state dependent exchange rate pass through behavior abstract we estimate a bayesian threshold vector autoregression tvar to study the relationship between exchange rate pass through and economic activity in canada and mexico both the model comparison and the analysis of impulse response functions provide strong evidence of a nonlinear relationship and suggest that the exchange rate pass through is dependent on the state of the economy in particular the pass through coefficient is higher when the growth rate of output is large and this difference is statistically significant across regimes for both countries furthermore the results show that the degree of pass through is complete in the case of import prices and that it falls along the distribution chain of goods

nonlinear dynamics in deviations from the law of one price a broad based empirical study abstract in this paper we test empirically the validity of the law of one price using data for five major bilateral us dollar exchange rates and nine goods sectors during the recent floating exchange rate regime since the early 1970s using threshold autoregressive models we find strong evidence of nonlinear mean reversion in deviations from the law of one price with plausible convergence speeds consistent with theoretical arguments on international goods markets arbitrage under transactions costs and with an emerging strand of empirical literature these results contribute towards forming a consensus view in favor of discrete regime switching in deviations from the law of one price and the presence of differing nonzero transactions costs across a broad range of goods and countries

increasing returns home production and persistence of business cycles abstract this paper presents a business cycle model with a propagation mechanism capable of generating persistence of output growth comparable to that observed in the us data the key is that in this model consumption and labor move together not only at the impact of a shock but also for a few periods after that this can happen if there are sufficient increasing returns to make the equilibrium indeterminate the exact degree of increasing returns is estimated so that the distance between the spectra of the model and us output growth is minimized

habit formation in consumer preferences evidence from panel data this paper tests for the presence of habit formation using household data a simple model of habit formation implies a condition relating the strength of habits to the evolution of consumption over time when the condition is estimated with food consumption data from the panel study on income dynamics the results yield no evidence of habit formation at the annual frequency this finding is robust to a number of changes in the specification it also holds for several proxies for nondurables and services consumption created by combining psid variables with weights estimated from consumer expenditure survey data

habit formation and the persistence of monetary shocks this paper studies the persistent e ects of monetary shocks on output previous empirical literature documents this persistence but standard general equilibrium models with sticky prices fail to generate output responses beyond the duration of nominal contracts this paper constructs and estimates a general equilibrium model with price rigidities habit formation and costly capital adjustment the model is estimated via maximum likelihood using u s data on output real money balances and the nominal interest rate econometric results suggest that habit formation and adjustment costs to capital play an important role in explaining the output e ects of monetary policy in particular impulse response analysis shows that the model generates persistent hump shaped output responses to monetary shocks

direct effects of base money on aggregate demand theory and evidence abstract meltzer the transmission process working paper carnegie mellon university 1999a shows that real monetary base growth is a significant determinant of consumption growth in the us controlling for the short term real interest rate in this paper i show that the same property of base money holds for total output relative to trend or potential in both the us and the uk the standard optimizing is lm model cannot account for this result but i show that it can once the long term nominal interest rate is included in the money demand function because the long term real rate matters for aggregate demand the presence of the long term nominal rate in the money demand function increases the effect of nominal money stock changes on real aggregate demand when prices are sticky

habit formation in consumption and its implications for monetary policy models this paper explores a monetary policy model with habit formation for consumers in which consumers utility depends in part on current consumption relative to past consumption the empirical tests developed in the paper show that one can reject the hypothesis of no habit formation with tremendous condence largely because the habit formation model captures the gradual hump shaped response of real spending to various shocks the paper then embeds the habit consumption specication in a monetary policy model and nds that the responses of both spending and inflation to monetary policy actions are signicantly improved by this modication jel d12 e52 e43

why does private consumption rise after a government spending shock recent empirical evidence suggests that private consumption is crowded in by government spending this outcome violates existing macroeconomic theory according to which the negative wealth effect brought about by a rise in public expenditure should decrease consumption

bayesian analysis of nonlinear exchange rate dynamics and the purchasing power parity persistence puzzle abstract we investigate the persistence of real exchange rates using bayesian methods first an algorithm for bayesian estimation of nonlinear threshold models is developed unlike standard grid based estimation the bayesian approach fully captures joint parameter uncertainty and uncertainty about complicated functions of the parameters such as the half life measure of persistence based on generalized impulse response functions second model comparison is conducted via marginal likelihoods which reflect the relative abilities of models to predict the data given prior beliefs about model parameters this comparison is conducted for a range of linear and nonlinear models and provides a direct evaluation of the importance of nonlinear dynamics in modeling exchange rates the marginal likelihoods also imply weights for a model averaged measure of persistence the empirical results for real exchange rate data from the g7 countries suggest general support for nonlinearity with the strength of the evidence depending on which country pair is being considered however the model averaged estimates of half lives are almost always as small or smaller than for the linear models alone suggesting that the purchasing power parity persistence puzzle is less of a puzzle than previously thought

exchange rate forecasting on a napkin abstract this paper shows that there are two regularities in foreign exchange markets in advanced countries with flexible regimes first real exchange rates are mean reverting as implied by the purchasing power parity model second the adjustment takes place via nominal exchange rates these features of the data can be exploited even on the back of a napkin to generate nominal exchange rate forecasts that outperform the random walk the secret is to avoid estimating the pace of mean reversion and assume that relative prices are unchanged direct forecasting panel data techniques and non linear models can outperform the random walk but fail to beat this simple calibrated model

time to build and aggregate fluctuations abstract this paper studies the contribution of time to build to the explanation of business cycle phenomena using a simple version of the neoclassical model the analysis shows that it is not evident that multiperiod construction is crucial to the theory of fluctuations

indivisible labor and the business cycle abstract a growth model with shocks to technology is studied labor is indivisible so all variability in hours worked is due to fluctuations in the number employed we find that unlike previous equilibrium models of the business cycle this economy displays large fluctuations in hours worked and relatively small fluctuations in productivity this finding is independent of individuals willingness to substitute leisure across time this and other findings are the result of studying and comparing summary statistics describing this economy an economy with divisible labor and post war u s time series

should monetary policy respond strongly to output gaps much recent monetary policy analysis has featured stochastic simulations with small structural macroeconomic models that include a spending vs saving is sector a price adjustment sector and an interest rate policy rule the first two are frequently specified so as to reflect optimizing behavior policy may or may not be specified as optimizing depending on the study s objectives some leading issues concern modifications to simple quantitative optimizing models that are needed to generate realistic degrees of persistence in inflation and output gap variables a major policy issue is whether it is desirable for monetary policy to respond strongly to the output gap the paper argues that the latter is unobservable and considers the implications of using a trend type measure while the true concept is of a type more in keeping with basic theory in such circumstances highly undesirable consequences are likely to ensue if policy responds strongly to the measured gap this abstract was borrowed from another version of this item

investment gestation lags the difference between time to build and delivery lags the timing of investment and capital stock accumulation can differ as a result of time to build and or delivery lags in this paper simple calibration methods are used to illustrate the differences in these sources of gestation lags

understanding the behavior of business groups a dynamic model and empirical analysis abstract business groups play significant economic roles in many countries motivated by the observation that the literature on business groups is ever expanding yet providing ambiguous or conflicting results based on empirical investigations this paper intends to first develop a theoretical model to explain behavior and performance of business groups and then conduct complementary empirical analysis drawing on penrose s 1959 resource based theory of firm growth this paper models the firms of which some key resources are lumpy or indivisible and thus they must be purchased or installed only in certain sizes this premise in the basic model leads to an advantage for business group firms relative to stand alone firms without respect to the existence of market failure the model also predicts that business group firms will be more profitable in terms of profit to sales and will have higher sales and asset leading to faster growth other things being equal implications of such advantage on firms performance and behavior are investigated first using numerical experiments based on a dynamic optimization model and then regression analyses based on the korean firm data it turns out that a set of testable predictions derived from the basic theoretical model is generally consistent with the conclusions from numerical experiments and empirical tests

why is consumption so smooth for thirty years it has been accepted that consumption is smooth because permanent income is smoother than measured income this paper considers the evidence for the contrary position that permanent income is in fact less smooth than measured income so that the smoothness of consumption cannot be straightforwardly explained by permanent income theory the paper argues that in postwar u s quarterly data consumption is smooth because it responds with a lag to changes in income

strategy structure and performance of korean business groups a transactions cost approach the authors use the transactions cost approach to analyze the diversification strategy and the resulting structure chosen by korean business groups to overcome market imperfections prevalent in developing countries business groups that have multidivisional struc ture are thought to show superior economic performance because such s tructure reduces transactions costs arising from organizational failure also major korean business groups have a relational structure showing both vertical integration and the characteristics of the conglomerate the authors modify the model of r e caves and m uekusa 1976 used for japan to obtain the empirical result tha t group affiliated firms show superior economic performance copyright 1988 by blackwell publishing ltd

the impact of affirmative action on labor demand a test of some implications of the le chatelier principle this paper presents an alternative approach to measuring the impact of affirmative action on firms affirmative action is modeled as a series of hiring quotas if the quotas are binding then a firm subject to affirmative action will operate with greater costs of production have less elastic demand for inputs and be less able to substitute between most inputs the results are consistent with the hypothesis that affirmative action regulations significantly constrain firms behavior own wage elasticities are less elastic and most inputs are less substitutable for constrained firms further affirmative action raises costs by 6 5 percent for firms subject to the program copyright 1992 by mit press

monetary policy trade offs and the correlation between nominal interest rates and real output the authors present a structural model of the u s economy that combines their price contracting specification with a term structure relationship an aggregate demand curve and a monetary policy reaction function the model matches important features of postwar data well and provides a structural explanation of the correlation between real output and the short term nominal rate of interest the authors perform a battery of monetary policy experiments that show that as viewed through the lens of this model monetary policy has struck a good balance recently among competing monetary policy objectives copyright 1995 by american economic association

term structure evidence on interest rate smoothing and monetary policy inertia abstract numerous studies have used quarterly data to estimate monetary policy rules or reaction functions that appear to exhibit a very slow partial adjustment of the policy interest rate the conventional wisdom asserts that this gradual adjustment reflects a policy inertia or interest rate smoothing behavior by central banks however such quarterly monetary policy inertia would imply a large amount of forecastable variation in interest rates at horizons of more than 3 months which is contradicted by evidence from the term structure of interest rates the illusion of monetary policy inertia evident in the estimated policy rules likely reflects the persistent shocks that central banks face

consumption and portfolio choice under internal multiplicative habit formation this paper explores the optimal consumption and investment behavior of an individual who derives utility from the ratio between his consumption and an endogenous habit we obtain closed form policies under general utility functionals and stochastic investment opportunities by developing a nontrivial linearization to the budget constraint this enables us to explicitly characterize how habit formation affects the marginal propensity to consume and optimal stock bond investments we also show that in a setting that combines habit formation with epstein zin utility consumption no longer grows at unrealistically high rates at high ages and investments in risky assets decrease

changing performance of business groups over two decades technological capabilities and investment inefficiency in korean chaebols abstract this article differentiates itself from the large volume of existing literature on business groups such as korean chaebols in several aspects first it uses productive efficiency rather than financial efficiency as a performance measure second it defines chaebols in three alternative ways and checks whether the results are robust third and most important it explains the sources of the post crisis change in the performance of korean chaebols in terms of technological capabilities and investment inefficiency this study finds that chaebols have become more efficient than non chaebols in the post crisis period compared with the pre crisis period that inefficiency in investment has always been critical in determining productive inefficiency and that after the 1997 financial crisis korean chaebols have improved their performance by reducing investment inefficiencies and enhancing technological capabilities the results of this study are consistent with the often acknowledged advantages of bus

the substitutability of occupational groups using firm level data abstract labor demand elasticity estimates are presented for a model in which labor groups are defined by occupation while most studies construct labor groups according to non productive characteristics such as race or gender the results corroborate much of the existing research

how costly is affirmative action government contracting and california s proposition 209 abstract this paper investigates the effect of disadvantaged business enterprise subcontractor goals on the winning bids for highway construction contracts using california s proposition 209 which prohibited the consideration of race or gender in awarding state funded contracts after proposition 209 prices on state funded contracts fell by 5 6 relative to federally funded projects for which preferences still applied most of the price decline after proposition 209 resulted from the mix of subcontractors employed which seems to arise from the higher costs of firms located in high minority areas finally short run barriers to entry and expansion may increase the cost of affirmative action

inflation output and markup dynamics with forward looking wage and price setters abstract medium scale new keynesian models are sometimes criticized for their use of backward looking wage and price setting mechanisms and for assuming several types of disturbances including some that would be difficult to interpret economically we propose a dsge model with purely forward looking wage and price setters and parsimoniously chosen disturbances our model emphasizes an interplay between production firms networking and working capital firms can use working capital to finance all or a fraction of their outlays on production factors and use the output of other firms as an input in a what is often called a roundabout production structure our model generates a response of inflation which is mute on impact of a monetary policy shock but highly persistent and very hump shaped afterwards it also yields a large contract multiplier for output two times larger than the one implied by a model relying on indexation only we also show that the response of the price markup can be positive on impact of an expansionary monetary policy shock which differs from the standard countercyclical markup channel emphasized in conventional new keynesian models in contrast to models relying on indexation to past inflation our model produces non inertial responses of inflation to productivity and investment shocks a finding which is broadly consistent with the existing var evidence

the nature of diversified business groups a research design and two case studies diversified business groups dominate the private sectors of most of the world s economies several of these economies have undergone sudden policy changes that significantly increase domestic competitive intensity the authors demonstrate how the changes in corporate scope that accompany such competitive shocks can be used to weigh the importance of different explanations for the existence of diversified business groups the authors illustrate their reasoning by studying the restructuring of two of india s largest business groups following a comprehensive post 1991 package of policy reforms the case studies also elucidate aspects of the restructuring process that should inform larger sample empirical analyses copyright 1998 by blackwell publishing ltd

what do interest rates reveal about the functioning of real business cycle models abstract this paper begins by documenting the extent to which the predictions of standard real business cycle rbc models are incompatible with observed movements in real interest rates the main finding of the paper is that extending the baseline model to include habit persistence in consumption and adjustment costs to capital significantly improves the model s empirical performance in our evaluation of the model s performance we take special care of estimating and testing predictions of the model using both moments drawn directly from the data and moments calculated after identifying shocks to the stochastic trend

assessing nominal income rules for monetary policy with model and data uncertainty nominal income rules for monetary policy have long been debated but two issues are of particular recent interest first there are questions about the performance of such rules over a range of plausible empirical models especially models with and without explicit rational inflation expectations second there are questions about the performance of these rules in real time using the type of data that is actually available contemporaneously to policy makers rather than final revised data this paper determines optimal monetary policy rules in the presence of such model uncertainty and real time data uncertainty and finds only a limited role for nominal output growth

time to build monetary shocks and aggregate fluctuations abstract the idea that the investment process takes time to produce finished capital goods was an integral part of kydland and prescott s early work on real business cycles but this feature has been dropped in much recent work mainly because it seemed to have little effect on macroeconomic dynamics with a generalization of the time to build feature that incorporates multiple types of capital however a new keynesian model can produce u shaped responses in output investment and inflation to a monetary policy shock such responses are not found in many studies that assume no time to build friction in addition different specifications of the time to build structure result in substantially different response patterns for these aggregate variables

long run inflation and the distorting effects of sticky wages and technical change we show that the calvo price setting model is not necessarily inconsistent with evidence of a weak relation between positive trend inflation and price dispersion we identify the interaction between sticky wages and technical change as factors disrupting the allocative role of the wage system under positive trend inflation in turn this interaction generates inefficient wage dispersion as opposed to price dispersion which fuels inflation costs we conclude that it is too early to dismiss the new keynesian model as a useful vehicle to assess the costs of inflation

a quantitative comparison of sticky price and sticky information models of price setting i estimate sticky price and sticky information models of price setting for the united states via maximum likelihood techniques reaching several conclusions first the sticky price model fits best and captures inflation dynamics as well as reduced form equations once hybrid behavior is allowed second the importance of hybrid behavior in sticky price models is potentially consistent with a role for some information imperfections such as sticky information as a complement to nominal price rigidities finally the favorable results herein for the hybrid sticky price model when evaluated by statistics that summarize the relative fit of different models is consistent with the existing literature that is both supportive and dismissive of such models as this literature has largely ignored fit in evaluating such models many previous studies have focused on ancillary issues such as the standard errors associated with certain parameters or granger causality tests that may not provide much information about sticky price models

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

union work rules and efficiency in the building trades this paper estimates the effect of union work rules in the building trades on employment and costs by comparing factor demand elasticities for union and nonunion contractors and subcontractors over micro data from two different types of construction the results show that the elasticities of substitution between labor and nonlabor inputs and own price elasticities for nonlabor inputs are about the same for union and nonunion contractors in contrast the elasticities of substitution among different skill categories of labor and the own price elasticities for each category are much lower under unionism

investment adjustment costs an empirical assessment we evaluate empirical evidence for costs that penalize changes in investment using us industry data in aggregate models such investment adjustment costs have been introduced to help account for a variety of business cycle and asset market phenomena so far no attempt has been made to estimate these costs directly at a disaggregated level we consider an industry model with investment adjustment costs and estimate its parameters using generalized methods of moments the ndings indicate small costs associated with changing the ow of investment at the industry level the weighted average of the industry elasticities with respect to the shadow price of capital which depends inversely on the adjustment cost parameter is more than seven times larger than the largest estimate based on aggregate data we examine potential sources which may account for the large industry aggregate dierence overall our results suggest

increasing returns and unsynchronized wage adjustment in sunspot models of the business cycle a challenge to models of equilibrium indeterminacy based on increasing returns is that required increasing returns for generating indeterminacy can be implausibly large and rise quickly with the relative risk aversion in labor we show that unsynchronized wage adjustment via a relative wage effect can both lower the required degree of increasing returns for indeterminacy to a plausible level and make it invariant to the relative risk aversion in labor consequently indeterminacy and sunspot driven fluctuations can emerge for plausible increasing returns regardless of the relative risk aversion in labor our model generates reasonable dynamics in terms of matching the business cycle and sunspot shocks become more important with labor market friction

on measuring the welfare cost of business cycles lucas 1987 argues that the gain from eliminating aggregate fluctuations is trivial following lucas a number of researchers have altered assumptions on preferences and found that the gain from eliminating business cycles are potentially very large however in these exercises little discipline is placed on preference parameters this paper estimates the welfare cost of business cycles allowing for potential time non separabilities in preferences where discipline is placed on the choice of preference parameters by requiring that the preferences be consistent with observed fluctuations in a model of business cycles that is a theoretical real business cycle world is constructed and the representative agent is then placed in this world the agent responds optimally to exogenous shocks given the frictions in the economy the agent s preference parameters along with other structural parameters are estimated using a bayesian procedure involving markov chain monte carlo methods two main results emerge from the paper first the form for the time non separability estimated in this paper is very different than the forms suggested and used elsewhere in the literature second the welfare cost of business cycles is close to lucas s estimate

time to build and the capital structure calibrating the time to build parameter in one sector models is non trivial because capital includes plant equipment etc having different gestation lags this issue is clarified by explaining when the long run dynamics of these models matches that of a more realistic multi sector counterpart

money in an estimated business cycle model of the euro area this article examines the role of money in a small scale dynamic general equilibrium model of the euro zone estimated by maximum likelihood the model allows for both intertemporal and intratemporal non separability in preferences we find first that real balances do not affect the marginal utility of consumption second money demand shocks mainly help to forecast real balances while real shocks explain the bulk of price output and interest rates fluctuations third the calculation of the natural rate of interest reveals that the evolution of the interest rate is mostly accounted for by the real sources of fluctuations

monetary policy rules and the indicator properties of asset prices abstract we investigate relationships between asset prices and inflation in a modern keynesian model in which monetary policy controls inflation by manipulating the federal funds rate the indicator properties of asset prices are quite sensitive to the monetary policy rule including the asset prices themselves in the reaction function can invert the sense of the indicator properties targeting the asset prices is tantamount to targeting the real interest rate when all of the weight in the reaction function is placed on asset prices the real rate converges so rapidly that policy loses control of inflation

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

maximum likelihood in the frequency domain the importance of time to plan abstract we illustrate the use of various frequency domain tools for estimating and testing dynamic stochastic general equilibrium models we show how to exploit the well known fact that the log gaussian density function has a linear decomposition in the frequency domain we also propose a new resolution to the problem that the phase angle between two variables is not uniquely determined these methods are applied to the analysis of business cycles our substantive findings confirm existing results in the literature which suggest that time to plan in the investment technology has a potentially useful role to play in business cycle analysis

what drives private saving around the world the authors investigate the policy and non policy factors behind saving disparities using a large panel data set and an encompassing approach including several relevant determinants of private saving they extend the literature in several dimensions by 1 using the largest data set on aggregate saving assembled to date 2 using panel instrumental variable techniques to correct for endogeneity and heterogeneity 3 performing robustness checks on changes in estimation procedures data samples and model specification their main empirical findings a private saving rates show considerable inertia are highly serially correlated even after controlling for other relevant factors b private sector rates rise with the level and growth rate of real per capita income so policies that spur development are in indirect but effective way to raise private saving rates c predictions of the life cycle hypothesis are supported in that dependency ratios generally have a negative effect on private saving rates d the precautionary motive for saving is supported by the finding that inflation conventionally taken as a summary measure of macroeconomic volatility has a positive impact on private saving holding other facts constant e fiscal policy is a moderately effective tool for raising national saving f the direct effect of financial liberalization are largely detrimental to private saving rates greater availability of credit reduces the private saving rate financial depth and higher real interest rates do not increase saving

tax policy and aggregate demand management under catching up with the joneses this paper examines the role for tax policies in productivity shock driven economies with catching up with the joneses utility functions the optimal tax policy is shown to affect the economy countercyclically via procyclical taxes i e cooling down the economy with higher taxes when it is overheating in booms and stimulating the economy with lower taxes in recessions to keep consumption up thus models with catching up with the joneses utility functions call for traditional keynesian demand management policies but for rather unorthodox reasons

expectations as a source of macroeconomic persistence evidence from survey expectations in a dynamic macro model abstract embedding survey expectations in a standard dsge model helps to identify key slope parameters in standard relationships dramatically reduces the need for lagged dependent variables often motivated by price indexation and habit formation and obviates the need for autocorrelated structural shocks in the key equations formal statistical tests demonstrate that much of the persistence in aggregate data is better accounted for by slow moving expectations rather than by habits indexation and autocorrelated structural shocks

the purchasing power parity persistence paradigm abstract rogoff journal of economic literature 1996 34 647 668 describes the remarkable consensus of 3 5 year half lives of purchasing power parity deviations among studies using long horizon data these studies however focus on rejections of unit roots in real exchange rates and do not use appropriate techniques to measure persistence our half life estimates explicitly account for serial correlation sampling uncertainty and most importantly small sample bias calculating confidence intervals as well as point estimates for long horizon and post 1973 data we find that even though most of the point estimates lie within the 3 5 year range univariate methods provide virtually no information regarding the size of the half lives

investment and time to plan and build a comparison of structures vs equipment in a panel of italian firms time to build models of investment expenditures play an important role in many traditional and modern theories of the business cycle especially for explaining the dynamic propagation of shocks we estimate the structural parameters of a time to build model using annual firm level investment data on equipment and structures for expenditures on equipment we find no evidence of time to build effects beyond one year for expenditures on structures by contrast there is clear evidence of such effects in the range of two to three years the contrast between equipment and structures is intuitively reasonable and consistent with previous results the estimates for structures also indicate that initial period expenditures are low and increase as projects near completion these results provide empirical support for including time to plan effects for investment in structures more generally these results suggest a potential source of specification error for q models of investment and production based asset pricing models that ignore the time required to plan build and install new capital jel d24 g31 c33 c34

business groups in a market economy abstract the purpose of this paper is to examine the nature and significance of the interfirm relationship called the business group first the nature of the japanese business group is discussed it is then pointed out that the business group is not a phenomenon unique to japan and an effort is made to explain the significance of the business group in the context of a market economy using the williamsonian approach to questions of internal organization and the market finally the relationship between the input output relationship of the firms and their group affiliation is tested

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

time to build capital revisiting investment cash flow sensitivities a large body of empirical work has established the significance of cash flow in explaining investment dynamics this finding is further taken as evidence of capital market imperfections we show using a perfect capital markets model that time to build for capital projects creates an investment cash flow sensitivity as found in empirical studies that may not be indicative of capital market frictions the result is due to mis specification present in empirical investment q equations under time to build investment in addition time aggregation error can give rise to cash flow effects independently of the time to build effect importantly both errors arise independently of potential measurement error in q evidence from a large panel of u k manufacturing firms confirms the validity of the time to build investment channel

endogenous markups intensity of competition and persistence of business cycles in order to study the propagation mechanism of business cycles in particular to investigate how the intensity of competition affects market structure and output persistence over business cycles this paper presents a real business cycle model with imperfect competition and increasing returns to scale this analysis considers the markups of price over cost to be endogenous with endogenous markups two standard forms of oligopolistic competition bertrand and cournot are considered results show that 1 the propagation mechanism in the sense of output persistence is greater under cournot 2 the propagation mechanism is unequivocally greater with imperfect competition regardless of whether markups are endogenous or not and 3 under imperfect competition the propagation mechanism is greater with endogenous markups than with exogenous markups overall these results suggest that more intense competition produces lower persistence in output growth and thus a weaker propagation mechanism in a calibration exercise these differences were also found to be quantitatively important

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

business groups and social welfare in emerging markets existing evidence and unanswered questions abstract this paper reviews existing studies of the role of emerging market business groups a ubiquitous but poorly understood organizational form i first suggest that understanding the definition of business groups is itself an interesting albeit under studied research issue i then argue that the existing evidence suggests that the performance effects of group affiliation are large and generally positive there is substantial evidence that part of this is due to welfare enhancing functions originating in the idea that groups substitute for missing outside institutions but that part is also due to welfare reducing minority shareholder exploitation evidence is lacking on the extent to which groups facilitate rent seeking or the exercise of market power evidence is also lacking on the extent to which groups hamper the future development of markets the paper identifies areas where research is needed before current competition policy experiments in countries like china india and korea can be evaluated

staggered price setting staggered wage setting and business cycle persistence abstract staggered price setting and staggered wage setting are commonly viewed as similar mechanisms in generating persistent real effects of monetary shocks in this paper we distinguish the two mechanisms in a dynamic stochastic general equilibrium framework we show that although the dynamic price setting and wage setting equations are alike a key parameter governing persistence is linked to the underlying preferences and technologies in different ways with reasonable parameter values the staggered price mechanism by itself is incapable of while the staggered wage mechanism plays an important role in generating persistence

dynamic inconsistencies counterfactual implications of a class of rational expectations models a number of recent papers have developed dynamic macroeconomic models that incorporate rational expectations and optimizing foundations while the theoretical motivation behind these models is sound the dynamic implications of many of the specifications that assume rational expectations and optimizing behavior can be seriously at odds with the data for both inflation and real side variables exhibit gradual and hump shaped responses to real and monetary shocks for models that are intended for monetary policy analysis these dynamic shortcomings should be considered quite serious when monetary policy has only short run effects on real variables the inability to approximately capture the short run responses of inflation or real variables to policy shocks makes a model unsuitable for policy analysis this paper identifies a simple feature common to many dynamic specifications for prices and real variables that causes the problem the paper also discusses several potential solutions to the problem including alterations to the expectations assumption to the order of differencing implicit in the model and to the underlying behavioral assumptions this abstract was borrowed from another version of this item

generating real persistent effects of monetary shocks how much nominal rigidity do we really need abstract this paper attempts to assess whether money can generate persistent economic fluctuations in dynamic general equilibrium models of the business cycle we show that a small nominal friction in the goods market can make the response of output to monetary shocks large and persistent if it is amplified by real wage rigidity in the labor market we also argue that for plausible levels of real wage rigidity a small degree of nominal stickiness is sufficient for money to produce economic fluctuations as persistent as those observed in the data

why does the cyclical behavior of real wages change over time the cyclical behavior of real wages has evolved from mildly countercyclical during the interwar period to modestly procyclical in the postwar era this paper presents a general equilibrium business cycle model that helps explain the evolution in the model changes in the real wage cyclicality arise from interactions between nominal wage and price rigidities and an evolving input output structure

the federal funds rate and the channels of monetary transmission the authors show that the interest rate on federal funds is extremely informative about future movements of real macroeconomic variables then they argue that the reason for this forecasting success is that the funds rate sensitively records shocks to the supply of bank reserves that is the funds rate is a good indicator of monetary policy actions finally using innovations to the funds rate as a measure of changes in policy the authors present evidence consistent with the view that monetary policy works at least in part through credit i e bank loans as well as through money i e bank deposits copyright 1992 by american economic association

input demand elasticities for heterogeneous labor firm level estimates and an investigation into the effects of aggregation labor economists have paid increasing attention to the estimation of demand elasticities for heterogeneous labor the majority of these studies investigate the effect on wage rates resulting from exogenous changes in factor quantities i e the measurement of elasticities of complementarity examples of these studies abound borjas for example investigates the impact of differences in labor market representation on the earnings of racial groups 8 in another paper borjas defines immigrants as a separate labor group and is able to determine the impact of immigration on the wages earned by natives 9 berger defines labor inputs along education and gender lines thereby allowing for the investigation of changes in the age education composition of the work force on wage rates 5 and grant and hamermesh study the effect of increasing female labor force participation on the wages earned by youth and adults 17 less attention has been paid to the study of the responsiveness of employment to exogenous changes in wage rates i e the measurement of elasticities of substitution less attention has been focused on this issue because the data requirements are more stringent since in order to presume that wage rates are exogenously determined the unit of observation must be small ideally establishmentor firm level data would be used the relative inaccessibility of these type of data has led researchers to use more aggregated figures such as smsa level or industry level data to address microissues as long as wage rates are determined exogenously the unit of observation chosen is appropriate there are real concerns however about the adequacy of more aggregated units to describe the behavior of firms 2 this study addresses the issue of whether micro level data are in fact needed to accurately measure elasticities of substitution among labor groups a firm level data set that includes input

confidence intervals for half life deviations from purchasing power parity existing point estimates of half life deviations from purchasing power parity ppp around 3 5 years suggest that the speed of convergence is extremely slow this article assesses the degree of uncertainty around these point estimates by using local to unity asymptotic theory to construct confidence intervals that are robust to high persistence in small samples the empirical evidence suggests that the lower bound of the confidence interval is between four and eight quarters for most currencies which is not inconsistent with traditional price stickiness explanations however the upper bounds are infinity for all currencies so we cannot provide conclusive evidence in favor of ppp either

endogenous growth and time to build the ak case abstract in this paper a continuous time ak model is fully analyzed under the time to build assumption the existence and uniqueness of a real balanced growth path as well as oscillatory convergence are proved transversality conditions and capital depreciation are highlighted moreover it has been shown how the introduction of the time to build assumption supports some interesting empirical evidences such as the negative link between mean output growth and output growth volatility finally numerical simulations are provided for different choices of the time to build delay in order to clarify the analytical results

saving growth and investment a macroeconomic analysis using a panel of countries this paper provides a descriptive analysis of the long and short run correlations among saving investment and growth rates for 123 countries over the period 1961 94 three results are robust across data sets and estimation methods i lagges saving rates are positively related to investment rates ii investment rates granger cause growth rates with a negative sign iii growth rates granger cause investment with a positive sign

modeling non linearities in real effective exchange rates abstract the aim of this paper is to test for and model non linearities in the real effective exchange rates of 10 major industrial countries the g 10 to exploit non linear dependencies in exchange rates we apply the star smooth transition autoregressive family of models these non linear models imply the existence of two distinct regimes in exchange rates with potentially different dynamic properties but the transition between the regimes is smooth tests reject linearity for eight exchange rates the real exchange rate process is cyclical in both regimes for almost all countries and there appears to be some evidence of asymmetry star models outperform hamilton s markov regime switching model in an out of sample forecasting contest

real exchange rate behavior the recent float from the perspective of the past two centuries using annual data spanning two centuries for dollar sterling and franc sterling real exchange rates we find strong evidence of mean reverting real exchange rate behavior using simple stationary autoregressive models estimated on prefloat data we easily outperform nonstationary real exchange rate models in dynamic forecasting exercises over the recent float such stationary univariate equations explain 60 80 percent of the in sample variation in real exchange rates although the degree of short run persistence may be high the econometric estimates imply a half life of shocks to the real exchange rate of about 6 years for dollar sterling and a little under 3 years for franc sterling

coase revisited business groups in the modern economy ronald coase s celebrated query as to why economic actors typically aggregate into entities called firms rather than transacting as individuals in a market has engendered a vigorous stream of research this paper asks a parallel question why is it that in all modern economies firms themselves aggregate into larger entities often more stable than any literature predicts which are here referred to as business groups after establishing some working definitions and discussing the curious conjunction of empirical importance and analytical invisibility of business groups an attempt is made to establish the most significant dimensions along which such groups vary we end with some speculations on the role of these groups in economic development copyright 1995 by oxford university press

exchange rate dynamics in south africa abstractthe structure of the nominal exchange rates in south africa is examined by using fractional integration we investigate the levels and the volatilities against the us dollar the british po

affirmative action and labor markets affirmative action remains controversial the controversy extends from the original antidiscrimination legislation and its interpretation to estimates of affirmative action s effect on the labor market this paper provides a progress report on our recent efforts at detecting the effects of affirmative action on minority wages and employment although we find a substantial increase in wages for black men and black women over our sample period the timing of these wage changes is surprising most of the wage gains came prior to 1974 before the establishment of an effective monitoring structure for affirmative action indeed when the powers of the eeoc and ofcc are greatest the wage effects for young blacks are somewhat perverse using eeo 1 reports we find a major shift in black employment toward firms most vulnerable to the monitoring and potential sanctions of the affirmative action programs as with wages the shift in minority employment came prior to the expansion of the powers and budgets of the ee

the own wage elasticity of labor demand a meta regression analysis firms labor demand responses to wage changes are of key interest in empirical research and policy analysis however despite extensive research estimates of labor demand elasticities remain subject to considerable heterogeneity in this paper we conduct a comprehensive meta regression analysis to re assess the empirical literature on labor demand elasticities building on 942 elasticity estimates from 105 different studies we identify sources of variation in the absolute value of this elasticity heterogeneity due to the theoretical and empirical specification of the labor demand model different datasets used or sectors and countries considered explains more than 80 of the variation in the estimates we further find substantial evidence for the presence of publication selection bias as estimates of the own wage elasticity of labor demand are upwardly inflated

does affirmative action reduce gender discrimination and enhance efficiency new experimental evidence we investigate experimentally the impact of quota policies on gender discrimination in hiring decisions by testing whether affirmative action increases female employment we also ask whether firm performance is affected by such policies our experiment consists of three treatments in the baseline no quota treatment groups of two employers and six potential job candidates are formed employers have to hire two workers based on information on candidate characteristics including gender and years and subject of study the second low penalty treatment is identical to the baseline except there is a quota such that at least half of the employees hired must be women if this quota is not respected the firm has to pay a penalty the last high penalty treatment is the same as the low penalty treatment except that the penalty is significantly higher we find that women are ranked unfavorably in the absence of a quota and the introduction of a quota significantly reduces gender discrimination firm performance is not affected by the introduction of quotas

human capital formation and business cycle persistence abstract in this paper we examine the role of the formation of human capital in propagating shocks over the business cycle we show that a two sector equilibrium business cycle model with human capital is able to generate persistence in the growth of output and other aggregate variables comparable to that observed in the post war us data a key feature is the relatively low elasticity of substitution between skilled and unskilled labor in the production of human capital

can a real business cycle model pass the watson test abstract watson 1993 measures of fit for calibrated models journal of political economy 101 6 1011 1041 proposes a procedure for evaluating the fit of a dynamic equilibrium business cycle model under watson s criterion the standard real business cycle rbc model fails dramatically in reconciling the dynamics of the model with the data this inability to account for the dynamics of us aggregate data remains a major challenge to rbc theory this paper demonstrates that reasonable modifications can bring rbc theory into closer conformity with the data the empirical results indicate that when habit formation on leisure choice and employment externality are incorporated into the analysis the striking spectral density differentials documented by watson virtually vanish at business cycle frequencies

an optimizing is lm specification for monetary policy and business cycle analysis we ask whether relations of the is lm type can sensibly be used for the aggregate demand portion of a dynamic optimizing general equilibrium model intended for analysis of issues regarding monetary policy and cyclical fluctuations the main result is that only one change the addition of a term regarding expected future income is needed to make the is function match a fully optimizing model whereas no changes are needed for the lm function this modification leads to a dynamic forward looking model of aggregate demand that is tractable and usable with a wide variety of aggregate supply specifications theoretical applications concerning price level determinacy and gradual price adjustment are included

strategic monetary policy with non atomistic wage setters monetary policy analyses usually assume an atomistic private sector thereby ignoring potential interactions between policy and wage setting decisions yet non atomistic wage setters are a key feature of several industrialized economies we study the economic consequence of non atomistic agents and show that this qualifies previous results on the effects and desirability of a conservative central banker in particular the central bank aversion to inflation may have a permanent effect on structural employment while no such effect emerges with atomistic agents

engineering growth business group structure and firm performance in china s transition economy business groups have received increasing attention from academics interested in interorganizational relations and their impact on firms as part of industrial reform the chinese government began in the mid 1980s to encourage firms to form business groups with structural characteristics that promised to enhance financial performance and productivity using 1988 90 panel data on china s 40 largest business groups and their 535 member firms the study finds that the presence and predominance of interlocking directorates and finance companies in business groups improved the financial performance and productivity of the groups member firms in addition firms in groups with nonhierarchical organizational structures performed better than firms in hierarchical groups suggesting that complete integration into a hierarchical organization is not an optimal strategy

transactions costs and nonlinear adjustment in real exchange rates an empirical investigation eolquilibrium models of real exchange rate determination in the presence of transactions costs imply a nonlinear adjustment process toward purchasing power parity ppp conventional cointegration tests which ignore the effect of transactions costs may be biased against the long run ppp hypothesis our results using both monthly data for the interwar period and annual data spanning two centuries clearly reject the linear framework in favor of an exponential smooth transition autoregressive process the systematic pattern in the estimates of the nonlinear models provides strong evidence of mean reverting behavior for ppp deviations and helps explain the mixed results of previous studies

are bid preferences benign the effect of small business subsidies in highway procurement auctions abstract bid preferences in procurement auctions allow firms from an identifiable group an advantage in bidding against unfavored firms while economic efficiency is expected to fall as a result of bid preferences government procurement costs may either increase or decrease depending on the competitive response of favored and unfavored firms this paper uses data from california auctions for road construction contracts where small businesses receive a 5 percent bid preference in auctions for projects using only state funds and no preferential treatment on projects using federal aid i show that while firms bidding behavior matches theoretical predictions procurement costs are 3 8 percent higher on auctions using preferences the higher procurement cost in preference auctions is attributed to reduced participation by lower cost large firms structural estimates of latent firm costs are then used to evaluate how efficiency and the division of surplus between firms and the government are impacted by bid preferences firm profits are 3 1 percent lower under bid preferences however this is overwhelmed by the efficiency loss due to reduced large firm participation the efficiency loss conditional on firm participation is estimated to represent around 0 1 percent of overall procurement costs including the adverse effect of preferences on the participation of large firms increases the estimated efficiency loss to 3 6 percent which represents 27 cents for each additional dollar awarded to small businesses through the program counterfactual simulations indicate that if participation were instead inelastic to bid preferences the 5 percent bid preference would be close to the optimal level

the performance of forecast based monetary policy rules under model uncertainty we investigate the performance of forecast based monetary policy rules using five macroeconomic models that reflect a wide range of views on aggregate dynamics we identify the key characteristics of rules that are robust to model uncertainty such rules respond to the one year ahead inflation forecast and to the current output gap and incorporate a substantial degree of policy inertia in contrast rules with longer forecast horizons are less robust and are prone to generating indeterminacy in light of these results we identify a robust benchmark rule that performs very well in all five models over a wide range of policy preferences

time to build and investment the paper investigates the effect of the time to build technology on investment dynamics it explains the positive autocorrelation of investment by showing that investment is serially correlated once the time to build technology is taken into account the paper also shows that the time to build technology can explain a substantial portion of the variation in aggregate investment data using estimated marginal q the paper illustrates that investment responds asymmetrically to different levels of q a fact in favor of the irreversibility argument