the labour market over the business cycle can theory fit the facts we examine the ability of six labour market models to account for the business cycle behaviour of uk labour markets when embedded in a stochastic growth model we assess the models in terms of i their ability to mimic general business cycle correlations and volatility ii their success at explaining the persistence of labour market fluctuations and iii whether the models can explain why the growth and speed of adjustment of labour market variables changes between periods of expansions and contractions the main success of the models is the ability to broadly account for business cycle correlations and co movements and the changes in employment unemployment growth rates between expansions and contractions however there are three main failures a the models tend to produce insufficiently volatile employment and unemployment fluctuations b the models tend to produce too strong a correlation between wages and employment c most of the models generate only brief temporary deviations in unemployment in response to shocks rather than the protracted dynamics of the data

the out of sample success of term structure models as exchange rate predictors a step beyond abstract a large literature suggests that standard exchange rate models cannot outperform a random walk forecast and that the forward rate is not an optimal predictor of the spot rate however there is evidence that the term structure of forward premia contains valuable information for forecasting future spot exchange rates and that exchange rate dynamics display nonlinearities this paper proposes a term structure forecasting model of exchange rates based on a regime switching vector equilibrium correction model which is novel in this context our model significantly outperforms both a random walk and to a lesser extent a linear term structure vector equilibrium correction model for four major dollar rates across a range of horizons

some empirical evidence on the effects of shocks to monetary policy on exchange rates this paper investigates the effects of shocks to u s monetary policy on exchange rates we consider three measures of these shocks orthogonalized shocks to the federal funds rate orthogonalized shocks to the ratio of nonborrowed to total reserves and changes in the romer and romer index of monetary policy in sharp contrast to the literature we find substantial evidence of a link between monetary policy and exchange rates specifically according to our results a contractionary shock to u s monetary policy leads to i persistent significant appreciations in u s nominal and real exchange rates and ii significant persistent deviations from uncovered interest rate parity in favor of u s interest rates

limited participation and exchange rate dynamics does theory meet the data the paper explores the empirical dimensions of a new open economy macronomy model characterized by credit market frictions we find that these frictions are essential for the model to match a large set of moments of german data moreover the simulated impulse response functions to supply and nominal shocks are consistent with var findings since the model is estimated on moments rather than on conditional irfs this underlines the ability of the model to match the data finally monetary shocks do not seem to be the primary driving force behind the aggregate dynamics which is consistent with the var literature

calculating and using second order accurate solutions of discrete time dynamic equilibrium models we describe an algorithm for calculating second order approximations to the solutions to nonlinear stochastic rational expectations models the paper also explains methods for using such an approximate solution to generate forecasts simulated time paths for the model and evaluations of expected welfare differences across different versions of a model the paper gives conditions for local validity of the approximation that allow for disturbance distributions with unbounded support and allow for non stationarity of the solution process

monetary policy and uncertainty in an empirical small open economy model this paper explores optimal policy design in an estimated model of three small open economies australia canada and new zealand within a class of generalized taylor rules we show that to stabilize a weighted objective of output consumer price in ation and nominal interest variation optimal policy does not respond to the nominal exchange this is despite the presence of local currency pricing and due in large part to observed exchange rate disconnect in these economies optimal policies that account for the uncertainty of model estimates as captured by the parameters posterior distrbution similarly exhibit a lack of exchange rate response in contrast to brainard 1967 the presence of parameter uncertainty can lead to more or less aggressive policy responses depending on the model at hand

some issues concerning interest rate pegging price level determinacy and the real bills doctrine abstract in a recent paper canzoneri henderson and rogoff have shown that it is possible for the monetary authority to peg the nominal interest rate without creating price level indeterminacy in a simplified version of the 1975 sargent wallace model the present paper begins by reviewing that result which involves a limiting case of a money supply rule that depicts the authority as responding to current values of the interest rate then it shows that there exists an alternative rule that will peg the nominal rate without creating indeterminacy but that this rule induces a different pattern of price level fluctuations next the paper considers whether indeterminacy will prevail if the authority tries to effect a peg in a third way by simply standing ready to buy and sell securities at the desired rate finally the implications of the foregoing results are drawn for arguments concerning the real bills doctrine and some critical comments are directed at the recent attempted rehabilitation of that doctrine by sargent and wallace

monetary policy actions intervention and exchange rates a reexamination of the empirical relationships using federal funds rate target data the authors reexamine the relationships among federal reserve monetary policy actions u s interventions in currency markets and exchange rates using an alternative measure of monetary policy actions the federal reserve s federal funds rate target they find that exchange rates generally respond immediately to u s monetary policy actions and that these responses are usually consistent with the overshooting hypothesis the authors also find evidence of signaling and leaning against the wind u s intervention policies over the sample however controlling for such interventions do not alter their estimates of exchange rate responses to federal funds rate target changes copyright 1998 by university of chicago press

liquidity effects and the monetary transmission mechanism several recent papers provide strong empirical support for the view that an expansionary monetary policy disturbance generates a persistent decrease in interest rates and a persistent increase in output and employment existing quantitative general equilibrium models which allow for capital accumulation are inconsistent with this view there does exist a recently developed class of general equilibrium models which can rationalize the contemporaneous response of interest rates output and employment to a money supply shock however a key shortcoming of these models is that they cannot rationalize persistent liquidity effects this paper discusses the basic frictions and mechanisms underlying this new class of models and investigates one avenue for generating persistence we argue that once a simplified version of the model in christiano and eichenbaum 1991 is modified to allow for extremely small costs of adjusting sectoral flow of funds positive money shocks generate long lasting quantitatively significant liquidity effects as well as persistent increases in aggregate economic activity

new evidence on the puzzles results from agnostic identification on monetary policy and exchange rates abstract past empirical research on monetary policy in open economies has found evidence of the delayed overshooting puzzle and the forward discount puzzle we revisit the effects of monetary policy on exchange rates by applying uhlig s uhlig h 2005a what are the effects of monetary policy on output results from an agnostic identification procedure journal of monetary economics 52 2 381 419 identification procedure that involves sign restrictions on the impulse responses of selected variables in a first step we leave the response of the exchange rate agnostically open and find sizeable evidence for both puzzles in a second step we additionally rule out the delayed overshooting by construction our results indicate that the forward discount puzzle is robust even without delayed overshooting

tastes and technology in a two country model of the business cycle explaining international trade on international financial markets allows people to insure country specific risk and smooth consumption intertemporally equilibrium models of business cycles with trade on global financial markets typically yield international consumption correlations near one and excessive volatility of investment the authors incorporate nontraded goods in the model and find that the implications for aggregate consumption investment and the trade balance are consistent with business cycle properties of industrialized countries however the model driven by technology shocks alone yields counterfactual implications for comovements between consumption and prices at the sectoral level taste shocks produce price quantity relationships more consistent with the data copyright 1995 by american economic association

uncertainty matters evidence from close elections abstract this paper uses a data rich environment to produce direct econometric estimates of macroeconomic and financial uncertainty for 11 advanced nations these indices exhibit significant independent variation from popular proxies and provide a refinement of the influential work of jurado et al 2015 that results in improved real time performance we use this new data in combination with narrative evidence to jointly identify macro uncertainty and financial shocks macro uncertainty shocks are identified with close elections and financial shocks with financial stress during financial crises we find that macro uncertainty shocks matter for the majority of countries and that the real effects of macro uncertainty shocks are generally larger conditioning on close elections these results are robust to controlling for news shocks and global uncertainty as well as a variety of shocks considered to be important drivers of the business cycle

the macroeconomic impact of oil earnings uncertainty new evidence from analyst forecasts we develop measures of oil earnings uncertainty oeu using analyst forecasts drawn from a large firm level dataset oeu is related to future economic downturns so some oeu measures may serve to forecast future downturns an increase in oeu also has adverse effects on the us oil sector the results are robust to conditioning on aggregate uncertainty at the same time oeu is related to increases in stock prices unlike aggregate uncertainty which has the opposite effect oeu is thus an independent influence on both the oil industry and on economic aggregates

the effects of economic policy uncertainty on china s economy evidence from time varying parameter favar this article explores the effects of china s economic policy uncertainty epu on its fiscal policy monetary policy and a wide range of macro economic variables using a time varying parameter fava

optimal risk allocation for regulated monopolies and consumers abstract the model shows how a regulated monopolist s price should change as random cost and demand parameters are revealed the regulator has a ramsey type problem with a linear tariff a trade off between allocative efficiency and risk sharing typically exists the attitudes of the consumer and the firm to both income and price risk determine how the price should move sufficient conditions are found for price adjustment schemes used in practice to be optimal these schemes include full partial and zero pass through of marginal costs and price caps average cost pricing and caps on total revenue for demand risk

do central banks respond to exchange rate movements a structural investigation abstract we estimate a small scale structural general equilibrium model of a small open economy using bayesian methods our main focus is the conduct of monetary policy in australia canada new zealand and the uk we consider generic taylor type rules where the monetary authority reacts in response to output inflation and exchange rate movements we perform posterior odds tests to investigate the hypothesis whether central banks do target exchange rates the main result of this paper is that the central banks of australia and new zealand do not whereas the bank of canada and the bank of england do include the nominal exchange rate in its policy rule this result is robust for various specification of the policy rule we also find that terms of trade movements do not contribute significantly to domestic business cycles

dynamic effects of monetary policy shocks on macroeconomic volatility we use a simple new keynesian model with firm specific capital non zero steady state inflation long run risks and epstein zin preferences to study the volatility implications of a monetary policy shock an unexpected increase in the policy rate by 150 basis points causes output and inflation volatility to rise around 10 above their steady state standard deviations var based empirical results support the model implications that contractionary shocks increase volatility the volatility effects of the shock are driven by agents concern about the in ability of the monetary authority to reverse deviations from the policy rule and the results are re enforced by the presence of non zero trend inflation

monetary policy and exchange rate volatility in a small open economy we lay out a small open economy version of the calvo sticky price model and show how the equilibrium dynamics can be reduced to a simple representation in domestic inflation and the output gap we use the resulting framework to analyse the macroeconomic implications of three alternative rulebased policy regimes for the small open economy domestic inflation and cpi based taylor rules and an exchange rate peg we show that a key difference among these regimes lies in the relative amount of exchange rate volatility that they entail we also discuss a special case for which domestic inflation targeting constitutes the optimal policy and where a simple second order approximation to the utility of the representative consumer can be derived and used to evaluate the welfare losses associated with the suboptimal rules

remittances monetary policy and partial sterilization author affiliation diego e vacaflores dv13 txstate edu acknowledgment the author thanks dennis w jansen for his insightful contributions and continuous guidance i also thank the editor kent kimbrough and two anonymous referees for their valuable comments and suggestions 1 introductionremittances have increased over the last several decades international estimates of official remittance flows suggest that the total amount of worker remittances have increased to us 300 billion in 2010 inter american development bank 2012 this increase may in part be attributed to the rapid growth of money transfer institutions which has reduced the average transaction cost and has made them more visible however it may also be indicative of an actual increase in these monetary transfers due to increased migration flows which now represent approximately 45 of net private capital flows to developing countries the importance of remittances for remittances receiving developing countries does not just come from their size but mainly from its potential and actual effects on both the society and the individual remittances affect labor market decisions school retention export sector competitiveness and financial deepening funkhouser 1992 glytsos 2002 cox edwards and ureta 2003 amuedo dorantes and pozo 2004 chami fullenkamp and jahjah 2005 giuliano and ruiz arranz 2009 in terms of consumption remittance flows have gone from satisfying basic needs to providing a vast array of durable goods for recipient households they can thus potentially promote economic growth and development through higher domestic demand if motivated by altruism or through enhanced productive capacity if motivated by self interest most of the literature on remittances focuses on the microeconomic implication of such flows for the sender and for the receiver of these funds on the basis of survey data this trend in the literature has examined the motivations to remit such as contractual arrangements altruism repayment of migration costs and so on and the uses of these funds in the home country e g for education health care entrepreneurial initiatives social works etc at the macro level the literature on the impact of remittances on the recipient country is sparse but growing as researchers realize that it could have important effects on the overall economy however economists have overlooked the examination of the potential influence that higher levels of remittances can have on the implementation of monetary policy and thus its understanding is still limited since remittances provide a secondary income to households they would affect decisions with respect to labor supply and consumption which can alter the effectiveness of monetary policy when this additional income is a significant portion of a household s income additionally although domestic governments usually try to sterilize capital flows to sustain a given policy the high levels of informality in some developing countries and the significant portion of remittances that continue to flow through informal channels make monetary targeting problematic given these potential complications monetary policy could potentially have a differential impact depending on the remittances share of gdp and fluctuations in remittances can affect the amount of money in circulation and therefore economic performance accounting for such influences thus became imperative for stabilization policy this study examines the potentially different impact that monetary policy can have on output depending on the relative share of remittances as a percentage of gdp and the differential effect that remittances shocks can have on the main macroeconomic aggregates when economies do not fully sterilize such inflows channels never explored before it builds on the theoretical model developed by jansen vacaflores and naufal 2010 explicitly incorporating remittances in a small open economy framework and is able to show that monetary policy has a differential effect on output depending on the relative size of these remittances

dynamic connectedness of uncertainty across developed economies a time varying approach abstract economic uncertainty has attracted a significant part of the modern research in economics proving to be a significant factor for every economy in this study we focus on the transmission channel of uncertainty between developed economies examining potential spillover effects between the u s the e u the u k japan and canada within a time varying framework our empirical results indicate of a significant spillover of uncertainty from the e u to the u s

a structural model of us aggregate job flows this paper contributes to the analysis of jobs flows dynamics through the explicit modelling of job creations and job destructions we propose a simple matching model extended for endogenous separation and tractable heterogeneity the parameters of the model are estimated using a simulation based estimation method we then test the ability of trade externalities generated by the matching process to i propagate reallocation and aggregate disturbances in the whole labor market and ii generate the observed distribution of aggregate job flows the results clearly indicate that the model is able to match the dynamics of us aggregate job flows copyright 2002 john wiley sons ltd

measuring inflation expectations uncertainty using high frequency data inflation expectations play a key role in determining future economic outcomes the associated uncertainty provides a direct gauge of how well anchored the inflation expectations are we construct a model based measure of inflation expectations uncertainty by augmenting a standard unobserved components model of inflation with information from noisy and possibly biased measures of inflation expectations obtained from financial markets this new model based measure of inflation expectations uncertainty is more accurately estimated and can provide valuable information for policymakers using u s data we find significant changes in inflation expectations uncertainty during the great recession

the international effects of global financial uncertainty shocks abstract in this paper we study the impact of sudden rises in global financial uncertainty on small open economies to this end we extract a global factor from the realised volatilities of about 1000 risky asset returns from around the world we then analyse how shocks to this factor affect economic activity in 44 advanced and emerging small open economies by estimating local projections in a panel regression framework we find that shocks increasing global financial uncertainty have adverse consequences on output trade and unemployment while their impact on nominal variables is more heterogeneous across countries furthermore the effects are more severe in countries with a higher degree of trade or financial openness higher levels of vulnerabilities weaker institutions or during economic downturns

economic policy uncertainty shocks and stock bond correlations evidence from the us market abstract this paper examines the effects of economic policy uncertainty shocks on stock bond correlations for the us market we devise a general framework which distinguishes a positive shock from a negative one and nests either as its special case the results show that innovations in the policy uncertainty index impact negatively and asymmetrically on the subsequent stock bond correlations which are characterized by a structural break and positive type asymmetry

technology shocks in the new keynesian model in the new keynesian model preference cost push and monetary shocks all compete with the real business cycle model s technology shock in driving aggregate fluctuations a version of this model estimated via maximum likelihood points to these other shocks as being more important for explaining the behavior of output inflation and interest rates in the postwar u s data these results weaken the links between the current generation of new keynesian models and the real business cycle models from which they were originally derived they also suggest that federal reserve officials have often faced difficult trade offs in conducting monetary policy

is there a role for uncertainty in forecasting output growth in oecd countries evidence from a time varying parameter panel vector autoregressive model this paper uses a time varying parameter panel vector autoregressive tvp pvar model to analyze the role played by domestic and us news based measures of uncertainty in forecasting the growth of industrial production of 12 organisation for economic co operation and development oecd countries based on a monthly out of sample period of 2009 06 to 2017 05 given an in sample of 2003 03 to 2009 05 there are only 46 of cases where domestic uncertainty can improve the forecast of output growth relative to a baseline monetary tvp pvar model which includes inflation interest rate and nominal exchange rate growth besides output growth moreover including us uncertainty does not necessarily improve the forecasting performance of output growth from the tvp pvar model which includes only the domestic uncertainty along with the baseline variables so in general while uncertainty is important in predicting the future path of output growth in the 12 advanced economies considered a forecaster can do better in majority of the instances by just considering the information from standard macroeconomic variables

the propagation of uncertainty shocks rotemberg versus calvo this article studies the effects of uncertainty shocks on economic activity focusing on inflation using a vector autoregression i show that increased uncertainty has negative demand effects reducing gdp and prices i then consider standard new keynesian models with rotemberg type and calvo type price rigidities despite the belief that the two schemes are equivalent i show that they generate different dynamics in response to uncertainty shocks in the rotemberg model uncertainty shocks decrease output and inflation in line with the empirical results by contrast in the calvo model uncertainty shocks decrease output but raise inflation because of firms precautionary pricing motive

constructing and estimating a realistic optimizing model of monetary policy abstract a dynamic stochastic general equilibrium dsge model with real and nominal both price and wage rigidities succeeds in capturing some key nominal features of u s business cycles additive technology shocks as well as multiplicative shocks are introduced and shown to be crucial monetary policy is specified as an interest rate targeting rule following developments in the structural vector autoregression var literature the interaction between real and nominal rigidities is essential to reproduce the liquidity effect of monetary policy the model is estimated by maximum likelihood on u s data and its fit is comparable to that of an unrestricted first order var besides producing reasonable impulse responses and second moments this model replicates a feature of u s business cycles never captured by previous research with dsge models that an increase in interest rates predicts a decrease in output two to six quarters in the future

liquidity loanable funds and real activity abstract this paper develops a general equilibrium model of two traditional explanations of the monetary black box linking money and real activity the liquidity effect and the loanable funds effect these effects are modeled with a monetary production economy in which central bank injections of cash are funnelled into the economy through the credit market since only borrowers have direct access to the newly injected cash monetary injections cause nominal interest rates to fall if firms are borrowers then monetary injections also increase current and future real activity

long memory economic policy uncertainty and forecasting us inflation a bayesian varfima approach abstractwe compare inflation forecasts of a vector autoregressive fractionally integrated moving average varfima model against standard forecasting models u s inflation forecasts improve when controlling for persistence and economic policy uncertainty epu importantly the varfima model comprising of inflation and epu outperforms commonly used inflation forecast models

monetary policy regimes and beliefs this paper investigates the role of beliefs over monetary policy in propagating the effects of monetary policy shocks within the context of a dynamic stochastic general equilibrium model in this model monetary policy periodically switches between low and high money growth regimes when individuals cannot observe the regime directly they must draw inferences over regime type based on historical money growth rates the authors show that for an empirically plausible money growth process beliefs evolve slowly in the wake of a regime change as a result their model is able to capture some of the observed persistence of real and nominal variables following such a regime change

international spillovers of policy uncertainty using the baker et al 2013 index of policy uncertainty for six developed countries this paper estimates spillovers of policy uncertainty we find that spillovers account for slightly more than one fourth of the dynamics of policy uncertainty in these countries with this share rising to one half during the financial crisis the us and uk are responsible for a large fraction of the spillovers since the financial crisis while the remaining countries are all net receivers of policy uncertainty shocks during and after this period

optimal simple and implementable monetary and fiscal rules welfare maximizing monetary and fiscal policy rules are studied in a model with sticky prices money and distortionary taxation the ramsey optimal policy is used as a point of comparison the main findings are the size of the inflation coefficient in the interest rate rule plays a minor role for welfare it matters only insofar as it affects the determinacy of equilibrium optimal monetary policy features a muted response to output interest rate rules that feature a positive response to output can lead to significant welfare losses the welfare gains from interest rate smoothing are negligible optimal fiscal policy is passive the optimal monetary and fiscal rule combination attains virtually the same level of welfare as the ramsey optimal policy

welfare and macroeconomic interdependence we develop a baseline model of monetary and fiscal transmission in interdependent economies the welfare effects of expansionary policies are related to monopolistic supply in production and monopoly power of a country in trade an unanticipated exchange rate depreciation can be beggar thyself rather than beggar thy neighbor as gains in domestic output are offset by deteriorating terms of trade smaller and more open economies are more prone to suffer from inflationary shocks larger economies benefit from moderate demand led expansions but may be worse off if policy makers attempt to close the output gap fiscal shocks are generally beggar thy neighbor in the long run in the short run they raise domestic demand at given terms of trade thus reducing the welfare benefits from monetary expansions analytical tractability makes our model uniquely suitable as a starting point to approach the recent new open economy macroeconomic literature

common and country specific economic uncertainty abstract we use a factor model with stochastic volatility to decompose the time varying variance of macroeconomic and financial variables into contributions from country specific uncertainty and uncertainty common to all countries we find that the common component plays an important role in driving the time varying volatility of nominal and financial variables the cross country co movement in volatility of real and financial variables has increased over time with the common component becoming more important over the last decade simulations from a two country dsge model featuring epstein zin preferences suggest that increased globalisation and trade openness may be the driving force behind the increased cross country correlation in volatility

the exchange rate in a dynamic optimizing business cycle model with nominal rigidities a quantitative investigation this paper studies a quantitative dynamic optimizing business cycle model of a small open economy with staggered price and wage setting the model exhibits exchange rate overshooting in response to money supply shocks the predicted variability of the nominal and especially of the real exchange rate is noticeably higher than in standard real business cycle models with flexible prices and wages a positive domestic money supply shock is predicted to lower the domestic interest rate raise gdp and trigger a depreciation of both the nominal and real exchange rate increases in domestic productivity and in the world interest rate are also predicted to induce a nominal and real exchange rate depreciation 2001 elsevier science b v all rights reserved

international transmission of transitory and persistent monetary shocks under imperfect information abstract we analyze the transmission of monetary shocks in a new open economy macroeconomics model with one period nominal contracts and imperfect information shocks may have transitory and persistent components that can be disentangled only through the accumulation of information over time as a consequence the responses to shocks are significantly altered compared with the case of full information there are persistent effects on international relative prices and delayed exchange rate overshooting is possible following a persistent shock in some cases there are ex post excess returns as a positive interest rate spread is accompanied by an appreciating currency or vice versa lastly it is demonstrated that staggering reinforces persistence

explaining international comovements of output and asset returns the role of money and nominal rigidities abstract output and asset returns are highly positively correlated across the u s and the remaining major industrialized countries standard business cycle models that assume flexible prices and wages in the real business cycle rbc tradition have great difficulties explaining this fact this paper presents a dynamic optimizing stochastic general equilibrium model of a two country world with sticky nominal prices and wages the structure here generates cross country correlations of output and returns that are markedly higher and hence closer to the data than the cross country correlations that obtain when flexible prices and wages are assumed

unconventional monetary policy and the credit channel in the euro area abstract we disentangle credit supply and demand and we then embed this information into a bayesian threshold var model to investigate the importance of the demand channel and the broad credit channel in the transmission of unconventional monetary policy on the macroeconomy during financial stress periods we find that during such periods ump shocks boost aggregate demand for loans increase agents net worth and revitalize credit to firms and households in addition counterfactual analysis suggests that non standard policy measures aiming at stimulating loan demand and relaxing banks balance sheet constraints would provide a significant support to economic activity prices and the financial sector

investment shocks and business cycles abstract the origins of business cycles are still controversial among macroeconomists this paper contributes to this debate by studying the driving forces of fluctuations in an estimated new neoclassical synthesis model of the u s economy in this model most of the variability of output and hours at business cycle frequencies is due to shocks to the marginal efficiency of investment imperfect competition and to a lesser extent technological frictions are the key to their transmission although labor supply shocks explain a large fraction of the fluctuations in hours at very low frequencies they are irrelevant over the business cycle this finding is important because the microfoundations of these disturbances are widely regarded as unappealing

the demand and liquidity effects of monetary shocks abstract this paper examines the effect of a monetary shock in a stochastic growth model with a cash in advance constraint and a financial intermediary it explores the differences between the results of restrictions on nominal price adjustment the demand effect and restrictions on savings behavior the liquidity effect it is found that the model that produces the appropriate response to a temporary monetary shock includes both demand and liquidity effects

should the euro area be run as a closed economy the european economic and monetary union emu has created a new economic area larger and closer with respect to the rest of the world area specifi cs hocks are thus more important in emu than country specific shocks used to be in the previous states e g in germany it is thus not surprising that the models used to determine optimal monetary policy in the euro area for instance smets and wouters 2004 assume that this works essentially as a closed economy hit by domestic shocks i e the same assumption made in standard models of u s monetary policy see e g christiano et al 1999 where all shocks are domestic with the only possible exception of energy price shocks this paper studies monetary policy in the euro area looking at the variable most directly related to current and expected monetary policy the yield on long term government bonds we explore how the behaviour of european long term rates has been affected by emu and whether the response of long term rates to monetary policy has got any closer to that consistent with a closed economy we find that the level of long term rates in europe is almost entirely explained by u s shocks and by the systematic response of u s and european variables to these shocks the systematic component of european monetary policy responds to u s variables more than it does to local variables this was true for the bundesbank before emu and remains true for the ecb since the start of emu we also find that unpredictable fluctuations in long term rates are driven by shocks to term premia not to monetary policy this means that the ecb can affect long rates only through the systematic component of its monetary policy which as we have seen mostly responds to u s variables monetary policy shocks induced by the ecb have virtually no effect on long rates claiming that monetary policy in the euro area can be determined as if the region were a closed economy is thus not consistent with the empirical evidence on

economic policy uncertainty and risk spillovers in the eurozone this paper focuses on the impact of economic policy uncertainty on risk spillovers within the eurozone and contributes to these two growing literatures to this end we adapt the two step procedure developed by adrian and brunnermeier forthcoming in the framework of financial systemic risk to the sovereign bond market accordingly we attempt i to measure the extent to which distress affecting one given country s sovereign spreads can affect the eurozone s bond market as a whole and then ii to identify the determinants of risk spillovers by estimating a panel data model with macroeconomic state variables and economic policy uncertainty epu indices introduced by baker et al 2013 as regressors epu indices considered concern the four largest eurozone countries i e germany france italy and spain as well as the united states the model is estimated with quarterly data for ten countries representing the bulk of debt issuances within the eurozone over a period ranging from q4 2008 to q2 2013 which is characterized by historically high dispersion of sovereign bond spreads either across time or across countries our results support the idea that economic policy uncertainty in the core economies of the eurozone i e germany and france as well as in the largest periphery countries i e italy and spain can create an environment likely to exacerbate the transmission of risk arising from abnormal developments of individual countries sovereign spreads to the eurozone bond market as a whole in this respect our results plead for larger effort of eurozone leaders to reduce the uncertainty surrounding their economic policy in periods of crisis not only to avoid adverse effects on their own economies but also to reduce the risk of a destabilization of the eurozone sovereign bond market as a whole

does economic policy uncertainty in the u s influence stock markets in china and india time frequency evidence this paper uses continuous and discrete wavelet tools to evaluate the dynamic correlation and causality between the u s economic policy uncertainty epu and stock markets in china and india from

trend inflation and firms price setting rotemberg versus calvo we compare the calvo and rotemberg price setting mechanisms in a new keynesian model with trend inflation we show that the long run relationship between inflation and output is positive in rotemberg and negative in calvo the dynamics of the two models differ even to a first order approximation positive trend inflation enlarges the determinacy region in the rotemberg model whereas it shrinks it in the calvo model the responses of output and inflation to technology shocks are amplified by trend inflation in calvo whereas they are dampened in rotemberg the two models imply differing non linear adjustments after a disinflation

economic policy uncertainty in the us does it matter for the euro area abstract we investigate the effects of a us economic policy uncertainty shock on some euro area macroeconomic aggregates via structural vars we model the indicators of economic policy uncertainty recently developed by baker et al 2013 jointly with the aggregate price indexes and alternative indicators of the business cycle for the two above indicated economic areas according to our svars a one standard deviation shock to us economic policy uncertainty leads to a statistically significant fall in the european industrial production and prices of 0 12 and 0 06 respectively the contribution of the us uncertainty shock on the european aggregates is shown to be quantitatively larger than the one exerted by an euro area specific uncertainty shock

overshooting and the exchange rate disconnect puzzle a reappraisal transitions to floating exchange rate regimes have led to sharp increases in exchange rate volatilities with no corresponding changes in the distribution of macroeconomic fundamentals in the spirit of dornbusch 1976 we assess whether nominal exchange rate overshooting is responsible for this phenomenon as long as uncovered interest rate parity holds nominal exchange rate overshooting is linked to a persistent fall in the spread between domestic and foreign nominal interest rates we thus develop a limited participation model in a small open economy setting with small adjustment costs on money holdings overshooting substantially contributes to the nominal exchange rate volatility

identifying monetary policy in a small open economy under flexible exchange rates abstract previous empirical study on the effects of monetary policy shocks in small open economies has generated puzzling dynamic responses in various macroeconomic variables this paper argues that these puzzles derive from an identification of monetary policy that is inappropriate for such economies to remedy this it is proposed that a structural model be estimated to explicitly account for the features of the small open economy such a model is applied to canada with tightly estimated results overall the dynamic responses to the identified monetary policy shock are consistent with standard theory and highlight the exchange rate as a transmission mechanism

the changing transmission of uncertainty shocks in the u s this article investigates if the impact of uncertainty shocks on the u s economy has changed over time to this end we develop an extended factor augmented vector autoregression var model that simultaneously allows the estimation of a measure of uncertainty and its time varying impact on a range of variables we find that the impact of uncertainty shocks on real activity and financial variables has declined systematically over time in contrast the response of inflation and the short term interest rate to this shock has remained fairly stable simulations from a nonlinear dynamic stochastic general equilibrium dsge model suggest that these empirical results are consistent with an increase in the monetary authorities antiinflation stance and a flattening of the phillips curve supplementary materials for this article are available online

tax uncertainty and business activity abstract we investigate the extent to which uncertainties about tax policies affect business activities we develop a statewide tax uncertainty measure tu measure and show that it captures state corporate tax uncertainty by comparing adjacent counties across state borders we show that increasing tax uncertainty by one standard deviation a 30 increase in the tu measure leads to a 0 17 point per year decrease in the growth rate of establishments over two years the result holds after conducting a variety of robustness checks and is not likely to be driven by general state policy uncertainties

money prices interest rates and the business cycle the mechanisms governing the relationship of money prices and interest rates to the business cycle are the most studied and most disputed topics in macroeconomics in this paper we first document key empirical aspects of this relationship we then ask how well three benchmark rational expectations macroeconomic models a real business cycle model a sticky price model and a liquidity effect model account for these central facts while the models have diverse successses and failures none can account for the fact that real and nom inal interest rates are inverted leading indicators of real economic activity that is none of the models captures the post war u s business cycle fact that a high real or nominal interest rate in the current quarter predicts a low level of real economic activity two to four quarters in the future i introduction the positive correlation of monetary aggregates and real economic activity over the course of many business cycles is a key empirical fact about the u s economy indeed the dynamic dimension of this covariation is so strong and stable that a monetary variable has long been included in the commerce department s index of leading economic indica tors while this pattern of cyclical comovement is widely agreed upon its interpretation is not some macroeconomists view money as purely passive with a positive response to varying levels of economic activity producing the positive correlation others view changes in the quantity of money as an important perhaps dominant source of economic fluctua tions frequently the real effects of monetary changes are suggested to arise from frictions in commodity labor or financial markets in economic theories that describe the influence of these frictions the transmission mechanism from monetary changes to real activity is typically viewed as involving interest rates and the price level the primary goal of this paper is to evaluate three models that explain the link between money prices interest rates and the business cycle we do this in three steps first we docu ment the cyclical behavior of these variables in the united states over the postwar period second we construct three quantitative rational expectations models of macroeconomic activity i a real business cycle model with endogenous money ii a model of commodity market frictions with mon etary non neutralities arising from gradual adjustment of goods prices and iii a model of financial market frictions with monetary non neutralities arising from gradual adjust ments of portfolios finally we compare the models predic tion for the business cycle behavior of money prices and interest rates with the data in exploring the predictions of these models we take the stock of money to be one of several exogenous variables in the system all of our models are capable of generating a forecasting role for money relative to real economic activity similar to that found in the u s data in the real business model monetary changes can forecast real activity because productivity is related to many underlying sources of shocks and because these real shocks also affect the money stock in the models with sticky prices and liquidity effects short hand names for the models with frictions in the com modity and financial markets monetary changes have an additional direct positive effect on aggregate output the outline of the paper is as follows section ii describes the data and documents its business cycle characteristics section iii outlines the three macroeconomic models and develops the particular quantitative versions of the models used in our analysis our main empirical results are pre sented in section iv and section v summarizes our results and concludes

sticky price and limited participation models of money a comparison abstract we provide new evidence that models of the monetary transmission mechanism should be consistent with at least the following facts after a contractionary monetary policy shock the aggregate price level responds very little aggregate output falls interest rates initially rise real wages decline by a modest amount and profits fall we compare the ability of sticky price and limited participation models with frictionless labor markets to account for these facts the key failing of the sticky price model lies in its counterfactual implications for profits the limited participation model can account for all the above facts but only if one is willing to assume a high labor supply elasticity 2 percent and a high markup 40 percent the shortcomings of both models reflect the absence of labor market frictions such as wage contracts or factor hoarding which dampen movements in the marginal cost of production after a monetary policy shock 1997 elsevier science b v

the robustness and efficiency of monetary policy rules as guidelines for interest rate setting by the european central bank abstract this paper examines the implications of recent research on monetary policy rules for practical monetary policy making with special emphasis on strategies for setting interest rates by the european central bank ecb the paper draws on recent research and new simulations of a large open economy model to assess the efficiency of a simple benchmark rule in comparison with other proposed rules further it stresses new results on the robustness of monetary policy rules in which each rule that is optimal or good according to one model or researcher is tested for robustness by other researchers using different models because of the large increase in the number of economists focussing on econometric evaluation of monetary policy rules for the interest rate instrument and because of the parallel increase in the variety of models being developed for this purpose much more evidence is becoming available on the robustness of simple monetary policy rules for the interest rate than ever before

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

macroeconomic policy uncertainty shocks on the chinese economy a gvar analysis abstractthis article studies the spillovers of economic policy uncertainty epu from developed economies to china in terms of the source extent and persistence by estimating a global vector autoregressive gvar model with both financial and trade variables acting as the transmission channels our findings confirm the existence of international transmissions of policy uncertainty while the patterns differ markedly the us epu appears to be the most significant cause of the fall of export industrial production equity price and exchange rate meanwhile the eu epu is also to be blamed for the depreciation of rmb in contrast to industrial production which shows the largest negative impact chinese inflation increases to a relatively smaller extent with the epu shocks ranking as the us japanese and the eu regardless of the minor impact on a long term interest rate the short term interest rate in china reacts positively to the european and us epu shocks despite the independent national monetary poli

endogenous money or sticky prices abstract what explains the correlations between nominal and real variables in the postwar us data are these correlations indicative of significant nominal rigidity or do they simply reflect the particular way that monetary policymakers react to developments in the real economy to answer these questions this paper uses maximum likelihood to estimate a model of endogenous money this model allows but does not require nominal prices to be sticky the results show that nominal price rigidity over and above endogenous money plays a role in accounting for key features of the data

the new open economy macroeconomics a survey since the 1995 publication of obsteld and rogoff s redux model there has been an outpouring of research on open economy dynamic general equilibrium models that incorporate imperfect competition and nominal rigidities this paper offers an interim survey of this recent literature 2001 elsevier science b v all rights reserved

fragility and the effect of international uncertainty shocks abstract when economic systems are fragile even modest shocks for example a shock to international capital movements can have strong negative effects on key macroeconomic fundamentals this paper proposes a large scale bayesian vector autoregression with factor stochastic volatility to investigate the macroeconomic consequences of international uncertainty shocks in g7 countries and shows that uncertainty increases fragility the factor structure enables us to identify an international uncertainty shock by assuming that it is the joint volatility process that determines the dynamics of the variance covariance matrix of the common factors to allow for first and second moment shocks we moreover assume that the uncertainty factor enters the var equation as an additional regressor our findings suggest that an international uncertainty shock has negative effects across all economies and variables under consideration leading to strong declines in output prices exports interest rates and equity prices the precise degree of fragility varies across countries a simple correlation exercise suggests that structural differences may be partially responsible for the observed differences

first and second best pricing with uncertain demand as has been well known since at least the work of hotelling 6 marginal cost pricing is the ideal regulatory policy in a simple certainty setting however when economies of scale exist in production such a policy will in general entail a revenue shortfall for the firm ideally the regulator should meet such a short fall by raising lump sum taxes but that solution is liable to prove infeasible ramsey pricing popularized by baumol and bradford 4 examines the second best pricing policy when firms receive no tax subsidy so prices must exceed marginal costs the celebrated inverse elasticity rule shows that with demands for the various goods independent goods whose elasticity of demand is proportionately less should have their price exceed marginal cost proportionately more further complications arise when one takes into account the uncertainty involved in economic decisions in recognition of this there has recently been considerable discussion of first best pricing with stochastic demand 5 the general conclusion of this discussion is that marginal cost pricing continues to be the first best policy in order to reach this conclusion however the literature has in effect assumed that regulators are risk neutral compared to this large literature on stochastic first best pricing the only two papers known to us that treat second best pricing with stochastic demand are by sherman visscher 11 and by wecker upton 15 both these treatments assume the marginal utility of income of the regulator is constant and so also require that there be risk neutrality in this work on the other hand we will consider both first and second best pricing policies when the regulator is explicitly allowed to be risk averse in the former case we will be interested in whether marginal cost pricing will continue to be the first best policy whereas in the latter case we will examine whether the simple inverse elasticity rule can hold despite considerations of risk and the risk behavior of regulators finally we will directly relate the results of our first best analysis to our study of the second best problem in much of the paper the source of demand uncertainty will be arbitrary we will

uncertainty shocks and unemployment dynamics in u s recessions abstract what are the effects of uncertainty shocks on unemployment dynamics we answer this question by estimating non linear smooth transition vars with post wwii u s data the relevance of uncertainty shocks is found to be much larger than that predicted by standard linear vars in terms of i magnitude of the reaction of the unemployment rate to such shocks and ii contribution to the variance of the prediction errors of unemployment at business cycle frequencies the ability of different classes of dsge models to replicate our results is discussed

were there regime switches in u s monetary policy working paper 2004 14 june 2004 abstract a multivariate model identifying monetary policy and allowing for simultaneity and regime switching in coefficients and variances is confronted with u s data since 1959 the best fit is with a model that allows time variation in structural disturbance variances only among models that also allow for changes in equation coefficients the best fit is for a model that allows coefficients to change only in the monetary policy rule that model allows switching among three main regimes and one rarely and briefly occurring regime the three main regimes correspond roughly to periods when most observers believe that monetary policy actually differed and the differences in policy behavior are substantively interesting though statistically ill determined the estimates imply monetary targeting was central in the early 80s but was also important sporadically in the 70s the changes in regime were essential neither to the rise in inflation in the 70s nor to its decline in the 80s jel classification e52 e47 c53 key words counterfactuals lucas critique policy rule monetary targeting simultaneity volatility model comparison i the debate over monetary policy change in an influential paper clarida gali and gertler 2000 cgg presented evidence that us monetary policy changed between the 1970 s and the 1980 s indeed that in the 70 s it was drastically worse they found that the policy rule apparently followed in the 70 s was one that when embedded in most stochastic general equilibrium models would imply non uniqueness of the equilibrium and hence vulnerability of the economy to sunspot fluctuations of arbitrarily large size their estimated policy rule for the later period on the other hand eliminated this indeterminacy these results are a possible explanation of the volatile and rising inflation of the 70 s and of its subsequent decline the cgg analysis has two important weaknesses one is that it fails to account for stochastic volatility us macroeconomic variables and particularly the federal funds rate have gone through periods of tranquility and of agitation with forecast error variances varying greatly from period to period ignoring such variation does not lead to inconsistent estimates of model parameters when the forecasting equations themselves are constant but it strongly biases toward a finding of changed parameters tests of the stability of the forecasting equations the other weakness is that the cgg analysis rests on powerful and implausible identifying assumptions they require that we accept that the response of the monetary authority to expected future inflation and output does not depend on the recent history of inflation money growth or output it is hard to understand why this should be so especially in the 70 s when monetarism was a prominent theme in policy debates congress was requiring reports from the fed of projected time paths of monetary aggregates and financial markets were reacting sensitively to weekly money supply numbers the requirement for existence and uniqueness of equilibrium in dynamic models is that the monetary policy rule show a more than unit response of interest rates to the sum of the logs of all nominal variables that appear on the right hand side of the reaction function if we force a particular measure of expected future inflation to proxy for all the nominal variables that actually appear independently in the reaction function we are bound to get distorted conclusions on the one hand because expected future inflation will be a noisy measure of the full set of nominal influences on policy we might get downward bias in our estimates from the usual errorsin variables effect on the other hand to the extent that expected future inflation like most expected future values shows less variation than current nominal variables we could find a mistaken scaling up of coefficients

a reconsideration of the uncovered interest parity relationship abstract this paper argues that the uncovered interest parity uip relationship is distinct from and more important than the unbiasedness of forward exchange rates as predictors of future spot rates the standard finding that the slope estimate b is roughly 3 in regressions of s t on t 1 s t 1 implies rejection of unbiasedness but not necessarily uip the hypothesis that monetary authorities manage interest rates so as to smooth their movements while also resisting changes in exchange rates is attractive conceptually and is capable of explaining not only the b 3 finding but also several other notable features of the data

liquidity and real activity in a simple open economy model abstract this paper analyzes the ability of an open economy version of lucas s 1990 liquidity model to account for properties of international data the focus is on the model s ability to account for exchange rate dynamics and measured effects of monetary policy shocks on exchange rates interest rates and real activities across countries the model generates a prediction that a positive domestic monetary innovation is associated with nominal and real currency depreciations however the model s predictions with respect to nominal and real exchange rate volatilities are low

stochastic fiscal policy and the swedish business cycle in this paper we show that fluctuations in distortive taxes can account for some of the key features of the swedish post war business cycle the empirical fit of a simple stochastic growth model is significantly improved when it is amended to include imperfectly predictable fluctuations in payroll taxes consumption taxes and government consumption indeed using the simulated method of moments smm we find that for large sets of conventional moments models with stochastic fiscal policy cannot be statistically rejected whereas a model without it is always rejected

time varied causality between us partisan conflict shock and crude oil return abstract to investigate the causality between us partisan conflict shock and crude oil return this paper utilizes bootstrap full sample granger causality and bootstrap rolling window sub sample granger causality tests although no evidence supports the causal nexus between partisan conflict shock and crude oil return with full sample data time varied causality is observed for particular sub samples such difference can be attributed to the parameter non constancy in the var system in terms of the empirical results the us partisan conflict shock causes the fluctuations of the crude oil market in 2008 2009 and 2014 2015 however such influence is temporary inversely the crude oil return causes us partisan shock in 1985 1986 1991 1994 1998 2000 and 2012 2013 these findings indicate crude oil market significantly affects political stability of the us especially during the periods of the gulf war and opec production cut the empirical results are robust in terms of both sample setting variation and window size selection

the international transmission of volatility shocks an empirical analysis this paper proposes an empirical model which can be used to estimate the international transmission of volatility shocks using this model we estimate that a one standard deviation increase in the volatility of the shock to us real gdp leads to a decline in uk gdp of 1 relative to trend and a 0 7 increase in uk cpi relative to trend at the two year horizon using a nonlinear open economy dsge model we find that these empirical estimates are consistent with the response to a perturbation to the volatility of foreign supply type shocks while an increase in the volatility of demand shocks has a negligible impact

optimal departures from marginal cost pricing focuses on departures from marginal cost pricing optimal allocation or resources level of tax revenue that will be collected by the government theorems developed for resource allocation ebsco

does trade openness matter for aggregate instability abstract this paper presents a cash in advance model of a small open economy and shows that whether an inflation targeting interest rate rule introduces aggregate instability depends in general on the degree of openness to international trade this result emerges regardless of whether prices are sticky or flexible in a closed economy as the monetary authority responds to movements in inflation the resulting changes in interest rates affect aggregate consumption through an intertemporal substitution effect and an inflation tax effect in a small open economy this policy also induces changes in the terms of trade which depending on the degree of openness can generate counteracting effects on consumption as a consequence the implications of interest rate rules on macroeconomic stability in an open economy differ from those in a closed economy

on international uncertainty links bart based empirical evidence for canada we use the indexes of economic policy uncertainty epu developed by baker et al 2015 for canada and seven china france germany japan russia united kingdom and united states other countries to study international uncertainty links by means of a bayesian additive regression trees bart algorithm using partial dependence plots relative importance measures and permutation tests we shed light on how epu in canada is linked to epu in seven other countries

impact of global uncertainty on the global economy and large developed and developing economies global uncertainty shocks are associated with a sharp decline in global inflation growth and interest rate global uncertainty shocks have more protracted statistically significant and substantia

putting the new open economy macroeconomics to a test abstract this paper explores one way to extend the new open economy macroeconomics in an empirical direction adapting maximum likelihood procedures it estimates and tests an intertemporal small open economy model with monetary shocks and nominal rigidities results offer mixed support for a benchmark model where prices are assumed to be sticky in the currency of the buyer price stickiness seems to be an important element as overall results are poorer for versions of the model in which prices either are flexible or are sticky in the currency of the producer the benchmark model does a better job explaining some variables than others in particular it does a poor job explaining exchange rate movements