sticky prices and monetary policy evidence from disaggregated us data this paper disentangles fluctuations in disaggregated prices due to macroeconomic and sectoral conditions using a factor augmented vector autoregression estimated on a large data set on the basis of this estimation we establish eight facts 1 macroeconomic shocks explain only about 15 of sectoral inflation fluctuations 2 the persistence of sectoral inflation is driven by macroeconomic factors 3 while disaggregated prices respond quickly to sector specific shocks their responses to aggregate shocks are small on impact and larger thereafter 4 most prices respond with a significant delay to identified monetary policy shocks and show little evidence of a price puzzle contrary to existing studies based on traditional vars 5 categories in which consumer prices fall the most following a monetary policy shock tend to be those in which quantities consumed fall the least 6 the observed dispersion in the reaction of producer prices is relatively well explained by the degree of market power 7 prices in sectors with volatile idiosyncratic shocks react rapidly to aggregate monetary policy shocks 8 the sector specific components of prices and quantities move in opposite directions

integration of spatial markets studies of spatial market integration draw their implications from a theory which assumes that there are no intraregional transport costs an alternative theory is offered based on the assumptions that buyers and sellers are spatially dispersed and intraregional transport costs are significant this implies that the market is a linked oligopoly or oligopsony and that market integration tests are tests of alternative oligopoly price formation processes for example collusive basing point pricing produces results typically assumed to imply efficiently integrated markets while competitive fob pricing does not the theoretical implications are illustrated with an analysis of hog prices in canada

time variation in the inflation passthrough of energy prices from bayesian estimates of a vector autoregression var which allows for both coefficient drift and stochastic volatility we obtain the following three results first beginning in approximately 1975 the responsiveness of core inflation to changes in energy prices in the united states fell rapidly and remains muted second this decline in the passthrough of energy inflation to core prices has been sustained through a recent period of markedly higher volatility of shocks to energy inflation finally reduced energy inflation passthrough has persisted in the face of monetary policy which quickly became less responsive to energy inflation starting around 1985

dynamic comovement among banks systemic risk and the macroeconomy abstract this paper develops a new measure of comovement in the banking sector that takes into account the dynamic nature of interlinkages in the return on assets roa and net chargeoffs nco among different bank holding corporations by using a dynamic factor model with time varying parameters and stochastic volatility we find that the degree of comovement in roa and nco peaked during the 2008 2009 financial crisis suggesting a significant increase in sector wide stress using the least absolute shrinkage and selection operator lasso methodology we show that comovement and risk measures derived from our approach perform well when compared to other widely used measures of systemic risk in explaining real economic activity

why has u s inflation become harder to forecast we examine whether the u s rate of price inflation has become harder to forecast and to the extent that it has what changes in the inflation process have made it so the main finding is that the univariate inflation process is well described by an unobserved component trend cycle model with stochastic volatility or equivalently an integrated moving average process with time varying parameters this model explains a variety of recent univariate inflation forecasting puzzles and begins to explain some multivariate inflation forecasting puzzles as well

optimal monetary policy responses to relative price changes abstract an optimizing model with a flexible price sector and a sticky price sector is presented to analyze the effects of relative price changes on inflation fluctuations the relative price of the flexible price good represents a shift parameter of the new keynesian phillips curve the optimal monetary policy is to target sticky price inflation rather than a broad inflation measure although stabilizing the relative price around its efficient value is one of the appropriate goals of the central bank stabilizing sticky price inflation is sufficient for achieving this goal an optimal monetary policy for a small open economy is also discussed

empirical evidence on inflation expectations in the new keynesian phillips curve abstract we review the main identification strategies and empirical evidence on the role of expectations in the new keynesian phillips curve paying particular attention to the issue of weak identi

the repeat rent index abstract we employ a weighted repeat rent estimator to construct quarterly indexes that expand the profession s ability to make cross sectional comparisons of housing markets our analysis shows that there is considerable heterogeneity in the behavior of rents across cities over the 2000 2010 decade but the number of cities and years for which nominal rents fell is substantial rents fell in many cities following the onset of the housing crisis in 2007 and the repeat rent and bureau of labor statistics indexes differ due to sampling and construction methods

military expenditure and the restructuring of capitalism the military industry in britain the character of the british defence industry since the 1940s has reflected a regime of accumulation which was shaped by both fordism and the cold war the decline of both these influences means that the political economy of defence spending and the internal organization of the defence industry are changing while the outbreak of peace in europe should lead to some reduction in defence spending on cold war items the world s arms industry is not about to disappear the global arms industry remains huge and is increasing beyond the control of individual national governments the concentration of capital and intensified search for markets is likely to increase the volatility of the industry and affect individual companies and nations with varying results britain may remain disproportionately important in the new military economy copyright 1990 by oxford university press

defence procurement and industrial structure in the u k defence ministries being monopsonists with considerable regulatory authority have the power to shape the electronics aerospace and engineering industries that supply them this paper uses the u k experience to investigate whether and how the government should influence industrial structure after reviewing market structure and policy it provides a quantitative measure of the impact of the new more competitive procurement practices on the size distribution of contracts and assesses the role of policy on the likely evolution of the structure of the european arms industry

inflation persistence the nairu and the great recession the rate of inflation fell far less over the period 2007 2013 than in the period 1979 1985 despite similar large increases in the unemployment rate this paper asks why possible explanations include a change in the persistence of inflation changes in nairu and other shocks a change in the persistence of inflation with inflation more anchored in the period 2007 2013 than in the period 1979 1985 is found to be important the level and change in the nairu cannot be precisely estimated but the data suggest an increase of nearly 1 percentage point since 2007

interpreting the macroeconomic time series facts the effects of monetary policy existing theory and evidence on the effects of monetary policy are reviewed substantial room for disagreement among economists remains new evidence based on multivariate time series studies of several countries is presented while certain patterns in the data consistent with effective monetary policy are strikingly similar across countries others particularly the tendency of interest rate increases to predict high inflation are harder to reconcile with effective monetary policy

business cycle dynamics under rational inattention we develop a dynamic stochastic general equilibrium dsge model with rational inattention and compare its predictions to data households and decision makers in firms have limited attention and optimally allocate their attention rational inattention is the only source of slow adjustment the model matches the empirical impulse responses to monetary policy shocks and aggregate technology shocks at the same time profit losses and utility losses from inattention are very small furthermore it matters whether one uses this model or a conventional dsge model for policy analysis

real time inflation forecasting in a changing world this article revisits the accuracy of inflation forecasting using activity and expectations variables we apply bayesian model averaging across different regression specifications selected from a set of potential predictors that includes lagged values of inflation a host of real activity data term structure data relative price data and surveys in this model average we can entertain different channels of structural instability by either incorporating stochastic breaks in the regression parameters of each individual specification within this average or allowing for breaks in the error variance of the overall model average or both thus our framework simultaneously addresses structural change and model uncertainty that would unavoidably affect any inflation forecast model the different versions of our framework are used to model u s personal consumption expenditures pce deflator and gross domestic product gdp deflator inflation rates for the 1960 2011 period a real time inflation forecast

strategic responses to defence sector restructuring an analysis of lancashire based companies this paper investigates the factors affecting the likelihood of lancashire based companies involved in defence production pursuing strategic responses to defence sector restructuring data covering 100 lancashire based companies form the lancashire defence survey database which is analysed results of the data analysis are of interest to organizations involved in local economic development policy making they suggest that the effects of restructuring are most profound in large core defece companies most directly involved in defence production other effects are passed on to companies that carry out subcontracting but there is less evidence of strategies being implemented in response to structural change among these companies company size product type and degree of defence dependency are uncovered as significant factors influencing whether a strategic response is instigated

optimal monetary policy with durable consumption goods abstract we document that the durable goods sector is much more interest sensitive than the nondurables sector and then investigate the implications of these sectoral differences for monetary policy we formulate a two sector general equilibrium model that is calibrated both to match the sectoral responses to a monetary shock derived from our empirical var and to imply an empirically realistic degree of sectoral output volatility and comovement while the social welfare function involves sector specific output gaps and inflation rates the performance of the optimal policy rule can be closely approximated by a simple rule that targets a weighted average of aggregate wage and price inflation in contrast a rule that stabilizes a more narrow measure of final goods price inflation performs poorly in terms of social welfare

inflation dynamics during the financial crisis using confidential product level price data underlying the u s producer price index ppi this paper analyzes the effect of changes in firms financial conditions on their price setting behavior during the great recession that surrounds the financial crisis the evidence indicates that during the height of the crisis in late 2008 firms with weak balance sheets increased prices significantly relative to industry averages whereas firms with strong balance sheets lowered prices a response consistent with an adverse demand shock these stark differences in price setting behavior are consistent with the notion that financial frictions may significantly influence the response of aggregate inflation to macroeconomic shocks we explore the implications of these empirical findings within a general equilibrium framework that allows for customer markets and departures from the frictionless financial markets in the model firms have an incentive to set a low price to invest in market share though when financial distortions are severe firms forgo these investment opportunities and maintain high prices in an effort to preserve their balance sheet capacity consistent with our empirical findings the model with financial distortions relative to the baseline model without such distortions implies a substantial attenuation of price dynamics in response to contractionary demand shocks

menu costs and phillips curves this paper develops a model of a monetary economy in which individual firms are subject to idiosyncratic productivity shocks as well as general inflation sellers can change price only by incurring a real menu cost we calibrate this cost and the variance and autocorrelation of the idiosyncratic shock using a new u s data set of individual prices due to klenow and kryvtsov the prediction of the calibrated model for the effects of high inflation on the frequency of price changes accords well with international evidence from various studies the model is also used to conduct numerical experiments on the economy s response to various shocks in none of the simulations we conducted did monetary shocks induce large or persistent real responses

evolving international inflation dynamics world and country specific factors inflation in the most industrialized economies of the world has an important international common component that accounts for the historical decline in the national rates country specific conditions explain the rise in inflation volatility of the late 1970s and early 1980s and the subsequent fall during the last decade the world contribution to the variance of inflation has become increasingly more important than national contributions monetary policy was a relevant source of country specific fluctuations our conclusions are based on a time varying dynamic factor model applied to a large panel of inflation indicators

an evaluation of the inflationary pressure associated with short and long term unemployment abstract the role of long term unemployment in inflationary pressures has been examined in academic studies and discussed by policymakers i demonstrate econometric weaknesses in previous studies propose a solution based on regional variation and present new evidence

an explanation of intra industry trade in identical commodities abstract a model of international trade under conditions of spatial price discrimination is developed in order to demonstrate that intra industry trade is identical commodities can occur between two countries over a wide range of market structures the geographic extent of intra industry trade is shown to be inversely related to the degree of competition affecting imports in each country in the sale of the homogeneous commodity furthermore the degree of intra industry trade is directly related to the incidence of spatial price discrimination in favor of distant customers

can aggregation explain the persistence of inflation abstract an aggregation exercise is proposed that aims at investigating whether the fast average adjustments of the disaggregate inflation series of the euro area cpi is coherent with the slow adjustment of euro area aggregate inflation estimating a dynamic factor model for 404 inflation sub indices of the euro area cpi allows to decompose the dynamics of inflation sub indices into a part due to a common macroeconomic shock and to sector specific idiosyncratic shocks although idiosyncratic shocks dominate the variance of sectoral prices one common factor appears to be the main driver of aggregate dynamics in addition the heterogenous propagation of this common shock across sectoral inflation rates and in particular its slow propagation to inflation rates of services generates the persistence of aggregate inflation we conclude that the aggregation mechanism explains a significant amount of aggregate inflation persistence

oil price pass through into inflation abstract this paper uses data from 19 industrialized countries to investigate oil price pass through into inflation across countries and over time a time varying pass through coefficient is estimated and the determinants of the recent declining effects of oil shocks on inflation are investigated the appreciation of the domestic currency a more active monetary policy in response to inflation and a higher degree of trade openness are found to explain the decline in oil price pass through

core inflation and trend inflation abstract this paper examines empirically whether the measurement of trend inflation can be improved by using disaggregated data on sectoral inflation to construct indexes akin to core inflation but with a time varying distributed lags of weights where the sectoral weight depends on the timevarying volatility and persistence of the sectoral inflation series and on the comovement among sectors the modeling framework is a dynamic factor model with time varying coefficients and stochastic volatility as in del negro and otrok 2008 and is estimated using u s data on seventeen components of the personal consumption expenditure inflation index

measuring the level and uncertainty of trend inflation abstract firmly anchored inflation expectations are widely viewed as playing a central role for the conduct of monetary policy this paper presents estimates of trend inflation based on information contained in monthly data on realized inflation survey expectations and the term structure of interest rates in order to assess whether inflation expectations are anchored a timevarying volatility of trend shocks is estimated as well while there is some commonality in inflation and survey based estimates of trend inflation yield based trend estimates embed a highly persistent component orthogonal to trend inflation trimmed mean inflation rates and survey forecasts are most indicative of trend inflation

a simple adaptive measure of core inflation this paper proposes a new measure of core inflation and compares it with several existing measures the new measure is adaptive and is designed to track sudden and persistent movements in inflation such as those arising from changes in monetary policy regimes the adaptive measure filters out transients more effectively than existing measures and it is a superior predictor of locally mean reverting components of inflation

the micro macro disconnect of purchasing power parity abstract this paper reconciles the persistence of aggregate real exchange rates with the faster adjustment of international relative prices in microeconomic data error correction model estimates indicate that a different mix of shocks drives international price deviations at the microeconomic level and that dynamic adjustment works through arbitrage in the goods market rather than the foreign exchange market when half lives are estimated conditional on a common set of estimated macro shocks we find that micro relative prices exhibit every bit as much persistence as aggregate real exchange rates these results challenge theories of real exchange rate persistence based on sticky prices and heterogeneity across goods

are oil shocks inflationary asymmetric and nonlinear specifications versus changes in regime this paper identifies a structural break in core u s inflation phillips curves such that oil prices contributed substantially before 1981 but since that time pass through has been negligible this characterization is robust to a variety of re specifications and fits the data better than asymmetric and nonlinear oil price alternatives evidence does not support the hypotheses that declining energy intensity or deregulation of energy producing and consuming industries played an important role monetary policy did not itself become less accommodative of oil shocks but may have helped create a regime where inflation is less sensitive to price shocks more generally

the economic consequences of reduced uk military expenditure the last few years have seen a variety of proposals for uk disarmament for a re orientation of defence policy towards a less expensive non nuclear stance more commen surate with britain s present economic position in the world unfortunately these proposals become suddenly coy and tentative as they approach the economic implications of their programme in complete contrast to the detailed quantitative calculations they pro vide for other aspects the alternative defence commission 1983 and prins 1983 are typical examples of this the difficulties this lacuna creates are illustrated by the ordeal the labour party faced in the 1983 election campaign they advocated it appears a reduc tion of british defence expenditure which now accounts for just over 5 of gdp to about the european average of around 3 5 but they proved unable to counter the claim of the conservative defence secretary mr heseltine that this policy would cost 400 000 jobs 1 the hesitancy with which proponents of reductions in military expenditure approach the economic consequences is surprising given the near unanimity in the technical litera ture two major studies in the uk eiu 1963 and brown 1964 studies in the us leontief 1965 and a recent survey kennedy 1983 all indicate that disarmament represents an economic opportunity rather than an economic problem nonetheless the tenor of the recent policy literature suggests that it would be useful to provide a detailed assessment of the economic consequences of a reduction in uk military expenditure from 5 to 3 5 of gdp since the results obtained below are broadly in line with those of the studies cited above the contribution of this paper does not lie in the novelty of its conclusion rather it provides a detailed quantitative review of the economic issues cur rently involved in a transition to lower levels of military expenditure since there is a wide literature already available which provides arguments to suggest that such a transition could provide real security benefits the strategic aspects will only be mentioned in passing d smith 1980 and alternative defence commission 1983 provide detail on this

time varying structural vector autoregressions and monetary policy a corrigendum this note shows how to apply the procedure of kim et al 1998 to the estimation of var dsge factor and unobserved components models with stochastic volatility in particular it revisits the estimation algorithm of the time varying var model of primiceri 2005 the main difference of the new algorithm is the ordering of the various mcmc steps with each individual step remaining the same

assessing the regional economic impacts of defense activities a survey of methods defense activities exercised in a specific region may alter the region s economic performance an accurate assessment of the potential economic impacts of defense activities is a valuable undertaking to enable regional planners to prepare for changes the variety in the methods among others input output models economic base models keynesian regional multipliers fixed effects estimators and case study approaches inspired by geography sociology and political science can pose a dilemma we detail the historical and theoretical background of each method as well as select exemplary cases where these methods were applied by examining old and new methods we aim to construct a typology that could be valuable to all stakeholders in this sense defense economics can also contribute to the allied social sciences by outlining evaluation methods that may be applicable to other fields

german and american wage and price dynamics differences and common themes abstract the theoretical section of this paper develops a new nonstructural model of wage and price adjustment that integrates several concepts that have often been treated separately including phillips curve level effects hysteresis change effects the error correction mechanism and the role of changes in labor s share that act as a supply shock the empirical analysis reaches two striking conclusions first during 1973 1990 coefficients in our german wage equations are remarkably similar to those in the u s with almost identical estimates of the phillips curve slope of the hysteresis effect and of the nairu the two countries also share similar inflation behavior in that inflation depends more closely on the capacity utilization rate than on the unemployment rate the big difference between the two countries is that there seems to be no feedback from wages to prices in germany and so high unemployment does not put downward pressure on the inflation rate during the 1970s and 1980s in germany there emerged a growing mismatch between the labor market and industrial capacity so that the unemployment rate consistent with the mean constant inflation utilization rate muru increased sharply while in the u s the muru was relatively stable

the persistence of inflation in the united states abstract has the persistence of inflation in the united states changed since 1965 we estimate the persistence of inflation over time using different measures and estimation procedures and we produce confidence intervals for our estimates as well as formal tests of unchanged persistence we find that inflation persistence has been high and approximately unchanged in the u s over our sample period we reconcile our results with other studies that reached different conclusions

reset price inflation and the impact of monetary policy shocks abstract many business cycle models use a flat short run phillips curve due to time dependent pricing and strategic complementarities to explain fluctuations in real output but in doing so these models predict unrealistically high persistence and stability of us inflation in recent decades we calculate reset price inflation based on new prices chosen by the subsample of price changers to dissect this discrepancy we find that the models generate too much persistence and stability both in reset price inflation and in the way reset price inflation is converted into actual inflation our findings present a challenge to existing explanations for business cycles jel e31 e52

how important are banks for development national banks in the united states 1870 1900 abstract do banks matter for growth and if so how this paper examines the effects of national banks in the united states from 1870 to 1900 i use the discontinuity in entry caused by a large minimum size requirement to identify the effects of banking for the counties on the margin between getting a bank and not gaining a bank increased production per person by 10 national banks in rural areas improved agriculture over manufacturing moving counties toward geographic comparative advantage since these banks made few long term loans the evidence suggests that the provision of working capital and liquidity matters for growth

firms and aggregate dynamics abstract we investigate the role of permanent and transitory shocks for firms and aggregate dynamics we find that permanent shocks to productivity and permanent shifts in the composition of output explain at least four fifths of firms dynamics however these permanent shocks are almost uncorrelated across firms and are therefore less relevant for aggregate dynamics transitory shocks on the other hand are not very important at the firm level but they account for most of the volatility of aggregate hours and output because they are significantly correlated across firms finally we try to make some progress on the interpretation of the shocks

five facts about prices a reevaluation of menu cost models are price decreases 3 the frequency of price increases covaries strongly with inflation whereas the frequency of price decreases and the size of price increases and price decreases do not 4 the frequency of price change is highly seasonal it is highest in the first quarter and then declines 5 we find no evidence of upwardsloping hazard functions of price changes for individual products we show that the first second and third facts are consistent with a benchmark menu cost model whereas the fourth and fifth facts are not

sticky prices new evidence from retail catalogs this paper presents new results on the size frequency and synchronization of price changes for twelve selected retail goods over the past 35 years three basic facts about the data are uncovered first nominal prices are typically fixed for more than one year although the time between changes is very irregular second prices change more often during periods of high overall inflation third when prices do change the sizes of the changes are widely dispersed both large and small changes occur for the same item and the sizes of these changes do not closely depend on overall inflation

the political economy of military expenditure an introduction this paper shows that although the military burden has declined since the korean war in the oecd it still represents an important component of government spending the magnitude of military spending does not provide a measure of its importance to the economy the relation between military spending and accumulation has to be seen as a complex historical dialectical process in which military spending plays a contradictory role the other contributions to the symposium are then discussed within this framework they deal with the empirical analysis of the economic costs of military spending the impact of changing military spending and the problems of conversion copyright 1990 by oxford university press

a core inflation indicator for the euro area this paper proposes a new core inflation indicator for the euro area obtained by cleaning monthly price changes from short run volatility idiosyncratic and measurement errors we use a factor model to project monthly inflation on a large panel of time series exploiting multivariate information we obtain a satisfactory degree of smoothing without using backward looking moving averages which induce a time delay in the signal the indicator forecasts inflation and is a useful tool for policy makers it outperforms other commonly used predictors at 6 months and longer horizons it tracks past policy interventions of the ecb

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

the magnitude of menu costs direct evidence from large u s supermarket chains we use store level data to document the exact process of changing prices and to directly measure menu costs at five multistore supermarket chains we show that changing prices in these establishments is a complex process requiring dozens of steps and a nontrivial amount of resources the menu costs average 105 887 year per store comprising 0 70 percent of revenues 35 2 percent of net margins and 0 52 price change these menu costs may be forming a barrier to price changes specifically 1 a supermarket chain facing higher menu costs due to item pricing laws that require a separate price tag on each item changes prices two and one half times less frequently than the other four chains 2 within this chain the prices of products exempt from the law are changed over three times more frequently than the products subject to the law in principle fixed costs of changing prices can be observed and measured in practice such costs take disparate forms in different firms and we have no data on their magnitude so the theory can be tested at best indirectly at worst not at all alan blinder 1991 p 90

core measures of inflation as predictors of total inflation two rationales offered for policymakers focus on core measures of inflation as a guide to underlying inflation are that core inflation omits food and energy prices which are thought to be more volatile than other components and that core inflation is thought to be a better predictor of total inflation over time horizons of import to policymakers our investigation finds little support for either rationale we find that food and energy prices are not the most volatile components of inflation and that depending on which inflation measure is used core inflation is not necessarily the best predictor of total inflation however we do find that combining cpi and pce inflation measures can lead to statistically significant more accurate forecasts of each inflation measure suggesting that each measure includes independent information that can be exploited to yield better forecasts

assessing monetary policy in the euro area a factor augmented var approach in order to overcome the omitted information problem of small scale vector autoregression var models this study combines the var methodology with dynamic factor analysis and assesses the effects of monetary policy shocks in the euro area in the period during which there is a single monetary policy using the factor augmented vector autoregressive favar approach of bernanke et al 2005 we summarize the information contained in a large set of macroeconomic time series with a small number of estimated factors and use them as regressors in recursive vars to evaluate the impact of the nonsystematic component of the european central bank s ecb s actions overall our results suggest that the inclusion of factors in the var allows us to obtain a more coherent picture of the effects of monetary policy innovations both by achieving responses easier to understand from the theoretical point of view and by increasing the precision of such responses moreover this framework allows us to compute impulse res

a new model of inflation trend inflation and long run inflation expectations a knowledge of the level of trend inflation is key to many current policy decisions and several methods of estimating trend inflation exist this paper adds to the growing literature which uses survey based long run forecasts of inflation to estimate trend inflation we develop a bivariate model of inflation and long run forecasts of inflation which allows for the estimation of the link between trend inflation and the long run forecast thus our model allows for the possibilities that long run forecasts taken from surveys can be equated with trend inflation that the two are completely unrelated or anything in between by including stochastic volatility and time variation in coefficients it extends existing methods in empirically important ways we use our model with a variety of inflation measures and survey based forecasts for several countries we find that long run forecasts can provide substantial help in refining estimates and fitting and forecasting inflation the same evidence indicates it is less helpful to simply equate trend inflation with the long run forecasts

factor analysis of a large dsge model summary we study the workings of the factor analysis of high dimensional data using artificial series generated from a large multi sector dynamic stochastic general equilibrium dsge model the objective is to use the dsge model as a laboratory that allows us to shed some light on the practical benefits and limitations of using factor analysis techniques on economic data we explain in what sense the artificial data can be thought of having a factor structure study the theoretical properties of the principal components estimates of the factor space investigate the substantive reason s for the good performance of diffusion index forecasts and assess the quality of the factor analysis of highly disaggregated data in all our exercises we explain the precise relationship between the factors and the basic macroeconomic shocks postulated by the model copyright 2012 john wiley sons ltd

conversion policy in the uk the democratization of eastern europe the disintegration of the warsaw pact the proposed strategic arms reduction talks start and the conventional forces in europe cfe agreements are concrete evidence of the end to the cold war for nato these events have precipitated an overhaul of strategic policies resulting in major cutbacks in the defence budgets of member states in the u k this has given rise to a growing debate on the economic effects of cuts in the military burden and the possible benefits to be derived from what has become popularly labelled the peace dividend however the way in which resources are transformed for the military into civil use and the interpretation of the objectives of the conversion process lie at the centre of a controversy about the optimal use of the peace dividend this paper provides a critical assessment of the contributions to this debate copyright 1990 by oxford university press

estimating the u s output gap with state level data this paper develops a method to estimate the u s output gap by exploiting the cross sectional variation of state level output and unemployment rate data the model assumes that there are common output and unemployment rate trend and cycle components and that each state s output and unemployment rate are subject to idiosyncratic trend and cycle perturbations i estimate the model with bayesian methods using quarterly data from 2005 q1 to 2018 q2 for the 50 states and the district of columbia results show that the u s output gap reached about negative 4 6 around the years of the great recession and was about 0 9 in 2018 q2

modeling time varying uncertainty of multiple horizon forecast errors we estimate uncertainty measures for point forecasts obtained from survey data pooling information embedded in observed forecast errors for different forecast horizons to track time varying uncer

yesterday s bad times are today s good old times retail price changes are more frequent today than in the 1890s this paper documents differences in the nominal rigidity of retail prices across two 28 month periods 1889 91 and 1997 99 the most striking finding is that prices changed much less frequently in 1889 91 in the late 1800s when price changes did occur they were smaller on average and more narrowly distributed with fewer small or large price changes further price changes were more permanent 100 plus years ago these differences are consistent with a high occurrence of temporary price shocks and a higher cost of changing prices in 1889 91 than in 1997 99

slack and cyclically sensitive inflation we investigate the flattening phillips relation by making two departures from standard specifications first we measure slack using real activity variables that are bandpass filtered or year over year changes in activity these are similar instead of gaps second we study the components of inflation instead of the standard aggregates we find that some inflation components have strong and stable correlations with the cyclical component of real activity these components tend to be relatively well measured and domestically determined other components typically prices that are poorly measured or internationally determined have weak and or unstable correlations with cyclical activity we construct a new inflation index cyclically sensitive inflation that weights the components by their joint cyclical covariation with real activity the index has strong and stable correlations with cyclical activity and provides a real time measure of cyclical movements in inflation

trend inflation indexation and inflation persistence in the new keynesian phillips curve purely forward looking versions of the new keynesian phillips curve nkpc generate too little inflation persistence some authors add ad hoc backward looking terms to address this shortcoming we hypothesize that inflation per sistence results mainly from variation in the long run trend component of inflation which we attribute to shifts in monetary policy we derive a version of the nkpc that incorporates a time varying inflation trend and examine whether it explains the dynamics of inflation when drift in trend inflation is taken into account a purely forward looking version of the model fits the data well and there is no need for backward looking components jel e12 e31 e52 in this paper we consider the extent to which guillermo calvo s 1983 model of nominal price rigidities can explain inflation dynamics without relying on arbitrary backward looking terms in its baseline formulation the calvo model leads to a purely forward looking new keynesian

the changing geography of the military industry in britain lovering j 1991 the changing geography of the military industry in britain reg studies 25 279 293 a number of studies have suggested that defence spending has had a significant impact on the location of industry and the geography of labour markets this paper drawing on a recent study of the employment of research and development professionals in the uk defence industry confirms that defence spending and related employment has been concentrated in the south and west of england it also shows that a number of changes are underway the unusually large british defence industry is restructuring as a result of changes in supply and in demand following the end of the cold war major job losses are in process which may amount to a third of a million jobs in the 1990s this is associated with a spatial reorganization the effect of which is generally to consolidate high level activities in the industry in the south of england and deepen the spatial division of labour a key locational influence in this

an output gap measure for the euro area exploiting country level and cross sectional data heterogeneity abstract this paper proposes a methodology to estimate the euro area output gap by taking advantage of two types of data heterogeneity on the one hand the method uses information on real gdp inflation and the unemployment rate for each member state on the other hand it jointly considers this information for all the euro area countries to extract an area wide output gap measure the setup is an unobserved components model that theorizes common output trend and cyclical components across euro area economies in addition to country specific counterparts i estimate the model with bayesian methods using data for the 19 countries of the euro area from 2000 q1 through 2018 q3 and perform model comparisons across different specifications of the output trend the estimation of the model preferred by the data indicates that because of negative shocks to trend output during the global financial crisis output was only slightly below potential in that period but an output gap of about negative 3 emerged during the european debt crisis at the end of the sample period output is estimated to be 3 5 above potential output which is growing at an average annual pace of only 0 5 in recent years

integrating sticky prices and sticky information abstract understanding the relationship between nominal and real variables most notably inflation and cyclical output is one of the fundamental questions of economics toward this understanding we develop a model that integrates sticky prices and sticky information a dual stickiness model we find that both rigidities are present in u s data we also show that the dual stickiness model s closest competitor is the hybrid new keynesian model for both models current inflation depends in part on last period s inflation the former model achieves this dependence endogenously through the interaction of the two rigidities rather than through backward looking behavior u s data support the dual stickiness model over the hybrid model because lagged expectations terms appear in the former s inflation euler equation finally we show that it is quantitatively important to distinguish between the two by simulating a dynamic equilibrium model under each of the two inflation equations

the macroeconomics of trend inflation most macroeconomic models for monetary policy analysis are approximated around a zero inflation steady state but most central banks target an inflation rate of about 2 percent many economists have recently proposed even higher inflation targets to reduce the incidence of the zero lower bound constraint on monetary policy in this survey we show that the conduct of monetary policy should be analyzed by appropriately accounting for the positive trend inflation targeted by policymakers we first review empirical research on the evolution and dynamics of u s trend inflation and some proposed new measures to assess the volatility and persistence of trend based inflation gaps we then construct a generalized new keynesian model that accounts for a positive trend inflation in this model an increase in trend inflation is associated with a more volatile and unstable economy and tends to destabilize inflation expectations this analysis offers a note of caution regarding recent proposals to address the existing zero lower bound problem by raising the long run inflation target jel e12 e31 e32 e52 e58

implications of rational inattention abstract a constraint that actions can depend on observations only through a communication channel with finite shannon capacity is shown to be able to play a role very similar to that of a signal extraction problem or an adjustment cost in standard control problems the resulting theory looks enough like familiar dynamic rational expectations theories to suggest that it might be useful and practical while the implications for policy are different enough to be interesting

macroeconomic forecasting using diffusion indexes this article studies forecasting a macroeconomic time series variable using a large number of predictors the predictors are summarized using a small number of indexes constructed by principal component analysis an approximate dynamic factor model serves as the statistical framework for the estimation of the indexes and construction of the forecasts the method is used to construct 6 12 and 24 monthahead forecasts for eight monthly u s macroeconomic time series using 215 predictors in simulated real time from 1970 through 1998 during this sample period these new forecasts outperformed univariate autoregressions small vector autoregressions and leading indicator models

short term interest rates as predictors of inflation on testing the hypothesis that the real rate of interest is constant in an innovative and provocative paper in this review eugene fama presents evidence which appears to be consistent with the joint hypothesis that the real rate of interest ignoring taxes is a constant and that the market for u s treasury bills is efficient in the sense of embodying rational expectations those findings are strikingly at variance with a long list of previous studies which seemed to support the view that the real rate of interest varies over time and can be related to economic variables such as real output monetary policy and so forth 2 the methodologies which lead to these contradictory conclusions are quite different previous studies had followed the lead of irving fisher by relating nominal interest rates to distributed lags on past rates of inflation 3 these distributed lags are generally interpreted as approximations to the market s expected rate of inflation and thus any remaining variation is attributed to variation in the real rate 4 fama s methodology on the other hand draws on the fact that the difference between the market interest rate and the subsequently observed rate of inflation the ex post real interest rate consists by definition of the ex ante real interest rate plus a pure forecasting error 5 the hypothesis of market efficiency implies that these forecasting errors must be serially random thus observing ex post real rates is equivalent to observing ex ante real rates with random measurement error these errors of course confound the problem of identifying variation in the ex ante real rate in this paper we will argue that the relative magnitude of these measurement errors is such that the tests carried out by fama were not powerful enough to reject the joint hypothesis that the ex ante real rate is a constant and expectations are rational more powerful tests which are presented in this paper using the same data do lead to rejection of that hypothesis of course rejection