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

on the role of government in a stochastically growing open economy abstract the relationship between the size of government economic growth and volatility in a small open economy is analyzed first we characterize the stochastic equilibrium for a centrally planned economy contrasting it with a closed economy the role of government consumption expenditure both as a stabilizing and a destabilizing factor is discussed the optimal size of government is derived and we find that an open economy will have a larger government if and only if it is a net creditor second the stochastic equilibrium in a decentralized economy is characterized and the optimal tax structure derived finally the role of government production expenditure and its impact on risk is briefly discussed

the long run effects of unemployment monitoring and work search programs experimental evidence from the united kingdom this article examines the long run effects of the restart unemployment program in the united kingdom the program aimed at the long term unemployed involved a combination of tighter monitoring of benefit eligibility rules and increased job search assistance we compare the employment behavior of a treatment group who participated in the scheme with that of a randomly chosen control group for whom participation was delayed while there is little evidence of a long term benefit for women the unemployment rate among males in the treatment group was six percentage points lower than that of the control group 5 years after the initial experiment

output dynamics in real business cycles models the time series literature reports two stylized facts about output dynamics in the united states gnp growth is positively autocorrelated and gnp appears to have an important trend reverting component this paper investigates whether current real business cycle rbc models are consistent with these stylized facts many rbc models have weak internal propagation mechanisms and must rely on external sources of dynamics to replicate both facts models that incorporate labor adjustment costs are partially successful they endogenously generate positive autocorrelation in output growth but they need implausibly large transitory shocks to match the trend reverting component in output

intertemporal production and intertemporal substitution in output supply and input demand abstractthis article presents an intertemporal model of production with multiple inputs to investigate substitution opportunities facing firms over time the firm s intertemporal profit maximization problem is characterized with the familiar cost function and various intertemporal substitution elasticities are delineated for output supply and input demand the absence of intertemporal substitution in production can imply production smoothing and allowance for intertemporal substitution in labour demand reinforces the prediction of the real business cycle model for aggregate us manufacturing we find substantial substitution in output supply and labour demand over time due to intertemporal changes in output price and wage rates

the quantitative analytics of the basic neomonetarist model this paper constructs a dynamic macroeconomic model with less than perfect price flexibility which has a classical side consistent with real business cycle theory augmented by investment adjustment costs increasing returns to scale and a new flexible formalization of imperfect competition something akin to the classical dichotomy is justified by a mode of approximation appropriate for a model in which one state variable adjusts quickly while another state variable adjusts slowly even with investment adjustment costs monetary expansions are found to raise the real interest rate the determinants of real rigidity and the macroeconomic rate of price adjustment are investigated copyright 1995 by ohio state university press

production function regressions returns to scale and externalities a number of recent papers have used simple linear regressions in an attempt to identify market structure the extent of returns to scale and possible external effects in u s manufacturing industries the results obtained from these regressions have important implications for several branches of modern macroeconomics as a result the macro literature frequently cites specific numerical evidence from caballero and lyons 1992 and hall 1990 which suggests that there are quantitatively significant increasing returns to scale or external effects in u s manufacturing in contrast it is the argument of this paper that this evidence is not convincing the most robust evidence suggests that the typical u s manufacturing industry displays constant returns with no external effects on the other hand there is significant heterogeneity across industries

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

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

assessing the effects of reemployment bonuses on job search a regression discontinuity approach abstract this study examines the impacts of reemployment bonuses that is the incentive payments to unemployment insurance ui recipients who find a job within a specified period using korean data a sharp discontinuity in treatment assignment at age 55 identifies the effect of increased reemployment bonuses on unemployment duration and on subsequent job duration the results indicate that increases in the reemployment bonus boost the job finding hazards of ui claimants early in their unemployment spells during the bonus qualification period and significantly shorten the duration of ui spells by 0 16 to 0 42 months 0 68 to 1 82 weeks in addition employment stability is not significantly affected by an increased bonus which implies no negative influence of the bonus on subsequent job match quality the simulated estimates show that the increase in tax revenue and the decrease in ui benefit payment caused by the behavioral response of ui recipients are large enough to offset the increased cost of the reemployment bonus

high and low frequency variations and the cyclical behaviour of real wages the conflicting empirical evidence on the cyclicality of real wages may be a result of the fact that the measure of comovements employed in the literature is affected by coherence among non business cycle variations in the data by recursively removing components the degree to which long and short term cycles contaminate the existing evidence is studied while confirming many of the results of the current literature it is found that evidence of cyclicality is affected more by long rather than by short term components even though the data have been detrended by a number of different methods it has been suggested in the literature that wages become more countercyclical as the deflators used represent less finished bundles of goods this study shows that this result is robust to the removal of components from either end of the spectrum

money new keynesian macroeconomics and the business cycle abstract we show in this paper that the typical modern business cycle cannot be reduced to the real business cycles archetype a monopolistic competition model with price adjustment costs affected by technological and monetary shocks better mimics the economic fluctuations in two countries with very different cyclical properties namely france and the united states in our model monetary shocks are necessary to reproduce the standard deviation of output the money output correlation the labour productivity worked hours relative standard deviation the labour productivity worked hours correlation and the mark up output correlation with two independent shocks one real more specifically defined than the solow residual and one nominal the model gives an answer to some empirical puzzles which were left unexplained by traditional rbc models

continuous time sunspot equilibria and dynamics in a model of growth abstract this article is concerned with the existence of sunspot equilibria in a continuous time growth setting it brings alternative approaches in the self fulfilling prophecies literature continuous time global dynamics and non stationarity the main contribution of the use of continuous time methods is to allow for a complete understanding of the global dynamical properties of these stochastic equilibria within a non stationary economy in this model fluctuations in growth rates occur through a self fulfilling prophecies mechanism journal of economic literature classification numbers e12 e32 o41

sectoral solow residuals this paper presents capital utilization corrected measures of technology shocks for aggregate and disaggregated two digit standard industrial classification code industries we correct for variations in capital utilization by employing industrial electrical use as a measure of capital services in contrast the standard measures of technology shocks used in the real business cycle literature are based on economy wide data and assume that capital services are proportional to the stock of measured capital to assess the impact of these differences we contrast selected properties of the competing technology shock measures we argue that the properties of technology shocks for the manufacturing sector are quite different than those used in the rbc literature we also find that correcting for capital utilization has important implications for the properties of the solow residual

wages and employment under trade unionism microeconomic models and macroeconomic applications the first part of this paper is a critical survey of microeconomic research into behavioural models of trade unionism although certain formulations of union objectives and models of wage and employment determination in unionized markets have found favor with economists unfortunately only a little is known about their empirical relevance the second part of this paper deals with the daunting problems of applying these models at the macroeconomic level one such model is estimated with data from sweden s mining and manufacturing sector from 1968 to 1982

does voluntary participation undermine the coase theorem abstract the coase theorem states that costless enforcement of voluntary agreements yields efficient outcomes we argue that previous treatments fail to recognize the full meaning of voluntary it requires a two stage game a non cooperative participation decision followed by coaseian bargaining only among those who choose to participate we illustrate this in a simple public goods model and find outcomes ranging from extremely inefficient to fully efficient however the efficient equilibrium is not robust to even very small transaction costs thus we cast doubt on coaseian claims of universal efficiency finally we outline a kind of coercion that restores efficiency

the economic significance of national border effects to address the economic significance of national border effects this paper provides evidence on two fundamental questions 1 do large border effects arise because of high perceived price wedges between foreign and domestic products or because imports and domestic goods are very close substitutes and 2 if price wedges are important do they reflect distortionary barriers to trade or do they arise from nondistortionary factors such as differences in transactions costs or product characteristics i conclude that while border effects may imply barriers welfare costs and a role for policy distortions are probably not as substantial as initial border results suggested jel f1

differential difference equations in economics on the numerical solution of vintage capital growth models we examine techniques for the analytical and numerical solution of state dependent differential difference equations such equations occur in the continuous time modelling of vintage capital growth models which form an important class of models in modern economic growth theory the theoretical treatment of non state dependent differential difference equations in economics was discussed by benhabib and rustichini 1991 in general though the state dependence of a model prevents its analytical solution in all but the simplest of cases we review a numerical method for solving state dependent models using simple examples to illustrate our discussion in addition we apply this numerical method to the solow vintage capital growth model

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

a model of creative destruction with undiversifiable risk and optimising households this paper studies optimal household behaviour in a model of creative destruction the saving technology is characterised by stochastic returns that follow a poisson process it is shown that equilibrium conditions with optimising households differ substantially from equilibrium conditions where investment in r d is determined by firms three out of four market failures disappear and a new market failure resulting from a complementarity in financing r d is identified studying the social optimum shows that it contains as the special case of risk neutrality the social optimum derived in the literature

an evaluation of the draft final act of the uraguay round this paper presents an evaluation of the proposed draft final act dfa of the uruguay round of multilateral trade negotiations using the computable general equilibrium model used in nguyen perroni and wigle i 9ib section ii gives a very brief overview of the dfa and the following sections explain how we represent the agreement in our model section v then describes the estimated impacts of the dfa with some discussion of the various components of the deal in section vi finally we give some concluding remarks our earlier analysis looked at a more ambitious conclusion of the uruguay round where agricultural liberalisation and textiles liberalisation were more complete in that study we found that the comprehensive uruguay round agreement generated wide spread gains to industrial countries as well as middle and low income countries we also found that the gains were largest for the two parties for whom the round seems most contentious the us and ec our analysis of a uruguay round agreement based on the dfa suggests a similar conclusion although changes since our earlier paper market opening in the economies in transition in particular have meant that the gains to eastern europe are likely to be significantly greater than before the gains to the us are still significant although much smaller than from the comprehensive agreement studied earlier and world wide gains are in the same order of magnitude at over 200 billion some discussion of our results follows in section v

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

real business cycle models of the great depression a critical survey recent years have witnessed a revival of interest in the great depression of the 1930s among the differing new interpretations the real business cycle rbc approach is particularly significant it represents an outstanding methodological innovation in trying to cast the great depression within an equilibrium framework this paper critically reviews the rbc interpretation of the great depression clarifying its theoretical and methodological foundations and paving the way for future assessments of its validity

technology revolutions and the gestation of new technologies we formalize an explanation for technology revolutions and growth cycles in a model where consumers and firms benefit from periodic changes in technology which result in the development and marketi

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

external effects in u s procyclical productivity abstract in this paper we highlight a new dimension of the aggregate procyclical productivity phenomenon we show that estimates of the degree of returns to scale are larger for manufacturing as a whole than for two digit industries since this difference must be due to factors that are only internalized at the most aggregate level we term it an external effect this result rules out explanations based on own input variation such as true increasing returns and unmeasured factor utilization tied to own activity as the sole explanations for aggregate procyclical productivity we explore several potential explanations of this external effect

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

sticky prices as coordination failure this paper links the coordination failure and menu cost approaches to the microeconomic foundations of keynesian macroeconomics if a firm s desired price is increasing in others prices then the gain from price adjustment after a nominal shock is greater if others adjust this strategic complementarity leads to multiple equilibria in the degree of rigidity welfare may be much higher in the equilibria with less rigidity thus nominal rigidity arises from a failure to coordinate price changes jel e12 e30 keynesian macroeconomics waned in the 1970 s because economists grew disenchanted with its weak microeconomic foundations the central difficulty was that keynesian models were based on ad hoc rigidities in nominal wages and prices the 1980 s produced two approaches to reviving keynesian theory the menu cost literature n gregory mankiw 1985 george akerlof and janet yellen 1985 seeks to provide rigorous explanations for nominal rigidities these papers argue that small frictions in price setting are enough to produce large nominal rigidities in contrast the coordination failure literature russell cooper and andrew john 1988 abandons nominal rigidities and seeks alternative foundations for keynesian models the central idea is that many economic activities such as production e g john bryant 1983 trade e g peter diamond 1982 and investment e g nobuhiro kiyotaki 1988 exhibit synergism or strategic complementarity one agent s optimal level of activity depends positively on others activity strategic complementarity can lead to multiple equilibria with high activity equilibria superior to low activity equilibria thus an economy may be stuck in an underemployment equilibrium even though a superior equilibrium exists models with nominal rigidities and models with coordination failures are often presented as competing paradigms 1 this paper shows that this view is incorrect we take a step toward unifying the foundations of keynesian economics by showing that the two sets of ideas are highly complementary nominal rigidity arises from a failure to coordinate price changes this failure has the essential features of coordination failures in previous models flexibility in one firm s price increases the incentives for other firms to make their prices flexible this strategic complementarity leads to multiple equilibria in the degree of nominal rigidity equilibria with less rigidity more active price adjustment are often pareto superior to equilibria with more rigidity these results contribute to our understanding both of coordination failure and of nominal rigidity the range of keynesian phenomena explained by coordination failures is greatly expanded previous coordination failure models contain only real variables and thus ascribe no role to monetary policy or other determinants of nominal spending our results suggest that coordination failure is at the root of inefficient nonneutralities of money theories of nominal rigidities gain new empirical and policy im

food aid food policy and the uruguay round implications for bangladesh abstract the relationship between the effects of food aid and those of the completion of the uruguay round of the gatt are studied in this paper focusing upon the food aid recipient countries and taking bangladesh as an illustrative example it is argued that among other factors the magnitudes of these effects depend crucially on the policy environment within the food aid recipient country itself particularly the government s policy with respect to commercial food imports it is shown that when the quantity of bangladesh s commercial food imports is controlled by the government the benefits derived from food aid are smaller than when these imports are liberalised likewise the negative effects that the uruguay round may be expected to have on bangladesh will also be larger if commercial food imports are subject to quantitative controls than if tney are liberalised the effects the uruguay round will have on bangladesh will also depend on the way food aid donors respond to the round if donors reduce the volumes of food aid either because of reduced food surpluses resulting from lower agricultural subsidies or in response to increased international food prices resulting from the round the losses incurred by bangladesh will be magnified but these effects will also depend heavily on whether bangladesh itself participates in the liberalisations that are central to the round itself if it were to participate fully the negative effects that the uruguay round would otherwise have on bangladesh may be entirely offset by the gains bangladesh would derive from its own liberalisation

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

marketing strategies that make entrepreneurial firms recession resistant abstract the recession of 1990 1991 adversely affected nearly every industry in the united states and entrepreneurial manufacturing firms were among those hardest hit by the recession the failure rate among this group by mid year 1991 had risen 37 from the previous year thus recessions pose a serious threat to the survival of entrepreneurial firms understanding how the business cycle influences performance and what strategies are effective in such turbulent times has practical value for managers of entrepreneurial firms in this paper we report a large scale empirical research study involving subjective and financial information from 118 publicly traded u s manufacturing firms the participating firms are involved in technologically demanding and highly innovative industry segments industrial and computer equipment electrical equipment and components and measuring analysis and control instruments none of the firms has achieved a market share of more than one half of one percent we find that in these industries a company s marketing strategies preceding a recession strongly impact the extent of economic downturn on the firm and influence its odds of a timely and complete recovery our specific prescriptions follow first maintain marketing activities in the core business as assurance against recession increasing sales and advertising increasing breadth of production and increasing geographic coverage improve performance during both the peak and the contraction of the business cycle second during the peak period cautiously expand with an emphasis on marketing efficiency increasing the number of channels of distribution and cutting price have a negative effect unless accompanied by sales force performance measurement a simple emphasis on incentives and efficiency alone hurts a firm as a recession hits all of these prescriptions run counter to existing views that suggest that recession simply requires cutbacks and retrenchment recessions seem to be different from other threats to firm viability and marketing activities appear to help pull the firm through a macroeconomic downturn

real and nominal propagation of nominal shocks the role of real and nominal propagation mechanisms in generating persistent real effects of nominal shocks is analysed analytically in a fully specified intertemporal general equilibrium model while neither a real propagation mechanism capital acccumulation with one period nominal contracts nor nominal propagation staggered nominal contracts in the absence of any real propagation can generate plausible impulse responses with strong persistence it is shown that the two mechanisms interact so as to strengthen persistence possibly unit roots and generate more plausible impulse responses

spectral and persistence properties of cyclical growth abstract this article investigates the cyclical properties of an endogenous growth model an explicit solution is derived which permits the full characterization of the cyclical as well as the long run properties of the model using spectral autocorrelation and impulse response functions we show that introducing endogenous growth overcomes some of the main shortcomings of rbc models in particular the model can generate positive autocorrelation of output growth when endogenous growth dominates the dynamics moreover the model exhibits the hump shaped pattern of impulse response functions of the trend reverting component of output

impact of reemployment bonuses on insured unemployment in the new jersey and illinois separate social experiments conducted in new jersey and illinois tested the effect of offering unemployment insurance ui claimants a cash bonus for rapid reemployment the illinois bonus was constant over time while the new jersey bonus declined over time so that the bonus received was greater the earlier that reemployment occurred this paper compares the effects of the bonus offers on the rate at which claimants exited ui the new jersey and illinois bonus offers generated similar increases in the ui exit rate during the period in which claimants could qualify for the bonus however the declining new jersey bonus had little impact on long term claimants who exhausted their ui benefits in contrast the constant illinois bonus had a substantial impact on long term claimants thereby reducing the rate at which claimants exhausted their ui benefits this finding at least partly explains why the illinois bonus had a larger impact on ui receipt than the new jersey bonus

persistency in sticky price models abstract nominal rigidities imply that nominal shocks have an impact effect which may be propagated by standard mechanisms however the nominal adjustment process may in itself be a propagation mechanism causing persistent effects of nominal shocks this may be caused by inertia in nominal wage and price adjustment arising due to input output networks or multiperiod nominal contracting as captured in models with staggered price wage decisions it has recently been contested whether staggering can account for persistency of any quantitative importance this paper reviews the theory and empirical evidence on this issue and it is concluded that staggering may be a quantitative important propagation mechanism

is the threat of reemployment services more effective than the services themselves evidence from random assignment in the ui system we examine the effect of the worker profiling and reemployment services system this program profiles unemployment insurance ui claimants to determine their probability of benefit exhaustion and then provides mandatory employment and training services to claimants with high predicted probabilities using a unique experimental design we estimate that the program reduces mean weeks of ui benefit receipt by about 2 2 weeks reduces mean ui benefits received by about 143 ana increases subsequent earnings by over 1 050 most of the effect results from a sharp increase in early ui exits in the treatment group relative to the control group jel j650

stationary ramsey equilibria under uncertainty abstract deterministic dynamic equilibrium models with borrowing constraints and heterogeneous agents exhibit stationary solutions where the most patient household owns the economy s capital stock an example shows that this result does not carry over to stationary stochastic environments we prove under some conditions the existence of a stationary rational expectations equilibrium in two related setups the first is the existence of a stationary nash equilibrium where each agent s payoff depends on his capital process and the capital processes of the remaining agents the second existence theorem applies to a stationary competitive equilibrium model journal of economic literatureclassification numbers e13 e21 d80

foreign exchange regimes and industrial growth in bangladesh abstract foreign exchange regimes have been found to play an important role in implementing trade and industrial development strategies in many developing countries the economic incentives provided to export oriented and import substituting industries can be measured by the real effective exchange rate reer for imports and exports such measures are developed for bangladesh the reer for exports and imports increased by around 72 and 82 respectively over the period 1973 1974 to 1976 1977 from 1976 1977 to 1984 1985 the reer for imports fell by nearly 10 while the reer for exports declined by 6 although the exchange rate for non traditional exports fared somewhat better the reer for both imports and exports appears to have recovered somewhat since 1984 1985 but the paper concludes that while trade and industry policies in bangladesh have become less inward looking the exchange regime is still biased in favor of import substituting industrialization substantially stronger export incentives than exist at present would be necessary to remove this bias

estimating potential output core inflation and the nairu as latent variables this article proposes a new method to obtain estimates of the nairu the core inflation rate and the trend investment rate for the united states using an unobserved components model that is compatible with the usual decomposition of real gross domestic product into trend and cycle the model includes okun s law a forward looking phillips curve and an accelerator type investment equation and accounts for some volatility breaks in two components the unknown parameters in the model are estimated by maximum likelihood using a kalman filter initialized with a partially diffuse prior and the unobserved components are estimated using a smoothing algorithm our results show that the output gap is positively correlated with the deviations of the investment rate from its trend and the inflation rate from core inflation and negatively correlated with the deviations of the unemployment rate from the nairu

output growth the real wage and employment fluctuations this paper is an attempt to contribute to the integration of business cycle analysis with long term growth a real business cycle model with endogenous growth is developed and estimated with u s data in the present framework wage movements do not have to be transitory to generate fluctuations in labor effort the reduced form is a constrained bivariate output hours or real wage hours vector autoregressive process the bivariate setup provides a useful framework for analyzing the persistence of output fluctuations given that the theory implies that hours of work contain information about future output movement copyright 1991 by american economic association

intranational risk sharing and its determinants abstract we develop a model of risk sharing in which agents can pool their consumption risks in both national and local markets and then smooth the remaining consumption fluctuations with credit markets estimating the model with a unique dataset on chinese cities we find that the participation rate in risk sharing is low but upon entering the market agents tend to pool risk in the national market rather than the local market the welfare gain from reaching the perfect consumption risk sharing at the national market could be as large as 4 of the perpetual deterministic consumption flow however conditional on the estimated degree of risk sharing participation the welfare gain from pooling all income risks at the national market is only 0 1 empirical analysis on the determinants of city risk sharing reveals that the degree of risk sharing depends on initial economic development and share of gdp contributed by tertiary industry

the wage price spiral this paper rehabilitates the old wage price spiral it shows that after an increase in aggregate demand the process of adjustment of nominal prices and nominal wages results from attempts by workers to maintain or increase their real wage and by firms to maintain or increase their markups of prices over wages under continuous price and wage setting the process of adjustment would be instantaneous under staggering of price and wage decisions the adjustment takes time the more inflexible real wages and markups are to shifts in demand the higher is the degree of price level inertia and the longer lasting are the effects of aggregate demand on output

least squares learning and the stability of equilibria with externalities this paper studies the stability of competitive equilibria in a model of aggregate employment when the representative agent uses a least squares forecasting procedure it is shown that the pareto inferior low employment steady state is always unstable under least squares learning even if it is stable under perfect foresight the high employment steady state is stable under learning if and only if it is saddle point stable under perfect foresight this weakens multiple equilibrium theories of coordination failure that purport to explain persistently high unemployment the pareto superior high employment steady state will be the focal point of individual forecasting

terms of trade and real exchange rates the canadian evidence abstract this paper presents empirical evidence linking the canada us real exchange rate with the terms of trade using recently developed econometric methods for nondashstationary data we find that the real exchange rate is cointegrated with terms of trade variables and that causality runs from the terms of trade to the exchange rate we then construct a simple exchange rate equation that satisfies several specification tests and performs better than a random walk in post sample forecasting experiments the results suggest that much of the variation in the real exchange rate is attributable to movements in the terms of trade and that the influence of monetary factors is secondary

fiscal policy monopolistic competition and finite lives abstract this paper studies the short run transitional and long run output effects of permanent and temporary shocks in public consumption under various financing methods to this end a dynamic macroeconomic model for a closed economy is developed which features a perfectly competitive final goods sector and a monopolistically competitive intermediate goods sector finitely lived households consume final goods supply labor and save part of their income amongst the findings for a permanent rise in public consumption are i monopolistic competition increases the absolute value of the balanced budget output multiplier ii positive long run output multipliers are obtained only if the generational turnover effect is dominated by the intertemporal labor supply effect iii short run output multipliers under lump sum tax financing are smaller than long run output multipliers if labor supply is elastic and iv bond financing reduces the size of long run output multipliers as compared to lump sum tax financing and may give rise to non monotonic adjustment paths if labor supply is sufficiently elastic and the speed of adjustment of lump sum taxes is not too high temporary bond financed fiscal shocks are shown to yield i permanent effects on output and ii negative long run output multipliers

replacement echoes in the vintage capital growth model this paper is concerned with a non standard source of fluctuations called echo effects i e the ability of an economy to reproduce its own past history in the 1960s growth theorists believed that this property could arise in vintage capital models taking the form of replacement echoes this line of research was stopped after the publication of solow et al 15 who showed that echoes should vanish in a solow growth model with vintage capital however the fundamental reason for this result has nothing to do with vintages rather it comes directly from the main assumption in a solow growth model i e at equilibrium investment is a constant fraction of output and does not depend on any optimal replacement rule we claim that in a more general ramsey model replacement echoes do not necessarily vanish and we show this in the case when instantaneous utility is linear c 1997 academic press

growing through cycles the neoclassical growth model focuses on factor accumulation as an engine of growth while the neo schumpetarian growth model stresses innovation this paper argues that these two views of growth may capture different phases of a single growth experience in the model presented below the balanced growth path is unstable and the economy achieves sustainable growth through cycles under an empirically plausible condition perpetually moving back and forth between two phases one phase is characterized by higher output growth higher investment no innovation and a competitive market structure the other phase is characterized by lower output growth lower investment high innovation and a more monopolistic market structure both investment and innovation are essential in sustaining growth indefinitely and yet they move in an asynchronized way only one of them appears to play a dominant role in each phase the economy grows faster along the cycles than along the unstable balanced growth path

estimating parameters of real business cycle models abstract the calibration technique is the most common procedure to match the data generated from an equilibrium business cycle model with actual macroeconomic time series this paper goes a step further and tests and applies a maximum likelihood procedure in combination with the simulated annealing to estimate the parameters of a baseline rbc model from u s macroeconomic time series data the procedure is tested on a simulated data set where the parameters are known and then applied to u s time series data this permits us to evaluate the efficiency of the procedure and the extent to which the rbc model is a good representation of macroeconomic data

how does the border affect productivity evidence from american and canadian manufacturing industries abstract this study reports on how much productivity fluctuations are industry specific versus country specific for the manufacturing industries in canada and the united states the correlation between cross border pairings of the same industry are found to be more often highly correlated than previously thought furthermore the study confirms earlier findings that the similarity of input use can help describe the comovement of productivity fluctuations across industries

time varying effects of recall expectation a reemployment bonus and job counseling on unemployment durations a simple search model that includes the possibility of recall provides predictions as to the changing effects of recall expectations a bonus offer and job counseling on new job finding rates over time using data from the new jersey unemployment insurance reemployment demonstration project njuirdp i find evidence for an initial positive effect of the bonus offer which diminishes over time new job finding rates are found to be negatively affected by higher initial recall expectations this effect also diminishes over time and evidence suggests that job counseling is successful in speeding up this process

time to implement and aggregate fluctuations in this paper we slightly modify the canonical rbc model by adding an implementation lag in the technology to reproduce the fact that consumption is a leading indicator of output indeed we assume that agents have today some information on the realization of the technology shock that will occur tomorrow today inventions are known and give information on the innovations which will be implemented tomorrow the model is estimated and tested on us data by a simulated method of moments using some suitable reconstructed data that are compatible with that model the results are in favor of this implementation lag hypothesis the model is not rejected by us post war data

business cycles and labor market search the quantitative implications of labor market search for economic fluctuations are evaluated in the context of a real business cycle model incorporating labor market search into the model is found to improve its empirical performance along several dimensions in particular hours now fluctuate substantially more than wages and the contemporaneous correlation between hours and productivity falls in addition the model replicates the observation that output growth displays positive autocorrelation at short horizons overall the empirical results suggest that the labor market search environment embodies a quantitatively important propagation mechanism copyright 1996 by american economic association

optimal saving under poisson uncertainty abstract this paper studies optimal saving and investment behaviour of a household that can either invest in a riskless or a risky saving technology when risk results from a poisson process the focus is on behaviour of households in a general equilibrium setup poisson processes are introduced since they allow us to understand and model endogenous cycles jointly with long run growth it turns out that a very simple intuitive and tractable characterization of equilibrium is possible journal of economic literature classification numbers c61 o33 o41

unemployment insurance and unemployment spells this paper tests the effects of the level and length of unemployment insurance benefits on unemployment durations the paper particularly studies individual behavior during the weeks just prior to when benefits lapse higher unemployment insurance benefits are found to have a strong negative effect on the probability of leaving unemployment however the probability of leaving unemployment rises dramatically just prior to when benefits lapse individual data are used with accurate information of spell durations and the level and length of benefits the semiparametric estimation techniques used in the paper yield more plausible estimates than conventional approaches and provide useful diagnostics copyright 1990 by the econometric society

optimal timing of technology adoption abstract in a dynamic programming framework this paper investigates the optimal timing of technology adoption by a competitive firm when technology choice is irreversible and the firm faces a stochastic innovation process with uncertainties about both the speed of the arrival and the degree of improvement of new technologies a numerical example illustrates how the optimal timing decision is affected by changes in parameter values reflecting market conditions the firm s initial technological attributes and the characteristics of the stochastic innovation process some of these effects turn out to be in sharp contrast to common intuition contrasting the optimal decision rule derived here with the rule obtained under the net present value shows that the former implies a slower pace of adoption than implied by the latter the optimal decision rule is generalized for the case of multiple technology switches and it is shown that for all the switching decisions except the last one the optimal rule satisfies the net present value criterion

alternative time patterns of decisions and dynamic strategic interactions this paper offers a simple approach to study steady state markov perfect equilibria arising in dynamic games when players are obliged to commit their actions for several periods it highlights the importance of spillovers and dynamic strategic interactions when assessing the various time patterns conceivable in such games the obtained results are then applied to various either micro or macroeconomic issues where time patterns of decisions matter

a simple model of schumpeterian growth with complex dynamics abstract in this paper we develop a schumpeterian discrete time model of endogenous growth with an explicit market for the resource used for innovation creating investment and study its global dynamics we show among others that the level of investment may fluctuate chaotically for a compact range of model parameters as a consequence of the explicit intermediation and market imperfections temporary monopoly power following an innovation underlying the growth process

long run implications of investment specific technological change an attempt is made to disentangle its effects from the more traditional hicksneutral form of technological progress the balanced growth path for the model is characterized and calibrated to u s national income and product account nipa data the quantitative analysis suggests that investment specific technological change accounts for the major part of growth jel e13 030 041 047

estimating persistence in canadian unemployment evidence from a bayesian arfima the degree of persistence in aggregate canadian unemployment is estimated within a bayesian arfima class of models the results conclude that unemployment exhibits persistence in the short and intermediate run the evidence of persistence is stronger than previously reported by koustas and veloce 1996 this persistence cast a vital implication regarding disinflation policies based on the unemployment rate these policies will prove very costly in terms of lost output and if implemented they considerably lengthen recessions

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

the economic determinants of technology shocks in a real business cycle model abstract creative destruction due to new technologies causes both long run growth and short run business fluctuations new technologies push the economy on a higher productivity level but also imply partial obsolescence of old production units obsolescence induces an adjustment period during which growth rates gradually fall at some endogenously determined point research for the next technology starts once the new technology is discovered a technology shock occurs and the next cycle starts this is shown in a continuous time rbc model with risk averse agents where savings can be used for financing deterministic capital accumulation and stochastic r d for new technologies

endogenous capacity utilization and macroeconomic persistence abstract this paper presents a monetary dynamic general equilibrium model featuring a strong internal propagation mechanism limited short run factor substitutability and idiosyncratic demand uncertainty play a prominent role in the results firms are ex post heterogeneous and a well defined distribution of capacity utilization rates characterizes the equilibrium of the model the economy responds gradually to aggregate shocks since firms with excess capacity can raise production without experiencing large increases in their marginal costs the modeling framework presented in this paper offers a plausible microeconomic interpretation for reduced form mark up shocks typically considered in the new keynesian literature

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

the relative stickiness of wages and prices i introduction a continuing challenge to macroeconomics is to explain how a purely nominal disturbance produces short term aggregate real effects in the classical paradigm in which wages and prices are perfectly flexible a positive nominal aggregate demand disturbance will cause nominal wages and output prices to rise in the same proportion leaving real wages unchanged thus neither employment nor output will be affected consequently many business cycle theories posit the existence of wage and or price stickiness to explain how nominal aggregate demand disturbances generate real macroeconomic effects according to these theories the failure of nominal wages or prices to fully adjust in the short run to purely nominal disturbances explains why shocks to aggregate demand will cause both employment and output to temporarily deviate from their natural rates the relative importance of wage and price stickiness in the transmission of nominal shocks to the real economy however remains an unsettled issue the purpose of this paper is to exploit evidence on the behavior of real wages in an attempt to assess the relative importance of these two sources of stickiness first consider models emphasizing sticky or slowly adjusting nominal wages 1 if for example output prices are free to adjust but nominal wages are sticky a positive aggregate demand shock will cause prices to rise and real wages to temporarily fall below market clearing levels the fall in real wages will stimulate employment and thus output as the aggregate demand shock induces movement along a stable labor demand curve consequently sticky wage models predict a negative correlation between aggregate demand shocks and real wages if on the other hand wages are flexible while output prices are sticky 2 aggregate demand disturbances and real wages will tend to be positively correlated in the short run in sticky price models imperfectly competitive firms may resist adjusting output prices in response to changes in demand perhaps due to menu costs instead increases in demand are met by corresponding increases in output this requires an increase in labor inputs which in turn requires an increase in the real wage rate if wages are flexible and the labor supply curve is positively sloped thus when prices are sticky but wages are flexible a positive aggregate demand shock is associated with an increase in real wages it may be that neither prices nor wages are fully flexible if prices and wages both exhibit stickiness we would expect real wages to be positively correlated or negatively correlated with aggregate demand shocks depending in large part on whether prices or wages are stickier thus knowledge of the direction of the short run response of real wages to aggregate demand disturbances would offer important evidence on the relative stickiness of nominal wages and output prices if all business cycle fluctuations are due solely to aggregate demand disturbances such evidence could be obtained by examining the cyclical behavior of real wages since regardless of the source of stickiness aggregate demand disturbances are positively correlated with employment and output countercyclical procyclical real wages would indicate that nominal wages are stickier more flexible than output prices indeed some consider the stylized fact of slightly procyclical real wages 3 to be an important challenge to models that emphasize wage stickiness for example bennett mccallum 1986 argues for the superiority of models with sticky output prices since if wage stickiness alone were responsible for the real effects of monetary actions with product prices adjusting flexibly then we should observe countercyclical movements in the real wage that we do not has recently been reconfirmed in a study by bils 1985 gregory mankiw 1987 107 has concluded the final and perhaps most serious problem with the unadorned nominal wage story is that real wages do not move over the business cycle as the theory predicts

animal spirits technology shocks and the business cycle the last few years have witnessed a revival of business cycle models in which beliefs of agents have played a leading role in explaining economic fluctuations 1 most of these models involve strong economy wide increasing returns to scale in order for sunspot equilibria to exist in a recent paper however basu and fernald 1996 present evidence that returns to scale are far from evenly distributed across the u s economy in particular they report that scale economies are present mainly in the domain of durable goods production in the nondurable goods sector of the u s economy evidence of increasing returns to scale cannot be found

optimising agents staggered wages and persistence in the real effects of money shocks in this paper we incorporate taylor s 1979 staggered wage setting into an optimising dynamic general equilibrium framework to study whether staggered wages could induce a high degree of persistence in the real effects of money shocks we conclude that high persistence is an unlikely outcome sensible values of the microeconomic parameters and or a moderate rate of underlying inflation imply a low degree of persistence furthermore once explicit microfoundations are taken into account we show that i the model is highly non linear ii the inertia of the system is inversely related to the level of average inflation

a spatial analysis of sectoral complementarity this paper presents a spatial econometric method for characterizing productivity comovement across sectors of the u s economy input output relations provide an economic distance measure that is used to characterize interactions between sectors as well as conduct estimation and inference we construct two different economic distance measures one metric implies that two sectors are close to one another if they use inputs of other industrial sectors in nearly the same proportion and the other metric implies that sectors are close if their outputs are used by the same sectors our model holds that covariance in productivity growth across sectors is a function of economic distance we find that 1 positive cross sector covariance of productivity growth generates a substantial fraction of the variance in aggregate productivity 2 cross sector productivity covariance tends to be greatest between sectors with similar input relations and 3 there are constant to modest increasing returns to scale we tes

endogenous vs exogenously driven fluctuations in vintage capital models in this paper we present a particular case of the creative destruction model of caballero and hammour quart j econ 111 1996 805 851 in which both exogenous and endogenous fluctuation sources are present we show that job creation follows a delayed differential equation with periodic coefficients the delay is equal to the optimal age of capital goods the period of the coefficients is equal to the period of an exogenous profitability cycle we mathematically show that job creation is asymptotically periodic with the same period as the profitability cycle furthermore using an explicit numerical method we find that replacement echoes generally dominate the short run dynamics finally we find that the combination of the two fluctuations sources favors the appearance of asymmetries in job creation and job destruction patterns

the effects of real and monetary shocks in a business cycle model with some sticky prices an established characteristic of macroeconomic fluctuations is the strong positive correlation between variations in the money stock and variations in production income and employment at business cycle frequencies this finding has motivated an enormous literature that has studied the effects of monetary policy disturbances on the real economy and in particular the role of money in business cycles several classes of monetary business cycle models have been developed that feature different channels through which monetary policy can have real effects one model that has been used widely is the keynesian model in which monetary shocks can have important effects on allocations because there are nominal rigidities in prices and or wages the keynesian assumption of sticky nominal prices is often motivated by reference to studies that have analyzed the frequency of nominal price changes the broad conclusion that emerges from this literature is that there are a number of goods that have prices that appear to change infrequently for example carlton 1989 has reported slow changes in nominal transactions prices for producers goods even without long term relationships between buyers and sellers and has documented that delivery lags and other product characteristics frequently change before nominal prces change similarly blinder s survey 1991 of firms shows that prices for many goods change only about once per year while this evidence

a multisectoral general equilibrium model of schumpeterian growth and fluctuations abstract this paper builds a dynamic multisectoral general equilibrium model of schumpeterian growth and fluctuations based on the endogenous introduction of new products the set of technological opportunities determines the degree of product quality upgrading and consists of breakthroughs and improvements the latter exhibiting diminishing returns if the degree of diminishing returns to technological improvements is low then there is no steady state equilibrium but cycles of breakthroughs and improvements we analyze two symmetric stable patterns of innovation which generate endogenous cycles and growth there is a negative correlation between the duration of each cycle and the long run growth trend

the accumulation of wealth and the cyclical generation of new technologies a search theoretic approach in this paper sustained technological progress results from the feedback between technical change and the accumulation of wealth the production technology is affected by a productivity factor which ensues from research and development the research and development process is described as a sequential search problem in which optimal decisions depend on current levels of wealth and technology the resulting growth path displays invention cycles a discovery of a significant technological improvement at the end of a search phase is followed by periods of growth without search eventually sufficient wealth is accumulated research and development resumes and a new cycle begins copyright 1996 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association