the american business cycle continuity and change in recent decades the american economy has experienced the worst peace time inflation in its history and the highest unemployment rate since the great depression these circumstances have prompted renewed interest in the concept of business cycles which joseph schumpeter suggested are like the beat of the heart of the essence of the organism that displays them in the american business cycle some of the most prominent macroeconomics in the united states focuses on the questions to what extent are business cycles propelled by external shocks how have post 1946 cycles differed from earlier cycles and what are the major factors that contribute to business cycles they extend their investigation in some areas as far back as 1875 to afford a deeper understanding of both economic history and the most recent economic fluctuations seven papers address specific aspects of economic activity consumption investment inventory change fiscal policy monetary behavior open economy and the labor market five papers focus on aggregate economic activity in a number of cases the papers present findings that challenge widely accepted models and assumptions in addition to its substantive findings the american business cycle includes an appendix containing both the first published history of the nber business cycle dating chronology and many previously unpublished historical data series

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

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

testing the efficient redistribution hypothesis an application to japanese beef policy we discuss and model the structure of the political economy of japanese beef markets and we apply bullock s statistical test of the efficient redistribution hypothesis to our model to study the pareto efficiency of japanese beef policy in 1990 and 1991 we found that under the hypothesis that our modeled political economy adequately reflects the true japanese beef political economy we could not reject at the 5 significance level that japanese beef policy was inefficient in 1990 and in 1991 however we could reject inefficiency in 1991 at a 7 level of significance

evidence on the cross country transmission of monetary shocks the international transmission of monetary shocks between the us and canada is explored focusing on real variables such as consumption investment employment and the bilateral trade balance along with measures of us and canadian money the empirical analysis examines the impact of a monetary shock in one country on real activity in both countries the long run analysis provides evidence of cointegration among the variables and suggests that money plays an important role in the equilibrium relationships between the two countries variance decompositions and impulse response functions reveal interesting avenues of real transmission in the short run the short run analysis provides strong evidence that us monetary shocks affect real activity in both the usa and canada the analysis also indicates that canadian monetary disturbances affect canadian and us real activity and that many of these effects are similar in magnitude to the effects of us monetary shocks the importance of the nominal exchange rate

factor models and time varying parameter framework for forecasting exchange rates and inflation a survey a survey of models used for forecasting exchange rates and inflation reveals that the factor based and time varying parameter or state space models generate superior forecasts relative to all other models this survey also finds that models based on taylor rule and portfolio balance theory have moderate predictive power for forecasting exchange rates the evidence on the use of bayesian model averaging approach in forecasting exchange rates reveals limited predictive power but strong support for forecasting inflation overall the evidence overwhelmingly points to the context of the forecasts relevance of the historical data data transformation choice of the benchmark selected time horizons sample period and forecast evaluation methods as the crucial elements in selecting forecasting models for exchange rate and inflation

monetary policy foreign exchange policy and delayed overshooting this paper provides an explanation for delayed overshooting puzzle based on foreign exchange policy s reaction to monetary policy for canada in which ample interactions between monetary and foreign exchange policies are found foreign exchange policy reaction mitigates the initial effects of monetary policy shocks on the exchange rate as the effects of the monetary policy shocks are more prolonged than that of the foreign exchange policy reaction the maximum effect is found in delay

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

external shocks u s monetary policy and macroeconomic fluctuations in emerging markets estimated structural vars show that external shocks are an important source of macroeconomic fluctuations in emerging markets furthermore u s monetary policy shocks affect interest rates and the exchange rate in a typical emerging market quickly and strongly the price level and real output in a typical emerging market respond to u s monetary policy shocks by more than the price level and real output in the u s itself these findings are consistent with the idea that when the u s sneezes emerging markets catch a cold at the same time u s monetary policy shocks are not important for emerging markets relative to other kinds of external shocks

what does the bank of japan do to east asia abstract in recent policy debates some have argued that expansionary monetary policy in japan can increase real output in japan and in japan s neighbors while others have warned that it is a beggar thy neighbor policy in this paper we estimate structural vector autoregressions to assess the effects of japanese monetary policy shocks we find that the effects of japanese monetary policy shocks on macroeconomic variation in east asia have been modest and difficult to reconcile with the beggar thy neighbor view we estimate that the asian crisis was preceded by expansionary monetary policy shocks in japan but we fail to find support for the view that these shocks contributed to the crisis

to bi or not to bi differences between spillover estimates from bilateral and multilateral multi country models abstract asymptotic analysis and monte carlo simulations show that spillover estimates obtained from widely used bilateral such as two country var models are in general less accurate both in terms of bias and mean squared error than those obtained from multilateral such as global var models in particular the accuracy of spillover estimates obtained from bilateral models depends on two aspects of economies integration with the rest of the world first accuracy worsens as direct bilateral transmission channels become less important for example when the spillover sender accounts only for a small share of the spillover recipient s overall integration with the rest of the world second accuracy worsens as indirect higher order spillovers and spillbacks become more important for example when the spillover recipient is more integrated with the rest of the world overall empirical evidence on the global output spillovers from us monetary policy is consistent with these generic results spillover estimates obtained from two country var models are systematically smaller than those obtained from a global var model and the differences between spillover estimates obtained from two country var models and a global var model are more pronounced for economies for which the us accounts for a smaller share of their overall trade and financial integration with the rest of the world and for economies which are more integrated with the rest of the world overall

canadian monetary policy will the checklist approach ever get us to price stability the purpose of this paper is to investigate whether the checklist approach that the bank of canada has followed in one way or another over the last two decades is likely to lead us to the stated objective of price stability the analysis of canadian monetary policy is performed through the estimation of a bayesian var model of a set of important canadian macroeconomic variables in their international context to estimate the model the authors borrowed form c sims 1989 but they also transposed his methodology to take into account canadian features the results suggest that the exchange rate has been high on the checklist of the bank of canada over the years and that rather the bank should concentrate its attention on broad monetary aggregates if it really wants to deliver price stability

stochastic trends and economic fluctuations are business cycles mainly the result of permanent shocks to productivity this paper uses a long run restriction implied by a large class of real business cycle models identifying permanent productivity shocks as shocks to the common stochastic trend in output consumption and investment to provide new evidence on this question econometric tests indicate that this common stochastic trend cointegration implication is consistent with postwar u s data however in systems with nominal variables the estimates of this common stochastic trend indicate that permanent productivity shocks typically explain less than half of the business cycle variability in output consumption and investment copyright 1991 by american economic association

narrative and var approaches to monetary policy common identification problems abstract romer and romer romer c d romer d h 1989 does monetary policy matter a new test in the spirit of friedman and schwartz in blanchard o j fischer s eds nber macroeconomics annual 1989 mit press cambridge ma pp 121 170 romer c d romer d h 1994 monetary policy matters journal of monetary economics 34 75 88 adopted a narrative approach to address the identification problems in time series models of monetary policy based on federal reserve documents the romers created a dummy variable equal to one in periods when the federal reserve contracted in response to perceived inflationary pressures this paper shows 1 the dummy variable is predictable from past macroeconomic variables reflecting the endogenous response of policy to the economy 2 unpredictable changes in the dummy do not generate dynamic responses that look like the effects of monetary policy the identification problems that plague time series models also afflict the narrative approach

economic impacts of el nino southern oscillation evidence from the colombian coffee market el nino southern oscillation enso is a naturally occurring phenomenon that affects weather around the world past enso episodes have had severe impacts on the economy of colombia we study the influence of enso on colombian coffee production exports and price our structural econometric specification is consistent with an economic model of the market for colombian coffee which in the short run is characterized by a downward sloping demand curve and by a vertical supply curve we show that el nino i e positive shocks to enso is beneficial for colombian production and exports and decreases the real price of colombian coffee on the contrary la nina i e negative shocks to enso depresses colombian coffee production and exports and increases price however the overall impact of enso shocks is small both in the short run and in the long run shocks to international demand for colombian coffee are more relevant than supply side shocks in colombia in explaining the dynamics of the price of colombian coffee our results suggest that a given coffee price shock can have beneficial detrimental or negligible effects on the colombian economy depending on its underlying cause as a consequence policy responses to coffee price shocks should be designed by looking at the causes of the shocks

political accountability and the room to maneuver a search for a causal chain many studies of the room to maneuver make no provision for popular evaluation of policy they assert rather than demonstrate popular satisfaction with policy choices and macroeconomic outcomes the authors present a framework that explicitly models channels for popular preferences to influence policies and outcomes results for economic policy making in britain do not support the room to maneuver thesis in the authors sample 1981 to 1997 the british government was responsive to changes in political evaluations and its policy choices effectively fed back into popular evaluations of government policy however this accountability mechanism worked outside the real economy shifts in popular evaluations induced changes in policy but had no impact on inflation and economic growth government capacity to shape macroeconomic outcomes was limited and popular influence over economic policy was ineffectual this form of accountability probably existed because british citizens had difficulty gauging the real impacts of their government s policies

liquidity exchange rates and business cycles abstract this paper presents a two country two good two currency model to study the role of liquidity effects in exchange rate determination and the international transmission of economic fluctuations the model provides an exchange rate equation which is different from the simple purchasing powerparity law of exchange rate determination both monetary injections and real disturbances can lead to exchange rate fluctuations and comovements of interest rates prices and output of the two economies whether the covariances of variables in the two countries are positive negative or zero depends critically upon the substitutability of the two consumption goods in consumers preferences

the dynamic impacts of monetary policy an exercise in tentative identification it is currently popular to identify monetary policy shocks with innovations in some measure of reserves or in the federal funds rate these assumptions about the interest elasticity of the supply of or demand for reserves imply monetary policy shocks that produce dynamic responses of macroeconomic variables that are anomalous relative to traditional monetary analyses this paper tentatively identifies supply and demand shocks in the markets for reserves and m2 for the 1980s and contrasts them with results for the 1970s in the later period identified monetary policy shocks have dynamic impacts that are fully consistent with traditional analyses

the management of countertrade factors influencing success countertrade success was found to be higher for large firms that were experienced in exporting and in countertrade operations could accommodate countertrade takebacks and valued vertical integration exported high value high visibility complex products had a low reputation for quality and had excess capacity success was also higher if the importer valued quality had low technical proficiency was inexperienced in exporting faced barriers in export markets had a high cost of forward contracts foreign exchange constraints and faced a disequilibrium exchange rate

in search of the liquidity effect abstract a short run negative relationship between monetary aggregates and interest rates the liquidity effect is central to discussions of monetary policy this paper searches for this empirical relationship we investigate whether the characterization of the liquidity effect is sensitive to i changes in sample period ii conditioning the correlations on past information iii assuming money growth is exogenous and iv treating monetary changes as anticipated or unanticipated the correlations change substantially in each case we conclude that the traditional analysis and modern models which rely completely on demand side behavior cannot explain the observed correlations a successful characterization of the liquidity effect requires identification of both private and policy behavior

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 transmission of international shocks to the uk estimates based on a time varying factor augmented var the aim of this paper is to gauge the importance of foreign demand supply and interest rate shocks on the uk economy and assess how their role has changed over time to that end we devise a time varying factor augmented var model that captures the relationship between 17 industrialised countries and the uk and accounts for any temporal evolution in this relationship the response of uk macroeconomic variables to a foreign interest rate shock is estimated to have changed significantly since the early 1990s international demand shocks play an important role in driving world and uk real activity especially during the recent recession

exchange rate stabilization in the erm identifying european monetary policy reactions abstract we develop the structural var models for european countries france denmark and germany during the erm period to examine the monetary policy reactions especially the within erm exchange rate stabilization in addition to analyzing the impulse responses and variance decomposition we present the full monetary reaction function in an interpretable manner without introducing additional assumptions the results suggest some asymmetry in exchange rate stabilization non german exchange rate stabilization is stronger than german exchange rate stabilization but do not support the hypothesis that german monetary policy was independent of the erm

the transmission of international shocks a factor augmented var approach the empirical literature on the transmission of international shocks is based on small scale vars in this paper we use a large panel of data for 17 industrialized countries to investigate the international transmission mechanism and revisit the anomalies that arise in the empirical literature we propose a factor augmented var favar that extends the model in bernanke boivin and eliasz 2003 to the open economy the main results can be summarized as follows first the dynamic effects on the uk economy of an unanticipated fall of short term interest rates in the rest of the world are real house price inflation investment gdp and consumption growth peak after one year wages peak after two years cpi and gdp deflator inflation peak during the third year second a positive international supply shock makes the distribution of the components of the uk consumption deflator negatively skewed third in response to a domestic monetary shock we find no evidence of the exchange rate and liquidity puzzles and little evidence of the forward discount and price anomalies

monetary policy and foreign price disturbances under flexible exchange rates a stochastic approach the analysis of monetary policy under flexible exchange rates has received extensive treatment during recent years particular attention has been devoted to the role of exchange rate expectations with a general conclusion being that many of the propositions of the traditional static flemingmundell model see fleming 8 and mundell 19 require substantial modification once such expectations are taken into account see 5 21 24 with few exceptions the analysis has been carried out in a deterministic framework the usual assumption made is that any monetary expansion that is introduced is initially ex ante unanticipated but having taken place it is then ex post expected to be permanent this assumption underlies for example the recent contribution by dornbusch 5 and much of the subsequent work that stems from it l this assumption while very natural is also a polar one in practice agents in the economy may attempt to anticipate monetary policy and the policies themselves

monetary policy shocks and foreign investment income evidence from a large bayesian var abstract this paper assesses the transmission of monetary policy in a large bayesian vector autoregression based on the approach proposed by banbura et al 2010 the paper analyzes the impact of monetary policy shocks in the united states and canada not only on a range of domestic aggregates trade flows and exchange rates but also foreign investment income the analysis provides three main results first a surprise monetary policy contraction has a statistically important impact on both gross and net foreign investment income flows in both countries against the background of growing foreign wealth and investment income this result provides preliminary evidence that foreign balance sheet channels might play an increasingly significant role for monetary transmission second the impact of monetary policy on foreign investment income flows differs considerably across asset categories and over time suggesting that the investment instruments and the currency denomination of a country s foreign assets and liabilities are potentially relevant for the way in which monetary policy affects the domestic economy finally the results support existing evidence on the effectiveness of large vector autoregressions and the bayesian shrinkage approach in eliminating price and exchange rate puzzles

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

fiscal imbalances and the dynamics of currency crises abstract this paper analyzes links between the fiscal theory of the price level ftpl and the first generation models after krugman journal of money credit and banking 11 1979 311 325 exploring the idea that a synthesis between the two can become a new framework to analyze the fiscal dimension of currency crises working in a simple synthetic framework we show how external nominal shocks can cause a fiscal imbalance and undermine currency stability resolve two well known paradoxes of the first generation model discuss the role of seigniorage revenues and illustrate how fiscal and interest rate policies interact to determine the magnitude and the timing of speculative attacks and devaluations

effects of usd euro parity on a small open economy evidence from turkey this study assesses the effect of usd euro parity on a small open economy where exports are predominantly denominated in euros and imports are denominated in usd empirical evidence from turkey suggests that a positive change in the usd value of the euro appreciates the local currency decreases inflation and increases output

the relative importance of foreign and domestic disturbances for aggregate fluctuations in the open economy switzerland 1964 1981 abstract this paper studies whether the advent of floating exchange rates served to insulate switzerland from economic shocks of foreign origin it estimates a vector autoregression comprising four swiss and three world aggregate time series and interprets the results in terms of the properties of the vector moving average representation implied by the estimates the chief finding is that foreign shocks explain most of the systematic variation of the swiss variables in both regimes

macroeconomic policy exchange rate dynamics and optimal asset accumulation the paper develops a model of exchange rate and current account determination for a small economy peopled by infinitely lived utility maximizing households in this setting a central bank purchase of foreign exchange has no real effects when central bank foreign reserves earn interest at the world rate and proceeds are returned to the public in contrast an increase in the monetary growth rate does have real effects even in the long run the model developed here implies that an increase in government spending may lead to a surplus on current account the external adjustment process predicted by the model is one in which consumption real balances and external assets all rise or fall simultaneously