk this paper studies the implications of cross border financial integration for financial stability when banks loan portfolios adjust endogenously banks can be subject to sectoral and aggregate domestic shocks after integration they can share these risks in a complete interbank market when banks have a comparative advantage in providing credit to certain industries financial integration may induce banks to specialize in lending an enhanced concentration in lending does not necessarily increase risk because a well functioning interbank market allows to achieve the necessary diversification this greater need for risk sharing though increases the risk of cross border contagion and the likelihood of widespread banking crises however even though integration increases the risk of contagion it improves welfare if it permits banks to realize specialization benefits

government debt in the euro area evidence from dynamic factor analysis abstract this paper shows that an unobserved common factor drives the co movement of government debt in the euro area the old age dependency ratio explains the factor after controlling for the maastricht treaty the adoption of the euro and the ongoing crisis

common and idiosyncratic disturbances in developed small open economies abstract using an estimated dynamic stochastic general equilibrium model i show that shocks to a common international stochastic trend explain on average about 10 of the variability of output in several small developed economies these shocks explain roughly twice as much of the volatility of consumption growth as the volatility of output growth when the model is expanded to include a common stationary productivity shock the model attributes around 23 of the variability of output to those international common innovations country specific disturbances account for the bulk of the volatility in the data substantial heterogeneity in the estimated parameters and stochastic processes translates into a rich array of impulse responses across countries

how strong is co movement in employment over the business cycle evidence from state sector data abstract this study measures the extent of co movement in employment across states and sectors at business cycle frequencies the strength of co movement is quantified using the cohesion measure developed by croux forni and reichlin rev econ statist 83 2001 232 the data indicate that cohesion is generally positive for the state sector pairs although the distributions mass around relatively low values the results suggest that cohesion has risen over time and that cohesion increases with spatial aggregation evidence reveals that the measured degree of co movement is sensitive to the chosen periodicity of the data and that there is much greater cohesion across states for a given sector than across different sectors within a state an investigation into the sources of cross state variation in cohesion reveals that important determinants include the share of state employment in manufacturing the different effects of monetary policy actions on each state s employment and the degree of sectoral diversity within a state

sectoral shocks and metropolitan employment growth abstract in this paper we study the sources of industry employment growth in each of five metropolitan statistical areas msas the objective is to understand the relative importance of aggregate disturbances versus local sectoral shocks in generating observed employment fluctuations at the msa level the empirical evidence presented in this paper derives from structural vector autoregressions svars estimated for each of the five msas estimations use monthly employment data covering nine one digit industrial categories for the period 1951 1 1999 8 as well as two variables that capture the influences of aggregate i e national shocks on msas we find that within msa industry shocks explain considerably more of the forecast error variance in industry employment growth than do aggregate shocks sectoral shocks account for between 87 and 94 of the 36 month ahead forecast error variance among individual local sectors shocks to msa specific government manufacturing and service sector employment growth are the predominate sources of variability

the euro and european financial market dependence a time varying copula model is used to investigate the impact of the introduction of the euro on the dependence between 17 european stock markets during the period 1994 2003 the model is implemented with a gjr garch ma t model for the marginal distributions and the gaussian copula for the joint distribution which allows capturing time varying non linear relationships the results show that within the euro area market dependence increased after the introduction of the common currency only for large equity markets such as in france germany italy the netherlands and spain structural break tests indicate that the increase in financial market dependence started around the beginning of 1998 when euro membership was determined and the relevant information was announced the uk and sweden but not other european countries outside the euro area are found to exhibit an increase in equity market co movement which is consistent with the interpretation that these countries may be expected to join the euro in the future

what lies beneath the euro s effect on financial integration currency risk legal harmonization or trade abstract although recent research shows that the euro has spurred cross border financial integration the exact mechanisms remain unknown we investigate the underlying channels of the euro s effect on financial integration using data on bilateral banking linkages among twenty industrial countries in the past thirty years we also construct a dataset that records the timing of legislative regulatory harmonization policies in financial services across the european union we find that the euro s impact on financial integration is primarily driven by eliminating the currency risk legislative regulatory convergence has also contributed to the spur of cross border financial transactions trade in goods while highly correlated with bilateral financial activities does not play a key role in explaining the euro s positive effect on financial integration

mean reversion in equilibrium asset prices this paper demonstrates that negative serial correlation in long horizon stock returns is consistent with an equilibrium model of asset pricing when investors display only a moderate desire to smooth their consumption commonly used measures of mean reversion in stock prices calculated from historical returns data nearly always lie within a 60 percent confidence interval of the median of the monte carlo distributions implied by the authors equilibrium model from this evidence the authors conclude that the degree of serial correlation in the data could plausibly have been generated by their model copyright 1990 by american economic association

trade interdependence and the international business cycle a stochastic general equilibrium model of the world economy is developed to analyze the contribution of trade interdependence to international business cycles we test some of the implications of the model using data from ten major industrial countries and a variety of detrending techniques to calculate the cyclical component of output we find that the significance of trade in the transmission of economic disturbances across countries is not robust to the choice of the detrending method in general the role of trade interdependence is moderate and seem to have been stronger in the period before 1973

international demand and liquidity shocks in a svar model of the australian economy a structural vector autoregressive model of the australian economy that allows for international shocks from the usa japan as well as world commodity prices is specified and estimated for the period 1979 1999 a block exogenous structure linking the three countries is imposed the international linkages are modelled using a factor structure to circumvent problems from estimating large scale dynamic models the factors are estimated recursively using a kalman filter and are found to represent aggregate demand and liquidity shocks for the usa and japan respectively the key empirical result is the usa shocks are the dominant source of international shocks on the australian economy with the japanese economy having a dampening effect on the usa shocks the empirical results also show that australian monetary policy responds to domestic conditions rather than international monetary policy

european financial market dependence an industry analysis this paper uses a copula model to investigate the degree and determinants of european market dependence across 10 industries in 12 euro zone and 8 non euro zone stock markets during the period 1992 2011 most of the industries in euro countries show a dependence increase with the euro area after the introduction of the euro the effects are strongest in countries with larger market capitalization and in the financials industrials consumer goods utilities technology and telecommunications industries overall the export intensity interest rate sensitivity and competitiveness of an industry and the financial development and economic openness of a country are the most important determinants of changes in equity market dependence the period around the lehman collapse also shows higher equity market dependence between european countries while the lower dependence increase during the period of the recent european sovereign debt crisis suggests that country specific factors may matter more than before

real business cycles and the animal spirits hypothesis abstract we calibrate a quantitative equilibrium macroeconomic model with an aggregate technology that is subject to increasing returns and show that this model may display fluctuations at business cycle frequencies even when there are no shocks to the fundamentals of the economy these fluctuations are due to the self fulfilling beliefs of investors which we call animal spirits we compare the impulse response functions predicted by our model and by two other more standard models with a four variable vector autoregression on u s data our animal spirits economy is the most successful of the three at matching broad features of the dynamic responses in the data journal of economic literature classification numbers e00 e3 e32

some unpleasant general equilibrium implications of executive incentive compensation contracts abstract we consider a simple real business cycle model in which shareholders hire self interested executives to manage their firm a generic family of compensation contracts similar to those employed in practice is studied when compensation is convex in the firm s dividend an increase in the firm s output results in a more than proportional increase in the managers income incentive contracts of sufficient yet modest convexity are shown to result in an indeterminate general equilibrium one in which business cycles are driven by self fulfilling fluctuations in managers expectations the proposed family of contracts may yield first best outcomes for specific parameter choices

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

identifying the common component of international economic fluctuations a new approach in this paper we develop an aggregation procedure using time varying weights for constructing the common component of international economic fluctuations the methodology for deriving time varying weights is based on some stylised features of the data documented in the paper the model allows for a unified treatment of cyclical and seasonal fluctuations and also accommodates the dynamic propagation of shocks across countries we find evidence for a world business cycle as well as evidence for a distinct european common component we also find some evidence that macroeconomic fluctuations have become more closely linked across industrial economies in the period after 1973 the world economy has become more closely integrated in recent years due to increasing trade and financial flows across countries this has spurred interest in the question of how the ongoing phenomenon of globalisation has affected the transmission and propagation of business cycle fluctuations across national borders an important question in this context is whether a substantial fraction of economic fluctuations are country specific or if there exists a world business cycle which might be defined as fluctuations that are common across all countries more generally the comovement of macroeconomic aggregates across different countries has become a topic of increasing interest in both academic and policy circles these issues have implications in a number of dimensions an empirical analysis of the relative importance of country specific versus common international fluctuations is of relevance for determining the structure of certain classes of international business cycle models from a policy perspective strong comovement of output across countries at business cycle frequencies implies that external trade would be unlikely to play a significant role in dampening fluctuations domestic policies aimed at affecting the real exchange rate and thereby attempting to boost net exports in the short run would then tend to have limited impact the degree of synchronisation of business cycles across countries also has important implications for short run international policy coordination and for assessing the feasibility of monetary unions therefore identifying and analysing the common component of international economic fluctuations is relevant from a number of different perspectives

world country and sector factors in international business cycles do sector specific factors common to all countries play an important role in explaining business cycle co movement we address this question by analyzing international co movements of value added va growth in a multi sector dynamic factor model the model contains a world factor country specific factors sector specific factors and idiosyncratic components we estimate the model using bayesian methods for 30 disaggregated sectors in the g7 economies for the 1974 2004 period our findings show that although there is a substantial role for sector specific factors fluctuations are dominated by country factors the world factor appears to play a minimal role because when using aggregate data the world factor captures both the factor common to all countries and industries and the factor common to the same industry across countries we then examine how these factors evolved as globalization deepened over the past two decades our results suggest that business cycles at a disaggregate level have not become more synchronized internationally this is mainly driven by a substantial fall in the volatility of world shocks during the globalization period rather than a lower sensitivity of sectoral growth to world factors our results also reveal that world factors appear to be more important for industries with a higher level of international vertical integration

international aspects of public infrastructure investment m odelling infrastructure as an international public good in a two country m odel of trade where each country s social planner behaves strategically we show that the equilibrium levels of infrastructure are sub optimal from a global perspective utilising an appropriate econom etric fram ework and data from 16 european countries over the period 1987 95 we find evidence that accords well with the m ain predictions of our theory thus we are able to offer a plausible theoretical explanation why public capital m ay be undersupplied as suggested by previous em pirical literature