optimal monetary policy in an economy with inflation persistence abstract this paper studies optimal monetary policy in a model where inflation is persistent two types of price setters are assumed to exist one acts rationally given calvo type constraints on price setting the other type sets prices according to a rule of thumb this results in a phillips curve with both a forward looking term and a backward looking term the phillips curve nests a standard purely forward looking phillips curve as well as a standard purely backward looking phillips curve as special cases a cost push supply shock is derived from microfoundations by adding a time varying income tax and by making the elasticity of substitution between goods stochastic a central bank loss function for this model is derived from a second order taylor approximation of the household s welfare function optimal monetary policy for different relative values of the forward and backward looking terms is then analyzed for both the commitment case and the case of discretion

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

a primer on mathematical modelling in economics the commission on graduate education in economics had raised several concerns regarding the role of mathematics in graduate training in economics krueger 1991 colander 1998 2005 this paper undertakes a detailed scrutiny of the notion of a utility function to motivate and describe the common patterns across mathematical concepts and results that are used by economists in the process one arrives at a classification of mathematical terms which is used to state mathematical results in economics the usefulness of the classification scheme is illustrated with the help of a discussion of arrow s impossibility theorem common knowledge of the patterns in mathematical concepts and results could be effective in enhancing communication between students teachers and researchers specializing in different sub fields of economics

trade finance specialization and synchronization i investigate the determinants of business cycle synchronization across regions the linkages between trade in goods financial openness specialization and business cycle synchronization are evaluated in the context of a system of simultaneous equations the main results are as follows i specialization patterns have a sizable effect on business cycles most of this effect is independent of trade or financial policy but directly reflects differences in gdp per capita ii a variety of measures of financial integration suggest that economic regions with strong financial links are significantly more synchronized even though they also tend to be more specialized iii the estimated role of trade is closer to that implied by existing models once intra industry trade is held constant the results obtain in a variety of data sets measurement strategies and specifications they relate to a recent strand of international business cycle models with incomplete markets and transport costs and on the empir

unfunded liabilities and uncertain fiscal financing we develop a rational expectations framework to study the consequences of alternative means to resolve the unfunded liabilities problem the projected exponential growth in federal social security medicare and medicaid spending with no known plan for financing the transfers resolution requires specifying a probability distribution for how and when monetary and fiscal policies will change as the economy evolves through the 21st century beliefs based on that distribution determine the existence of and the nature of equilibrium we consider policies that in expectation combine reaching a fiscal limit some distorting taxation modest inflation and some reneging on the government s promised transfers in the equilibrium inflation targeting monetary policy and debt targeting tax policy cannot anchor expectations on those target variables expectational effects are always present but need not have large impacts on inflation and interest rates in the short and medium runs in the economy s stationary distribution the capital stock may grow or shrink and substantial probability falls on little or no reneging

international business cycle spillovers since the 1870s this article considers the evolution of international business cycle interdependencies among 27 developed and developing countries since the beginning of 1870s utilizing the generalized vector autoregressive var based spillover index of diebold and yilmaz 2012 which allows the construction of a time varying measure of business cycle spillovers we find that on average 65 of the forecast error variance of the 27 countries business cycle shocks is due to international spillovers however the magnitude of international business cycle spillovers varies considerably over time there is a clear increasing trend since the end of world war ii and until the mid 1980s after that international business cycle interdependencies declined during the period that was dubbed the great moderation and stabilized around the beginning of the twenty first century during the great recession of 2008 2009 international business cycle spillovers increased to unprecedented levels finally developed countries are cons

forming priors for dsge models and how it affects the assessment of nominal rigidities abstract we discuss prior elicitation for the parameters of dynamic stochastic general equilibrium dsge models and provide a method for constructing prior distributions for a subset of these parameters from beliefs about steady state relationships and second moments of the endogenous variables the empirical application documents how the specification of the prior distribution affects our assessment of the relative importance of price and wage rigidities in a new keynesian dsge model

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

exact likelihood computation for nonlinear dsge models with heteroskedastic innovations abstract phenomena such as the great moderation have increased the attention of macroeconomists towards models where shock processes are not log normal this paper studies a class of discrete time rational expectations models where the variance of exogenous innovations is subject to stochastic regime shifts we first show that up to a second order approximation using perturbation methods regime switching in the variances has an impact only on the intercept coefficients of the decision rules we then demonstrate how to derive the exact model likelihood for the second order approximation of the solution when there are as many shocks as observable variables we illustrate the applicability of the proposed solution and estimation methods in the case of a small dsge model

the case for restricting fiscal policy discretion this paper studies the effects of discretionary fiscal policy on output volatility and economic growth using data for 91 countries we isolate three empirical regularities 1 governments that use fiscal policy aggressively induce significant macroeconomic instability 2 the volatility of output caused by discretionary fiscal policy lowers economic growth by more than 0 8 percentage points for every percentage point increase in volatility 3 prudent use of fiscal policy is explained to a large extent by the presence of political constraints and other political and institutional variables the evidence in the paper supports arguments for constraining discretion by imposing institutional restrictions on governments as a way to reduce output volatility and increase the rate of economic growth

estimating fiscal limits the case of greece summary this paper uses bayesian methods to estimate a real business cycle model that allows for interactions among fiscal policy instruments the stochastic fiscal limit and sovereign default using the particle filter to perform likelihood based inference we estimate the full nonlinear model with post emu data until 2010 q4 we find that i the probability of default on greek debt was in the range of 5 10 in 2010 q4 and ii the 2011 surge in the greek real interest rate is within model forecast bands the results suggest that a nonlinear rational expectations environment can account for the greek interest rate path copyright 2014 john wiley sons ltd

comparing solution methods for dynamic equilibrium economies this paper compares solution methods for dynamic equilibrium economies the authors compute and simulate the stochastic neoclassical growth model with leisure choice using undetermined coefficients in levels and in logs finite elements chebyshev polynomials second and fifth order perturbations and value function iteration for several calibrations the authors document the performance of the methods in terms of computing time implementation complexity and accuracy and they present some conclusions about their preferred approaches based on the reported evidence

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

determinants of sovereign yield spreads in the eurozone a bayesian approach abstract we analyze the determinants of sovereign yields spreads of emu member states applying bayesian model averaging bma to annual panel data from 1999 to 2009 bma is well suited in cases of small samples and high model uncertainty this seems to be the case in modeling sovereign yield spreads in the eurozone since the literature reports heterogeneous results with respect to significant explanatory variables we are testing a number of variables reported to be significant in the literature and find that the most likely country specific drivers of yield spreads are fiscal variables such as budget balance and government debt as well as external sector variables such as terms of trade trade balance and openness global financing conditions indicated by the us interest rate and market sentiments indicated by corporate bond spreads are likely to influence sovereign yield spreads

non linear dsge models and the optimized central difference particle filter abstract we improve the accuracy and speed of particle filtering for non linear dsge models with potentially non normal shocks this is done by introducing a new proposal distribution which i incorporates information from new observables and ii has a small optimization step that minimizes the distance to the optimal proposal distribution a particle filter with this proposal distribution is shown to deliver a high level of accuracy even with relatively few particles and it is therefore much more efficient than the standard particle filter

euro area inflation persistence in an estimated nonlinear dsge model abstract we estimate the approximate non linear solution of a small dsge model on euro area data using the conditional particle filter to compute the model likelihood our results are consistent with previous findings based on simulated data suggesting that this approach delivers sharper inference compared to the estimation of the linearised model we also show that the non linear model can account for richer economic dynamics the impulse responses to structural shocks vary depending on initial conditions selected within our estimation sample

the general equilibrium effects of fiscal policy estimates for the euro area abstract this paper describes a dynamic stochastic general equilibrium model featuring a fraction of non ricardian agents in order to estimate the effects of fiscal policy in the euro area the model takes into account distortionary taxation on labor and capital income and on consumption while expenditures are broken down into purchases of goods and services compensation of public employees and transfers to households a newly computed quarterly data set of fiscal variables is used our results point to the prevalence of mild keynesian effects of public expenditures in particular although innovations in fiscal policy variables tend to be rather persistent government purchases of goods and services and compensations for public employees have small and short lived expansionary effects on private consumption while innovations in transfers to households show a slightly more sizeable and lasting effect the effects are more significant on the revenue side decreases in labor income and consumption tax rates have sizeable effects on consumption and output while a reduction in capital income tax favors investment and output in the medium run finally our estimates suggest that fiscal policy variables contribute little to the cyclical variability of the main macro variables

judgment aggregation in search for the truth we analyze the problem of aggregating judgments over multiple issues from the perspective of whether aggregate judgments manage to efficiently use all voters private information while new in judgment aggregation theory this perspective is familiar in a different body of literature about voting between two alternatives where voters disagreements stem from conflicts of information rather than of interest combining the two bodies of literature we consider a simple judgment aggregation problem and model the private information underlying voters judgments assuming that voters share a preference for true collective judgments we analyze the resulting strategic incentives and determine which voting rules efficiently use all private information we find that in certain but not all cases a quota rule should be used which decides on each issue according to whether the proportion of yes votes exceeds a particular quota

international business cycles world region and country specific factors the paper investigates the common dynamic properties of business cycle fluctuations across countries regions and the world we employ a bayesian dynamic latent factor model to estimate common components in macroeconomic aggregates output consumption and investment in a 60 country sample covering seven regions of the world the results indicate that a common world factor is an important source of volatility for aggregates in most countries providing evidence for a world business cycle we find that region specific factors play only a minor role in explaining fluctuations in economic activity we also document similarities and differences across regions countries and aggregates jel f41 e32 c11 c32

aggregation of binary evaluations with abstentions abstract a general model of aggregation of binary evaluations over interrelated issues introduced by wilson and further studied by rubinstein and fishburn and by the authors is extended here to allow for abstentions on some of the issues it is shown that the same structural conditions on the set of feasible evaluations that lead to dictatorship in the model without abstentions lead to oligarchy in the presence of abstentions arrow s impossibility theorem for social welfare functions gibbard s oligarchy theorem for quasi transitive social decision functions as well as some apparently new theorems on preference aggregation are obtained as corollaries

inflation stabilization and welfare the case of a distorted steady state this paper considers the appropriate stabilization objectives for monetary policy in a microfounded model with staggered price setting rotemberg and woodford 1997 and woodford 2002 have shown that under certain conditions a local approximation to the expected utility of the representative household in a model of this kind is related inversely to the expected discounted value of a conventional quadratic loss function in which each period s loss is a weighted average of squared deviations of inflation and an output gap measure from their optimal values zero however those derivations rely on an assumption of the existence of an output or employment subsidy that offsets the distortion due to the market power of monopolistically competitive price setters so that the steady state under a zero inflation policy involves an efficient level of output here we show how to dispense with this unappealing assumption so that a valid linear quadratic approximation to the optimal policy problem is possible even when the steady state is distorted to an arbitrary extent allowing for tax distortions as well as market power and when as a consequence it is necessary to take account of the effects of stabilization policy on the average level of output we again obtain a welfare theoretic loss function that involves both inflation and an appropriately defined output gap though the degree of distortion of the steady state affects both the weights on the two stabilization objectives and the definition of the welfare relevant output gap in the light of these results we reconsider the conditions under which complete price stability is optimal and find that they are more restrictive in the case of a distorted steady state we also consider the conditions under which pure randomization of monetary policy can be welfare improving and find that this is possible in the case of a sufficiently distorted steady state though the parameter values required are probably not empirically realistic

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

computing second order accurate solutions for rational expectation models using linear solution methods this paper shows how to compute a second order accurate solution of a non linear rational expectation model using algorithms developed for the solution of linear rational expectation models the result is a state space representation for the realized values of the variables of the model this statespace representation can easily be used to compute impulse responses as well as conditional and unconditional forecasts

yield spreads on emu government bonds government bond spreads we provide evidence that the movements in yield differentials between euro zone government bonds explained by changes in international risk factors as measured by banking and corporate risk premiums in the united states are more pronounced for bonds issued by italy and spain liquidity factors play a smaller role so policies meant to increase financial market efficiency do not appear sufficient to deliver a seamless bond market in the euro area the risk of default is a small but important component of yield differentials movements which signal market perceptions of fiscal vulnerability impose market discipline on national fiscal policies and may be reduced only by further convergence in debt ratios lorenzo codogno carlo favero and alessandro missale

the yield curve and macroeconomic dynamics we show that microfounded dsge models with nominal rigidities can be successful in replicating features of bond yield data including sizeable term premia and volatile long term yields which have previously been considered puzzling in general equilibrium frameworks at the same time sample moments of consumption growth and inflation can be fit relatively well the improved model performance does not arise directly from the presence of nominal rigidities however this feature introduces short run monetary non neutrality so that monetary policy affects consumption dynamics and bond prices a high degree of interest rate smoothing in the policy rule is essential for our results at the core of dynamic macroeconomic models we find equilibrium relationships which describe the allocation of quantities e g consumption and investment and when imperfect competition prevails the setting of prices these equations are typically valid across time and across states of nature and financial assets form the tool that is supposed to ensure their validity financial assets are therefore an integral part of macroeconomic models any well specified model should be able to match financial data as well as macro data it is therefore problematic that microfounded models have had a hard time explaining key features of asset prices the most famous example of this difficulty is the equity premium puzzle but various features of bond yield data have also been char acterised as puzzling in the literature a number of papers including backus et al 1989 donaldson et al 1990 den haan 1995 and chapman 1997 have con cluded that general equilibrium models cannot generate term premia of a magnitude comparable to what we observe in actual data and may not even be capable of producing positive term premia for equity one could argue that fundamentals the expected future profitability of individual firms are unobservable and difficult to evaluate equity prices may therefore be thought to be subject to fluctuations disconnected from the real economy information acquisition fads etc and one could hope that the inability of macroeconomic models to match equity prices does not represent a signal of misspecification this argument is more difficult to construct for bonds bond yields should ultimately reflect expectations of future monetary policy decisions which at least in recent years are arguably more predictable than equity fundamentals thus the ability of macroeconomic models to explain bond prices represents an important test of their empirical performance in this article we revisit the relationship between bond prices and macroeconomic fundamentals contrary to the papers cited above that rely on flexible price models we

new evidence on inflation persistence and price stickiness in the euro area implications for macro modeling this paper evaluates new evidence on price setting practices and inflation persistence in the euro area with respect to its implications for macro modeling it argues that several of the most commonly used assumptions in micro founded macro models are seriously challenged by the new findings jel e31 e52

yield curve in an estimated nonlinear macro model this paper estimates a sticky price macro model with us macro and term structure data using bayesian methods the model is solved by a nonlinear method the posterior distribution of the parameters in the model is found to be bi modal the degree of nominal rigidity is high at one mode sticky price mode but is low at the other mode flexible price mode i find that the degree of nominal rigidity is important for identifying macro shocks that affect the yield curve when prices are more flexible a slowly varying inflation target of the central bank is the main driver of the overall level of the yield curve by changing long run inflation expectations in contrast when prices are more sticky a highly persistent markup shock is the main driver the posterior probability of each mode is sensitive to the use of observed proxies for inflation expectations ignoring additional information from survey data on inflation expectations significantly reduces the posterior probability of the flexible price mode incorporating this additional information suggests that yield curve fluctuations can be better understood by focusing on the flexible price mode considering nonlinearities of the model solution also increases the posterior probability of the flexible price mode although to a lesser degree than using survey data information

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

sovereign risk premiums in the european government bond market this paper provides a study of bond yield differentials among eu government bonds issued between 1993 and 2005 on the basis of a unique dataset of issue spreads in the us and dm euro bond market interest differentials between bonds issued by eu countries and germany or the usa contain risk premiums which increase with fiscal imbalances and depend negatively on the issuer s relative bond market size the start of the european monetary union has shifted market attention to debt service payments as the key measure of indebtedness and eliminated liquidity premiums in the euro area

the role of geography in financial and economic integration a comparative analysis of foreign direct investment trade and portfolio investment flows the objective of this paper is to examine the role of geography in explaining the patterns of financial and economic integration among both developed and developing countries using a gravity model we compare north north north south and south north fdi trade and portfolio investment flows to examine how geographical factors influence these bilateral flows the results indicate that the impact of geography variables on fdi and portfolio are similar to their effect on trade geography variables have a statistically significant effect both on fdi and portfolio investment but fdi is more sensitive to distance we interpret the negative effect of distance as the existence of information costs in financial flows also bilateral fdi trade and portfolio investment flows react to macroeconomic fundamentals in the same way however with different degrees of sensitivity there are significant differences between north north and north south flows our results find support for the argument that most fdi among industrial countries are horizontal whereas most fdi investment in developing countries is vertical the fact that the significance of geographical variables on financial flows still remained even after controlling for the macroeconomic fundamentals is in contrast with the standard capital market model the results can however be reconciled if geographical factors can proxy for information costs which may in turn explain why country portfolios are still home biased the significant effect of distance on financial flows may also explain how idiosyn cratic shocks are spread i e contagion to other countries in the same region ultimately the geographical location of a country may determine its economic and financial integration into the world economy

judgment aggregation im possibility theorems the aggregation of individual judgments over interrelated propositions is a newly arising field of social choice theory i introduce several independence conditions on judgment aggregation rules each of which protects against a specific type of manipulation by agenda setters or voters i derive impossibility theorems whereby these independence conditions are incompatible with certain minimal requirements unlike earlier impossibility results the main result here holds for any non trivial agenda however independence conditions arguably undermine the logical structure of judgment aggregation i therefore suggest restricting independence to premises which leads to a generalised premise based procedure this procedure is proven to be possible if the premises are logically independent

the time varying volatility of macroeconomic fluctuations we investigate the sources of the important shifts in the volatility of us mac roeconomic variables in the postwar period to this end we propose the esti mation of dsge models allowing for time variation in the volatility of the structural innovations we apply our estimation strategy to a large scale model of the business cycle and find that shocks specific to the equilibrium condition of investment account for most of the sharp decline in volatility of the last two decades jel c51 e32

a macro finance model of the term structure monetary policy and the economy this paper develops and estimates a macro finance model that combines a canonical affine no arbitrage finance specification of the term structure with standard macroeconomic aggregate relationships for output and inflation from this new empirical formulation we obtain several interesting results 1 the latent term structure factors from finance no arbitrage models appear to have important macroeconomic and monetary policy underpinnings 2 there is no evidence of monetary policy inertia or a slow partial adjustment of the policy interest rate by the federal reserve and 3 both forward looking and backward looking elements play important roles in macroeconomic dynamics

macro factors and the affine term structure of interest rates this paper formulates an affine term structure model of bond yields from a dynamic stochastic general equilibrium model with observable macro state variables as the term structure factors model implications for the joint macro term structure dynamics are consistent with the empirical patterns from the var estimation model calibration and simulation exercises also provide clear macroeconomic interpretations of the latent term structure factors as found in the finance literature most of the slope factor movement can be explained by exogenous monetary policy shocks and the level factor movement is closely related to the technology shocks

comparing shocks and frictions in us and euro area business cycles a bayesian dsge approach this paper estimates a dsge model with many types of shocks and frictions for both the us and the euro area economy over a common sample period 1974 2002 the structural estimation methodology allows us to investigate whether differences in business cycle behaviour are due to differences in the type of shocks that affect the two economies differences in the propagation mechanism of those shocks or differences in the way the central bank responds to those economic developments our main conclusion is that each of these characteristics is remarkably similar across both currency areas copyright 2005 john wiley sons ltd

common and idiosyncratic disturbances in developed small open economies abstract using an estimated dynamic stochastic general equilibrium model i show that shocks to a common international stochastic trend explain on average about 10 of the variability of output in several small developed economies these shocks explain roughly twice as much of the volatility of consumption growth as the volatility of output growth when the model is expanded to include a common stationary productivity shock the model attributes around 23 of the variability of output to those international common innovations country specific disturbances account for the bulk of the volatility in the data substantial heterogeneity in the estimated parameters and stochastic processes translates into a rich array of impulse responses across countries

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

measuring the world economy this paper provides an empirical assessment of whether the world economy has become smaller in terms of economic distance over the last decades we adopt a cross sectional spatial econometric approach relating domestic output volatility to distance weighted averages of other countries output volatility using a sample of 135 countries and rolling 10 year time windows over the period 1955 to 2006 using descriptive measures test statistics and spatial econometric estimates we find that cross country interdependence was virtually insignificant in the early post war period but has increased strongly from the mid 1960s to the mid 1980s and remained at a high level since then results for the most recent period suggest that common shocks to output volatility have a magnified impact and roughly quadruplicate through international spillover effects which are transmitted through both trade and financial openness

agent based stock flow consistent macroeconomics towards a benchmark model abstract the paper moves from a discussion of the challenges posed by the crisis to standard macroeconomics and the solutions adopted within the dsge community although several recent improvements have enhanced the realism of standard models we argue that major drawbacks still undermine their reliability in particular dsge models still fail to recognize the complex adaptive nature of economic systems and the implications of money endogeneity the paper argues that a coherent and exhaustive representation of the inter linkages between the real and financial sides of the economy should be a pivotal feature of every macroeconomic model and proposes a macroeconomic framework based on the combination of the agent based and stock flow consistent approaches the papers aims at contributing to the nascent ab sfc literature under two fundamental respects first we develop a fully decentralized ab sfc model with several innovative features and we thoroughly validate it in order to check whether the model is a good candidate for policy analysis applications results suggest that the properties of the model match many empirical regularities ranking among the best performers in the related literature and that these properties are robust across different parameterizations second the paper has also a methodological purpose in that we try to provide a set or rules and tools to build calibrate validate and display ab sfc models

estimation of agent based models using sequential monte carlo methods abstract estimation of agent based models is currently an intense area of research recent contributions have to a large extent resorted to simulation based methods mostly using some form of simulated method of moments estimation smm there is however an entire branch of statistical methods that should appear promising but has to our knowledge never been applied so far to estimate agent based models in economics and finance markov chain monte carlo methods designed for state space models or models with latent variables this latter class of models seems particularly relevant as agent based models typically consist of some latent and some observable variables since not all the characteristics of agents would mostly be observable indeed one might often not only be interested in estimating the parameters of a model but also to infer the time development of some latent variable however agent based models when interpreted as latent variable models would be typically characterized by non linear dynamics and non gaussian fluctuations and thus would require a computational approach to statistical inference here we resort to sequential monte carlo smc estimation based on a particle filter this approach is used here to numerically approximate the conditional densities that enter into the likelihood function of the problem with this approximation we simultaneously obtain parameter estimates and filtered state probabilities for the unobservable variable s that drive s the dynamics of the observable time series in our examples the observable series will be asset returns or prices while the unobservable variables will be some measure of agents aggregate sentiment we apply smc to two selected agent based models of speculative dynamics with somewhat different flavor the empirical application to a selection of financial data includes an explicit comparison of the goodness of fit of both models

identifying the common component of international economic fluctuations a new approach in this paper we develop an aggregation procedure using time varying weights for constructing the common component of international economic fluctuations the methodology for deriving time varying weights is based on some stylised features of the data documented in the paper the model allows for a unified treatment of cyclical and seasonal fluctuations and also accommodates the dynamic propagation of shocks across countries we find evidence for a world business cycle as well as evidence for a distinct european common component we also find some evidence that macroeconomic fluctuations have become more closely linked across industrial economies in the period after 1973 the world economy has become more closely integrated in recent years due to increasing trade and financial flows across countries this has spurred interest in the question of how the ongoing phenomenon of globalisation has affected the transmission and propagation of business cycle fluctuations across national borders an important question in this context is whether a substantial fraction of economic fluctuations are country specific or if there exists a world business cycle which might be defined as fluctuations that are common across all countries more generally the comovement of macroeconomic aggregates across different countries has become a topic of increasing interest in both academic and policy circles these issues have implications in a number of dimensions an empirical analysis of the relative importance of country specific versus common international fluctuations is of relevance for determining the structure of certain classes of international business cycle models from a policy perspective strong comovement of output across countries at business cycle frequencies implies that external trade would be unlikely to play a significant role in dampening fluctuations domestic policies aimed at affecting the real exchange rate and thereby attempting to boost net exports in the short run would then tend to have limited impact the degree of synchronisation of business cycles across countries also has important implications for short run international policy coordination and for assessing the feasibility of monetary unions therefore identifying and analysing the common component of international economic fluctuations is relevant from a number of different perspectives

trade policy and productivity abstract previous studies on the determinants of productivity emphasized the role of trade and institutions but omitted trade policy due to endogeneity concerns this paper considers the role of one important element of trade policy free trade agreements ftas based on recent work on the determinants of ftas we suggest an instrument which is based on the propensity to enter an fta due to exogenous geographical characteristics we find that differences in institutional quality and trade due to variations in geography and trade policy have a sizeable effect on productivity and can explain the huge variation in per capita income across countries