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

the dynamic behavior of the real exchange rate in sticky price models comment in an article published in the american economic review j n steinsson 2008 argues that two sticky price models driven by real shocks can explain the observed persistence volatility and hump shaped impulse response function of the real exchange rate this comment shows first that correcting an error in one of steinsson s models leads to substantially lower persistence and volatility of the real exchange rate second that steinsson s models cannot match real exchange rate volatility relative to output and third that reasonable variations of the model calibration or specification all lead to lower real exchange rate persistence and volatility or both

how do fiscal and technology shocks affect real exchange rates new evidence for the united states abstract using vector autoregressions on u s time series relative to an aggregate of industrialized countries this paper provides new evidence on the dynamic effects of government spending and technology shocks on the real exchange rate and the terms of trade to achieve identification we derive robust restrictions on the sign of several impulse responses from a two country general equilibrium model we find that both the real exchange rate and the terms of trade whose responses are left unrestricted depreciate in response to expansionary government spending shocks and appreciate in response to positive technology shocks

monetary policy and fiscal limits with no default abstract this paper discusses monetary and fiscal policy interactions that stabilize government debt two distortions prevail in the model economy income taxes and liquidity constraints possible obstructions to fiscal policy include a ceiling on the equilibrium debt to gdp ratio zero or negative elasticity of tax revenues and a political intolerance of raising tax rates at the fiscal limit two mechanisms restore solvency fiscal inflation which reduces the real value of nominal debt and open market operations which diminish the size of government debt held by the private sector three regimes achieve this goal in all regimes monetary policy is passive in all regimes a muted tax response to government debt is consistent with equilibrium the propensity of a fiscal authority to smooth output is found to determine what is an acceptable response in the form of tax rate changes to the level of government debt while monetary policy determines the timing and magnitude of fiscal inflation impulse responses show that the inflation and tax hikes needed to offset a permanent shock to transfers are lowest under nominal interest rate pegs in this regime most of the reduction in the real value of government debt comes from open market purchases

decentralization and the duration of fiscal consolidation shifting the burden across layers of government this paper analyzes the relationship between fiscal decentralization the duration of fiscal consolidation episodes and their success for 17 oecd countries between 1978 and 2009 the consolidation of the general government budget appears to be of longer duration when expenditure decisions are more decentralized we also find that transfers from higher levels of government are cut during consolidation episodes suggesting that central governments shift the burden of consolidation towards lower tiers of government this is especially true when the latter have little legal autonomy to raise tax revenues and have little influence over executive decisions taken at the central level we document that this increases local governments public debt gdp ratios in terms of the success of consolidation episodes countries with greater degrees of decentralization appear to make smaller improvements in their primary balance when consolidating

interactions between monetary and fiscal policy rules the fiscal stability pact for emu implies that constraints on fiscal policy facilitate inflation control in this paper we identify two stable policy regimes when monetary policy seeks to raise real interest rates in response to excess inflation a self stabilising fiscal policy is required to ensure model stability a fiscal policy which does not by itself ensure fiscal solvency constrains monetary policy to be relatively passive however in simulations we conclude that the central bank does not need to seek on this account the degree of debt stabilisation that appears to be implied by the fiscal stability pact

the effects of surprise and anticipated technology changes on international relative prices and trade abstract this paper argues that it is important to distinguish surprise and anticipated components of total factor productivity tfp when we study the international transmission of tfp shocks we document that surprise and anticipated shocks to us tfp induce distinct dynamics for international relative prices the real exchange rate and the terms of trade and international trade real exports real imports and the trade balance our empirical findings can reconcile some conflicting empirical results in the literature and hence lead to a better understanding of the international transmission of tfp shocks in addition we evaluate a standard international macroeconomic model and discuss the mechanisms that may help to replicate our empirical findings

dynamics of the trade balance and the terms of trade in ldcs the s curve abstract in their analysis of the dynamic behavior of terms of trade and the trade balance backus kehoe and kydland found that the lead and lag correlation between these two variables is s shaped for a set of oecd countries furthermore they show that this s curve can be replicated by a two country dynamic general equilibrium model surprisingly the s curve also describes the dynamic relationship between terms of trade and the trade balance for a large set of ldcs this s curve can also be reproduced by a small open economy model which captures some important features of ldc economies the s curve is unexpectedly robust to variations in the key parameters of the model the model also captures the business cycle properties of the ldc data

uncertain policy promises abstract we develop a general method for analyzing the effects of macroeconomic policy promises about which the private sector is uncertain we illustrate the method in two applications to a central bank s forward guidance about the path for its policy rate we demonstrate that uncertainty about forward guidance resulting from its potential to be imperfectly credible makes it much less powerful than in textbook models in an application to the fomc s threshold based guidance we show that increasing the precision of the conditions under which the policy rate lifts off from the zero bound requires a lower unemployment threshold to deliver a given amount of stimulus

a new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the business cycle abstract this paper introduces a general procedure for decomposition of non stationary time series into a permanent and transitory component allowing both components to be stochastic the permanent component is shown to be a random walk with drift and the transitory or cyclical component is a stationary process with mean zero the decomposition methodology which depends only on past data and therefore is computable in real time is applied to the problem of measuring and dating business cycles in the portwar u s economy we find that measured expansions and contractions are of roughly equivalent duration and that our dating of cyclical episodes tends to lead the traditional nber dating and to a lesser extent the growth cycle chronology of zarnowitz and boschan 1977

optimal non linear pricing with regulatory preference over customer type abstract in this paper we characterize the pareto optimal set of non linear pricing schedules when non negative weights are assigned to each customer type our analysis first compares general non linear tariff schedules and sets of self selecting two part tariffs when there are two customer types and the cost function is linear we then derive optimal sets of two part tariffs for arbitrary numbers of customer types and general cost functions we also consider the sustainability of non linear pricing schedules under the threat of entry of rival firms

news noise and fluctuations an empirical exploration a common view of the business cycle gives a central role to anticipations consumers and firms continuously receive information about the future which is sometimes news and sometimes just noise based on this information consumers and firms choose spending and because of nominal rigidities spending affects output in the short run if ex post the information turns out to be news the economy adjusts gradually to a new level of activity if it turns out to be just noise the economy returns to its initial state therefore the dynamics of news and noise generate both short run and long run changes in aggregate activity this view appears to capture many of the aspects often ascribed to fluctuations the role of animal spirits in affecting demand spirits coming here from a rational reaction to information about the future the role of demand in affecting output in the short run together with the notion that in the long run output follows a natural path determined by fundamentals in this paper we examine whether this view is consistent with the data we reach three main conclusions the first two methodological the third substantive structural vars typically cannot recover news and noise shocks the reason is straightforward if agents face a signal extraction problem and are unable to separate news from noise then the econometrician faced with either the same data as the agents or a subset of these data cannot do it either while structural estimation methods cannot recover the actual time series for news and noise shocks either they can recover underlying structural parameters and thus the relative role and dynamic effects of news and noise shocks estimation of both a simple model and then of a more elaborate dsge model suggest that agents indeed solve such a signal extraction problem and that noise shocks play an important role in determining short run dynamics recent efforts to estimate business cycle models in which expectations about the future play an important role include christiano et al 2010 and schmitt grohe and uribe 2012 those papers follow the approach of jaimovich and rebelo 2009 and model news as perfectly anticipated productivity changes that will occur at

tales of fiscal adjustment fiscal adjustments why they can be expansionary this paper examines the evidence on fiscal adjustments in oecd countries from the early 1960s to today the results shed light on the recently observed phenomenon of fiscal tightening that produces non keynesian expansionary effects one interpretation is that a serious fiscal tightening increases demand wealth rises when future tax burdens decline and when interest rates decline credibility is restored and inflation or default risks abate both consumption and investment rise for this effect to produce an expansion the tightening must be sizeable and occur after a period of stress when the budget is quickly deteriorating and public debt is building up another interpretation emphasizes the supply side typically a fiscal consolidation based on tax increases is short lived to be long lasting it must include cuts in public employment transfers and government wages to be politically possible such a policy must be supported by trade unions these measures result in more efficient labour markets and boost the supply side based both on statistical evidence and on a detailed analysis of ten cases of major fiscal adjustment this article provides cautious support to the supply side view without denying a more limited role for the demand side channel alberto alesina and silvia ardagna

bridging dsge models and the raw data abstract a method to estimate dsge models using the raw data is proposed the approach links the observables to the model counterparts via a flexible specification which does not require the model based component to be located solely at business cycle frequencies allows the non model based component to take various time series patterns and permits certain types of model misspecification applying standard data transformations induces biases in structural estimates and distortions in the policy conclusions the proposed approach recovers important model based features in selected experimental designs two widely discussed issues are used to illustrate its practical use

the dynamic effects of aggregate demand and supply disturbances we interpret fluctuations in gnp and unemployment as due to two types of disturbances disturbances that have a permanent effect on output and disturbances that do not we interpret the first as supply disturbances the second as demand disturbances demand disturbances have a hump shaped mirror image effect on output and unemployment the effect of supply disturbances on output increases steadily over time peaking after two years and reaching a plateau after five years

fiscal forward guidance a case for selective transparency abstract should the fiscal authority use forward guidance to reduce future policy uncertainty perceived by private agents using dynamic general equilibrium models we examine the welfare effects of announcing future fiscal policy shocks and show that selective transparency is desirable announcing distortionary future policy shocks can be detrimental to ex ante social welfare whereas announcing non distortionary shocks generally improves welfare sizable welfare gains are found with constructive ambiguity regarding the timing of a tax increase in a realistic fiscal consolidation scenario however being secretive about distortionary shocks is time inconsistent and welfare loss from communication may be unavoidable

productivity shocks and real exchange rates abstract previous studies have concluded that productivity shocks have negligible effects on real exchange rate fluctuations this paper shows that when long run equilibrium relationships between real exchange rate levels and fundamental variables are taken into account relative productivity shocks account for most of the long run movements in the real exchange rates this can be interpreted as empirical support for the balassa 1964 journal of political economy 72 584 596 and samuelson 1964 review of economics and statistics 46 145 154 model where differences in relative productivity is the main source of long run deviations for purchasing power parity

labor market dynamics and the business cycle structural evidence for the united states we use a 12 dimensional var to examine the aggregate effects of two structural technology shocks and two policy shocks for each shock we examine the dynamic effects on the labor market the importance of the shock for labor market volatility and the comovement between labor market variables and other key aggregate variables in response to the shock we document that labor market indicators display hump shaped responses to the identified shocks technology shocks and monetary policy shocks are important for labor market volatility but the ranking of their importance is sensitive to the var specification the conditional correlations at business cycle frequencies are similar in response to the four shocks apart from the correlations between hours worked labor productivity and real wages to account for the unconditional correlations between these variables a mixture of shocks is required

the welfare state and competitiveness in all industrial countries fiscal policy is increasingly about redistribution in this paper the authors study redistribution across different types of agents in a world characterized by the presence of labor unions and distortionary taxation they show that an increase in transfers financed by distortionary taxation has nonlinear effects on unit labor costs relative to the other countries depending on the degree of centralization of the wage setting process in the labor market the authors find considerable empirical support for the model in a sample of fourteen oecd countries copyright 1997 by american economic association

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

regime switching debt and taxation the effects of changes to the tax rate are studied within a framework where an estimated regime switching process for the debt output ratio is embedded in a standard growth model the regime is a hidden state variable so agents face a signal extraction problem consequently agents incorporate the possibility of switching to different fiscal regimes when forming expectations over future taxes decision rules have additional nonlinearity relative to fixed regime models income allocation and the tax elasticity of investment depend on agents inference regarding the regime specifically the tax elasticity can be either positive or negative depending on whether agents perceive a tax reform as an intra regime shock or change in regime

fiscal sustainability in a new keynesian model recent work on optimal monetary and fiscal policy in new keynesian models suggests that it is optimal to allow steady state debt to follow a random walk in this paper we consider the nature of the time inconsistency involved in such a policy and its implication for discretionary policymaking we show that governments are tempted given inflationary expectations to utilize their monetary and fiscal instruments in the initial period to change the ultimate debt burden they need to service we demonstrate that this temptation is only eliminated if following shocks the new steady state debt is equal to the original efficient debt level even though there is no explicit debt target in the government s objective function analytically and in a series of numerical simulations we show which instrument is used to stabilize the debt depends crucially on the degree of nominal inertia and the size of the debt stock we also show that the welfare consequences of introducing debt are negligible for precommitment policies but can be significant for discretionary policy finally we assess the credibility of commitment policy by considering a quasi commitment policy which allows for different probabilities of reneging on past promises

fiscal consolidations quality economic conditions and success recent research has demonstrated theimportance of good quality of fiscaladjustments for the success of governmentbudget consolidations we extend thisapproach to analyze the importance of theeconomic conditions in which fiscalconsolidations are started for theirsuccess the cyclical positions of thedomestic and international economy theinitial debt level and the stance of fiscalpolicy in the oecd are all importantdeterminants of the likelihood of fiscalconsolidations they also affect thegovernment s choice of consolidationstrategy making them importantdeterminants of the success of fiscalconsolidations in contrast the monetarypolicy stance plays only a negligible rolefor fiscal consolidations we use theanalysis to test for any maastricht effectson the performance of european governmentsduring the 1990s such effects are weak atbest and occurred only during the firsthalf of the decade

can news be a major source of aggregate fluctuations a bayesian dsge approach we examine whether the news shocks as explored in beaudry and portier 2004 can be a major source of aggregate fluctuations for this purpose we extend a dynamic stochastic general equilibrium model a la christiano eichenbaum and evans 2005 by allowing news shocks on the total factor productivity and estimate the model using bayesian methods estimation results on the japanese and u s economies show that 1 the news shocks play an important role in business cycles 2 a news shock with a longer forecast horizon has larger effects on nominal variables and 3 the overall effect of the total factor productivity on hours worked becomes ambiguous in the presence of news shocks

when can changes in expectations cause business cycle fluctuations in neo classical settings abstract it is often argued that changes in expectation are an important driving force of the business cycle however it is well known that changes in expectations cannot generate positive co movement between consumption investment and employment in the most standard neo classical business cycle models this gives rise to the question of whether changes in expectation can cause business cycle fluctuations in any neo classical setting or whether such a phenomenon is inherently related to market imperfections this paper offers a systematic exploration of this issue our finding is that expectation driven business cycle fluctuations can arise in neo classical models when one allows for a sufficiently rich description of the production technology however such a structure is rarely allowed or explored in macro models in particular we identify a multi sector setting and a setting with a costly distribution system in which expectation driven business cycles can arise

house prices borrowing constraints and monetary policy in the business cycle i develop a general equilibrium model with sticky prices credit constraints nominal loans and asset prices changes in asset prices modify agents borrowing capacity through collateral value changes in nominal prices affect real repayments through debt deflation monetary policy shocks move asset and nominal prices in the same direction and are amplified and propagated over time the financial accelerator is not constant across shocks nominal debt stabilises supply shocks making the economy less volatile when the central bank controls the interest rate i discuss the role of equity debt indexation and household and firm leverage in the propagation mechanism finally i find that monetary policy should not target asset prices as a means of reducing output and inflation volatility

how do experts forecast sovereign spreads this paper assesses how forecasting experts form their expectations about future government bond spreads using monthly survey forecasts for france italy and the united kingdom between january 1993 and october 2014 we test whether respondents consider the expected evolution of the fiscal balance and other economic fundamentals to be significant drivers of the expected bond yield differential over a benchmark german 10 year bond our main result is that a projected improvement of the fiscal outlook significantly reduces expected sovereign spreads this suggests that credible fiscal plans affect market experts expectations and reduce the pressure on sovereign bond markets in addition we show that expected fundamentals generally play a more important role in explaining forecasted spreads compared to realized spreads

can exchange rates forecast commodity prices we show that commodity currency exchange rates have surprisingly robust power in predicting global commodity prices both in sample and out of sample and against a variety of alternative benchmarks this result is of particular interest to policy makers given the lack of deep forward markets in many individual commodities and broad aggregate commodity indices in particular we also explore the reverse relationship commodity prices forecasting exchange rates but find it to be notably less robust we offer a theoretical resolution based on the fact that exchange rates are strongly forward looking whereas commodity price fluctuations are typically more sensitive to short term demand imbalances

is the exchange rate a shock absorber or a source of shocks new empirical evidence this paper analyses the role of the real exchange rate in a structural vector autoregression framework for the united kingdom euro area japan and canada vis a vis the united states a new identification strategy is proposed building on sign restrictions the results are compared to the benchmark conventional approach of clarida and gali 1994 based on longrun zero restrictions although the restrictions are derived from the same theoretical model the results are strikingly different in contrast to the benchmark model an important role for nominal shocks in explaining real exchange rate fluctuations is found hence the exchange rate can rather be considered as a source of shocks instead of a shock absorber

equilibria under monetary and fiscal policy interactions in a portfolio choice model abstract this paper studies how the presence of income taxes changes the properties of general equilibrium models with monetary and fiscal policy interactions it is found that from a global perspective the only policy regime that leads to a unique equilibrium is one where fiscal policy is active i e the fiscal theory of the price level regime in sims 1994 from a local perspective there are three regimes in particular and relative to the previous literature following leeper 1991 a new third regime exists where a passive fiscal rule combined with a passive monetary rule can still deliver determinacy where the same area of the parameter space would lead to multiple solutions if taxes were lump sum to obtain the size of the new regime the paper characterizes analytically the extent to which tax cuts are self financing and how the distortionary tax laffer curve looks near the steady state in the new regime monetary and fiscal backstops are brought into play so as to rule out off equilibrium dynamics and inflation can temporarily increase in order to increase seigniorage revenues with this flexibility the monetary policy is consistent with the real debt remaining bounded and the arithmetic that follows is monetarist and unpleasant in the sense of sargent and wallace 1981

the exchange rate a shock absorber or source of shocks a study of four open economies abstract the paper provides svar estimates for the uk canada sweden and denmark making explicit a monetary policy reaction function and taking account of exchange rate targeting practices it examines the role of the exchange rate as shock absorber as opposed to a source of its own and destabilizing shocks we find that in all countries but the uk real shocks are predominantly symmetric relative to the neighbor implying little need for the exchange rate to act as shock absorber the shocks arising in the exchange market appear to have played a more important role in denmark than in the other countries

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

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

anomalies foreign exchange most all behavior can be explained by assuming that agents have stable well defined preferences and make rational choices consistent with those preferences in markets that eventually clear an empirical result qualifies as an anomaly if it is difficult to rationalize or if implausible assumptions are necessary to explain it within the paradigm this column will present a series of such anomalies readers are invited to suggest topics for future columns by sending a note with some reference to or better yet copies of the relevant research comments on anomalies printed here are also welcome the address

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

fiscal stimulus in expectations driven liquidity traps abstract i study liquidity traps in a model where agents have heterogeneous expectations and finite planning horizons backward looking agents base their expectations on past observations while forward looking agents have fully rational expectations liquidity traps that are fully or partly driven by expectations can arise due to pessimism of backward looking agents only when planning horizons are finite these liquidity traps can be of longer duration without ending up in a deflationary spiral i further find that fiscal stimulus in the form of an increase in government spending or a cut in consumption taxes can be very effective in mitigating the liquidity trap a feedback mechanism of heterogeneous expectations causes fiscal multipliers to be the largest when the majority of agents are backward looking but there also is a considerable fraction of agents that are forward looking labor tax cuts are always deflationary and are not an effective tool in a liquidity trap

dynamics of the trade balance and the terms of trade the j curve the authors provide a theoretical interpretation of two features of international data the countercyclical movements in net exports and the tendency for the trade balance to be negatively correlated with current and future movements in terms of trade but positively correlated with past movements they document the same properties in a two country stochastic growth model in which trade fluctuations reflect in large part the dynamics of capital formation the authors find that their general equilibrium perspective is essential the relation between the trade balance and the terms of trade depends critically on the source of fluctuations copyright 1994 by american economic association

comparison of solutions to the incomplete markets model with aggregate uncertainty abstract this paper compares numerical solutions to the model of krusell and smith 1998 income and wealth heterogeneity in the macroeconomy journal of political economy 106 867 896 generated by different algorithms the algorithms have very similar implications for the correlations between different variables larger differences are observed for i the unconditional means and standard deviations of individual variables ii the behavior of individual agents during particularly bad times iii the volatility of the per capita capital stock and iv the behavior of the higher order moments of the cross sectional distribution for example the two algorithms that differ the most from each other generate individual consumption series that have an average maximum difference of 1 63 11 4

fiscal consolidations and heterogeneous expectations abstract we analyze fiscal consolidations using a new keynesian model where agents have heterogeneous expectations and are uncertain about the composition of consolidations we look at spending based and tax based consolidations and analyze their effects separately we find that the effects of consolidations and the output multipliers are sensitive to heterogeneity in expectations before and after implementation of a specific fiscal plan depending on the beliefs about the type of consolidation prior to implementation we show that heterogeneity in expectations may lead to optimism in the economy improving thus the performance of a specific fiscal plan or can work towards the opposite direction leading to pessimism amplifying the contractionary effects of the consolidation in general we find that spending based consolidations last longer and lead to deeper recessions when agents are boundedly rational compared to the rational expectations benchmark while the opposite holds for tax based consolidations

risk assessment under a nonlinear fiscal policy rule i introduction countries around the world are establishing nonlinear fiscal rules whereby governments respond more aggressively to lower deficits when debt is above some threshold level these policies range from the german style debt break which imposes limits on the deficits to fiscal rules that intensify fiscal consolidation at high debt levels the purpose of this paper is to study the implications of a nonlinear fiscal rule on solvency crisis do nonlinear fiscal rules allay the possibility of future insolvency does the increased responsiveness suggested by the nonlinear fiscal rules need to be exhibited at low levels of debt could fiscal authorities offset the stronger responsiveness at high levels of debt with a weaker responsiveness at low levels of debt without altering the probability of a solvency crisis we build on daniel and shiamptanis 2012 framework where negative shocks such as the 2007 2009 worldwide financial turmoil could lead a government to a position where agents refuse to lend thereby creating a solvency crisis to restore lending monetary and fiscal authorities could implement a policy switch in which the fiscal policy switches to active and the monetary policy to passive and the post crisis equilibrium is characterized by the fiscal theory of the price level ftpl 1 their analysis however utilizes a linear fiscal policy rule and assumes that authorities remain in the ftpl regime once they switch this paper modifies daniel and shiamptanis 2012 dynamic policy switching model to allow for a nonlinear fiscal policy rule that governs the evolution of the primary surplus relative to gdp and to allow the authorities to switch back to the original regime an important feature of the nonlinear fiscal rule is that it naturally yields an endogenous stochastic responsiveness to debt to capture changes in policy over time 2 we also build on bohn 1998 who argues that it is sufficient for a sustainable fiscal policy to satisfy the government s intertemporal budget constraint ibc bohn s analysis however does not incorporate a fiscal limit on the size of debt defined as the maximum level of debt that the country can repay bi 2012 bi et al 2010 2013 cochrane 2011 ghosh et al 2013 this paper can be viewed as an extension of bohn 1998 when a country faces fiscal limits we derive the criteria necessary for a nonlinear fiscal rule to satisfy both the government s ibc and eliminate explosive behavior the final contribution of the paper is empirical we apply the model to canada which is often cited as an example of a small open economy that implemented a significant fiscal adjustment lloyd ellis and zhu 2001 we estimate a nonlinear fiscal rule with annual data from 1970 to 2012 and utilize it to quantify the probability of a solvency crisis the following key results emerge first to eliminate explosive behavior the responsiveness of the nonlinear fiscal rule to debt should be larger than bohn s 1998 criterion second a nonlinear fiscal rule lowers the expected maximum level of debt on the path back to its long run target and also shortens the expected adjustment time third the strong responsiveness suggested by a nonlinear fiscal rule is very important to reduce the probability of a solvency crisis however this strength need not be exhibited until debt is high as long as the government has a stronger responsiveness at high levels of debt the responsiveness at low levels of debt has miniscule impact on solvency risk this paper is organized as follows section ii derives the necessary conditions for global stability and the dynamics leading to a solvency crisis under a nonlinear fiscal rule section iii estimates the policy parameters of the canadian fiscal rule and the probability of a solvency crisis section iv provides conclusions ii model we set up a simple small open economy model with a stochastic endowment

the fiscal state dependent effects of capital income tax cuts abstract using the post wwii data of u s federal corporate income tax changes within a smooth transition var this paper finds that the output effect of capital income tax cuts is government debt dependent it is less expansionary when debt is high than when it is low to explore the mechanisms that can drive this fiscal state dependent tax effect the paper uses a dsge model with regime switching fiscal policy and finds that a capital income tax cut is stimulative to the extent that it is unlikely to result in a future fiscal adjustment as government debt increases to a sufficiently high level the probability of future fiscal adjustments starts rising and the expansionary effects of a capital income tax cut can diminish substantially whether the expected adjustments are through a policy reversal or a consumption tax increase also a capital income tax cut need not always have large revenue feedback effects as suggested in the literature

nonlinear pricing and price cap regulation abstract this paper analyzes profit maximizing nonlinear pricing by a firm that is subject to price cap regulation two forms of regulatory constraint are considered i a cap on the firm s average revenue and ii a constraint that the firm must continue to offer each consumer the option of buying at the uniform price optimal nonlinear price schedules in these regimes are shown to have simple characterizations that are related to the nonlinear tariffs that an unregulated monopolist would charge of the regulatory regimes the firm prefers the average revenue constraint to the option constraint and likes uniform pricing least consumers in aggregate prefer the option regime to uniform pricing and like the average revenue constraint least but there are also distributional effects between consumers although the optional tariff regime pareto dominates uniform pricing it is ambiguous whether welfare is higher under uniform pricing or under the average revenue regime an example is used to illustrate the nature of the ambiguity

fiscal stabilizations when do they work and why abstract this paper studies the determinants and channels through which fiscal contractions influence the dynamics of the debt to gdp ratio and gdp growth using data from a panel of oecd countries the paper shows that the success of fiscal adjustments in decreasing the debt to gdp ratio depends on the size of the fiscal contraction and less on its composition the rate of growth of output matters too but higher gdp growth does not drive the success of a fiscal stabilization in contrast whether a fiscal adjustment is expansionary depends largely on the composition of the fiscal maneuvre in particular stabilizations implemented by cutting public spending lead to higher gdp growth rates the effects of the composition on growth work mostly through the labor market rather than through agents expectations of future fiscal policy finally the evidence suggests that successful and expansionary fiscal contractions are not the result of accompanying expansionary monetary policy or exchange rate devaluations

when do fiscal consolidations lead to consumption booms lessons from a laboratory experiment according to the expectations channel a fiscal consolidation may give rise to less contractionary or even expansionary effects on consumption despite a decline in current disposable income intuitively people may accumulate a stock of savings in anticipation of the consolidation and may start to reduce their savings to support consumption once it occurs we design a laboratory experiment to study the conditions under which the expectations channel operates our results indicate that fiscal contractions that occur in an unsustainable fiscal environment exert less contractionary effects on consumption which supports the expectations channel we also find that the expectations channel is more pronounced if the fiscal authority can convincingly commit to abstain from tax increases in the future whereas increasing subjects level of awareness by running a transparent policy has only little influence on the outcomes

how well can the new open economy macroeconomics explain the exchange rate and current account abstract this paper advances the new open economy macroeconomic literature in an empirical direction estimating and testing a two country model fit to u s and g7 data the model performs moderately well for the exchange rate and current account results offer guidance for future theoretical work parameter estimates lend support to the assumption of local currency pricing estimates are found for key parameters commonly calibrated in the theoretical literature such as the elasticity of substitution between home and foreign composite goods and the response of a country s risk premium to the net foreign asset position results also indicate that deviations from interest rate parity are not closely related to monetary policy shocks as recently hypothesized but that these deviations are strongly related to shifts in the current account

international evidence on output fluctuation and shock persistence we estimate output growth rate spectra for 58 countries the spectra exhibit diverse shapes to study the sources of this diversity we estimate the short run business cycle and long run frequency components of the sampled series for most oecd countries the bulk of the spectral mass is in the business cycle frequency band and the magnitude of this cyclical component increases with income for the developing countries however the spectral mass is not concentrated in the business cycle frequency band and the income cycle relationship is not as strong we also estimate two frequency domain measures of shock persistence and find both measures to vary considerably across countries with the u s having the lowest estimates for the oecd countries most of the variation in the variance ratio statistic appears to be explained by the variation in the long term growth component

rate of return regulation and product variety abstract this paper examines the effect of rate of regulation on a monopolist that faces a market of observationally identical but heterogeneous consumers under plausible technological conditions rate of return regulation increases the quality offered to any consumer and expands the variety of products it offers some consumers receive a quality that is greater than the socially optimal quality rate of return regulation unambiguously increases consumers surplus if the allowed rate of return is close to the monopoly rate of return social welfare increases as well

expansionary contractions and fiscal free lunches too good to be true this paper builds a framework to jointly examine the possibility of both expansionary fiscal contractions austerity increasing output and fiscal free lunches expansions reducing government debt arguments supported by the austerity and stimulus camps respectively in recent debates we propose a new metric quantifying the budgetary implications of fiscal action a key aspect of fiscal policy particularly at the monetary zero lower bound we find that austerity needs to be highly persistent and credible to be expansionary and stimulus temporary responsive and well targeted in order to lower debt we conclude that neither are likely especially during periods of economic distress this article is protected by copyright all rights reserved

fiscal crises and aggregate demand can high public debt reverse the effects of fiscal policy abstract this paper shows how the power of fiscal policy to affect consumption can vary depending on the level of public debt at moderate levels of debt fiscal policy has the traditional keynesian effects current generations of consumers discount future taxes because they may not be alive when taxes are raised or there will be a larger population available to pay the taxes but when debt reaches extreme values current generations of consumers know there is a high probability that they will have to pay extra taxes a fiscal deficit can have a contractionary effect in these situations

the consequences of an unknown debt target abstract several proposals to reduce u s debt reveal large differences in their targets we examine how an unknown debt target affects economic activity using a real business cycle model in which bayesian households learn about a state dependent debt target in an endogenous tax rule recent papers use stochastic volatility shocks to study fiscal uncertainty in our setup the fiscal rule is time varying due to unknown changes in the debt target households infer the current debt target from a noisy tax rule and jointly estimate the transition probabilities three key findings emerge from our analysis 1 limited information about the debt target amplifies the effect of tax shocks through changes in expected tax rates 2 the welfare losses are an order of magnitude larger when both the debt target state and transition matrix are unknown than when only the debt target state is unknown to households 3 an unknown debt target likely reduced the stimulative effect of the arra and uncertainty about the sunset provision in the bush tax cuts may have slowed the recovery and led to welfare losses

what are the effects of fiscal policy shocks we propose and apply a new approach for analyzing the effects of fiscal policy using vector autoregressions specifically we use sign restrictions to identify a government revenue shock as well as a government spending shock while controlling for a generic business cycle shock and a monetary policy shock we explicitly allow for the possibility of announcement effects i e that a current fiscal policy shock changes fiscal policy variables in the future but not at present we construct the impulse responses to three linear combinations of these fiscal shocks corresponding to the three scenarios of deficit spending deficit financed tax cuts and a balanced budget spending expansion we apply the method to us quarterly data from 1955 to 2000 we find that deficit financed tax cuts work best among these three scenarios to improve gdp with a maximal present value multiplier of five dollars of total additional gdp per each dollar of the total cut in government revenue 5 years after the shock copyright 2009 john wiley sons ltd

equilibrium in a production economy with an income tax this paper develops a method to study an infinite horizon production economy distorted by a state dependent income tax this setting permits taxes to depend on the capital stock an endogenous state variable and thus captures situations where the evolution for capital and taxes is jointly determined to solve this model the consumption function is represented as a fixed point of a nonlinear monotone operator that is defined such that its nth iteration computes the consumption function n steps away from the horizon for a corresponding finite horizon economy the oparator s monotonicity is exploited in proving the existence of and constructing an equilibrium copyright 1991 by the econometric society

news shocks and business cycles abstract this paper proposes and implements a novel structural var approach to the identification of news shocks about future technology the news shock is identified as the shock orthogonal to the innovation in current utilization adjusted tfp that best explains variation in future tfp a favorable news shock leads to an increase in consumption and decreases in output hours and investment on impact more suggestive of standard dsge models than of recent extensions designed to generate news driven business cycles though news shocks account for a significant fraction of output fluctuations at medium frequencies they contribute little to our understanding of recessions

nonlinear prices and the regulated firm this paper examines the problem of a regulated utility that sells output according to a nonlinear price schedule three results are obtained first rate of return regulation lowers the price schedule charged by the firm along its entire length second some units of output will always be sold at a marginal price below true marginal cost third a move from linear to nonlinear prices at a given fair rate of return can lead to an unambiguous increase in welfare

technology shocks and robust sign restrictions in a euro area svar we use a model based identification strategy to estimate the impact of technology shocks on hours worked and employment in the euro area the sign restrictions applied in the vector autoregression var analysis are consistent with a large class of dynamic stochastic general equilibrium dsge models and are robust to parameter uncertainty the results are in line with the conventional real business cycle rbc interpretation that hours worked rise as a result of a positive technology shock by comparing the sign restrictions method to the long run restriction approach of gali quaterly journal of economics 1992 709 38 we show that the results do not depend on the stochastic specification of the hours worked series or the data sample but only on the identification scheme

debt dependent effects of fiscal expansions abstract economists often postulate that fiscal expansions are less stimulative when government debt is high than when it is low empirical evidence however is ambiguous using a nonlinear neoclassical growth model we show that the difference in government spending effects between high and low debt environments depends on the wealth effect on labor supply and on whether the government uses taxes or spending to retire debt because of interrelated state variables structural var estimations conditioning on debt alone can fail to isolate debt dependent effects also uncertainty on when the government will conduct fiscal consolidations generates wide confidence bands for spending multipliers further complicating efforts to estimate debt dependent government spending effects

sovereign default risk and state dependent twin deficits abstract this paper analyzes the impact of the government debt to gdp ratio on the correlation of the fiscal balance and the current account above a government debt to gdp ratio of 90 percent the correlation of the two balances decreases by 0 16 in a sample of 12 euro area countries and by 0 17 for greece ireland portugal and spain this paper develops a small open economy model with defaultable government debt and riskless international capital markets to explain the empirical evidence of a state dependent change in the correlation in the model high public debt to gdp ratios raise sovereign risk premia as the default probability increases leading to higher uncertainty about future taxes in this case precautionary savings of households increase and partially compensate current account deficits that result from fiscal deficits the increase in households saving reduces the correlation of the two balances by the same magnitude as documented in the data the model calibrated to greece matches further business cycle moments and the empirical default frequency

fiscal policy in the new neoclassical synthesis we analytically derive the cyclical effects of fiscal policy shocks in a new neoclassical synthesis model price stickiness has the consequence that a rise in government demand affects labor demand while at the same time the usual wealth effect boosts labor supply the strength of the demand effect depends on the response of the real interest rate governed by the monetary policy regime when the central bank controls money growth fiscal expansions are deflationary and might even be contractionary whereas output wages and inflation can increase when the rise in the real interest rate is dampened by an interest rate rule however price stickiness alone is not sufficient to explain a rise in consumption as predicted by keynesian theory

a theory of demand shocks this paper presents a model of business cycles driven by shocks to consumer expectations regarding aggregate productivity agents are hit by heterogeneous productivity shocks they observe their own productivity and a noisy public signal regarding aggregate productivity the public signal gives rise to noise shocks which have the features of aggregate demand shocks they increase output employment and inflation in the short run and have no effects in the long run numerical examples suggest that the model can generate sizable equilibrium dsge models of the business cycle include a large number of shocks to technol ogy monetary policy preferences etc but typically do not include expectational shocks as independent drivers of short run fluctuations 1 this paper explores the idea of expectation driven cycles looking at a model where technology determines equilibrium output in the long run and consumers receive noisy signals about technology in the short run the presence of noisy signals produces expectational errors this paper studies the role of these expectational errors in gener ating volatility at business cycle frequencies the model is based on two ingredients first consumers take time to recognize permanent changes in aggregate fundamentals although they may have good information on the current state of the individual firm or sector where they operate they have only limited information regarding the long run determinants of aggregate activity second consumers have access to public information that is relevant to estimate long run productivity this includes news about technological innovations publicly released macroeconomic and sectoral statistics financial market prices and public statements by policy makers however these signals provide only a noisy forecast of the long run effects of technological innovations this opens the door to noise shocks which induce consumers to temporarily overestimate or underestimate the productive capacity of the economy

finite lifetimes long term debt and the fiscal limit abstract the u s faces exponentially rising entitlement obligations i introduce a fiscal limit a point where higher taxes are no longer a feasible financing mechanism into a perpetual youth model to examine how intergenerational redistributions of wealth the average duration of government debt and entitlement reform impact the consequences of explosive government transfers three key findings emerge 1 growing government transfers cause more severe and more persistent stagflation than in representative agent models that do not capture intergenerational transfers of wealth 2 a longer average duration of government debt pushes the financing of government liabilities into the future and reduces the short run impacts of explosive transfers 3 the time it takes the economy to rebound from a period of growing transfers increases exponentially with the number of years it takes to pass entitlement reform

on the international transmission of technology shocks abstract using vector autoregressions on u s time series and an aggregate of industrialized countries we find that technology shocks appreciate the terms of trade and lower the trade balance they induce an s shaped cross correlation function for both variables the s curve in calibrating a prototypical international business cycle model under complete and incomplete financial markets we find two distinct sets of parameter values while both model specifications deliver the s curve the underlying transmission mechanism of technology shocks is fundamentally different most importantly only in the incomplete markets economy the terms of trade appreciate and thus amplify the relative wealth effects of technology shocks as suggested by the evidence

are supply shocks important for real exchange rates a fresh view from the frequency domain abstract this paper re examines the role of supply shocks for real exchange rate fluctuations and contributes by exploiting insights from the frequency domain perspective in contrast to the existing literature our empirical findings point towards an important role played by supply productivity shocks in driving us real effective exchange rate fluctuations at low frequencies while real demand shocks matter mostly at high and medium frequencies in addition we propose an approach to structurally decompose the persistence of the real exchange rate and find that supply shocks explain up to half of its persistence

uncertain fiscal consolidations the paper explores the macroeconomic consequences of fiscal consolidations whose timing and composition are uncertain drawing on the evidence in alesina and ardagna 2010 we emphasize whether or not the fiscal consolidation is driven by tax rises or expenditure cuts we find that the composition of the fiscal consolidation its duration the monetary policy stance the level of government debt and expectations over the likelihood and composition of fiscal consolidations all matter in determining the extent to which a given consolidation is expansionary and or successful in stabilizing government debt

hours per capita and productivity evidence from correlated unobserved components models recent studies debate the effect of a permanent productivity shock on hours per capita within a structural var context this paper examines the issue using a correlated unobserved components uc framework the estimates show that permanent shocks to productivity are negatively correlated with transitory shocks to hours this result is robust for non stationary or levels stationary specifications of hours model comparisons indicate that the data do not favor imposing var type restrictions on the uc models copyright 2008 john wiley sons ltd

welfare effects of price discrimination by a regulated monopolist should a multiproduct monopolist whose average price is capped by regulation be allowed to engage in third degree price discrimination if the cap applies to a price index with weights proportional to demands at uniform prices then price discrimination benefits consumers as well as the firm but if perhaps more realistically it is the firm s average revenue that is capped then consumers prefer uniform pricing in this case total output is higher when discrimination is allowed which increases welfare but marginal utilities differ across markets which is inefficient and the overall effect is ambiguous a small amount of discrimination is desirable however it is better not to allow price discrimination if the price cap is close to the level of marginal cost the consequences of tightening the price cap when discrimination is allowed are also examined

political economy of mechanisms we study the optimal mirrlees taxation problem in a dynamic economy in contrast to the standard approach where the taxation mechanism is operated by a benevolent planner with full commitment power we focus on economies in which policy decisions are made by self interested politicians who cannot commit to policies the society controls politicians using elections we show that the provision of incentives to politicians can be partly separated from redistribution across agents and that political economy constraints can be modeled as introducing additional aggregate distortions in the dynamic mirrlees problem we provide conditions under which the political economy distortions persist or disappear in the long run if the politicians are as patient as the agents the best sustainable mechanism leads to an asymptotic allocation where the aggregate distortions arising from political economy disappear in contrast when politicians are less patient than the citizens positive aggregate labor and capital taxes remain even asymptotically we conclude by providing a brief comparison of centralized

optimal monetary policy with uncertain fundamentals and dispersed information this paper studies optimal monetary policy in a model where aggregate fluctuations are driven by the private sector s uncertainty about the economy s fundamentals information on aggregate productivity is dispersed across agents and there are two aggregate shocks a standard productivity shock and a noise shock affecting public beliefs about aggregate productivity neither the central bank nor individual agents can distinguish the two shocks when they are realized despite the lack of superior information monetary policy can affect the economy s relative response to the two shocks as time passes better information on past fundamentals becomes available the central bank can then adopt a backward looking policy rule based on more precise information about past shocks by announcing its response to future information the central bank can influence the expected real interest rate faced by forward looking consumers with different beliefs and thus affect the equilibrium allocation if the announced future response is sufficiently aggressive the central bank can completely eliminate the effect of noise shocks however this policy is typically suboptimal as it leads to an excessively compressed distribution of relative prices the optimal monetary policy balances the benefits of aggregate stabilization with the costs in terms of cross sectional efficiency copyright wiley blackwell