intrinsic bubbles the case of stock prices several puzzling aspects of the behavior of united states stock prices may be explained by the presence of a specific type of rational bubble that depends exclusively on aggregate dividends the authors call bubbles of this type intrinsic bubbles because they derive all of their variability from exogenous economic fundamentals and none from extraneous factors intrinsic bubbles provide a more plausible empirical account of deviations from present value pricing than do the traditional examples of rational bubbles their explanatory potential comes partly from their ability to generate persistent deviations that appear to be relatively stable over long periods copyright 1991 by american economic association

decomposing the declining volatility of long term inflation expectations abstract the level and volatility of survey based measures of long term inflation expectations have come down dramatically over the past several decades to capture these changes in inflation dynamics we embed both short and long term expectations into a medium scale var model with stochastic volatility the model estimates attribute most of the marked decline in the volatility of expectations to smaller shocks to long run inflation expectations according to our estimates the volatility of shocks plummeted in the early to mid 1980s moved to a somewhat higher level that prevailed for much of the 1990s and then declined to and remained at very low levels

the impact of fat tails on equilibrium rates of return and term premia abstract we investigate the impact of ignoring fat tails observed in the empirical distributions of macroeconomic time series on the equilibrium implications of the consumption based asset pricing model with habit formation fat tails in the empirical distributions of consumption growth rates are modeled as a dampened power law process that nevertheless guarantees finiteness of moments of all orders this renders model implied mean equilibrium rates of return and equity and term premia finite comparison with a benchmark gaussian process reveals that accounting for fat tails lowers the model implied mean risk free rate by 20 percent raises the mean equity premium by 80 percent and the term premium by 20 percent bringing the model implications closer to their empirically observed counterparts fat tails also increase the model implied volatility of the risk free rate and the equity premium

generation capacity expansion analysis open loop approximation of closed loop equilibria in this paper we propose a methodology to approximate closed loop capacity equilibria using only open loop capacity equilibrium models in the closed loop model generation companies choose capacities that maximize their individual profit in the first stage while the second stage represents the conjectured price response market equilibrium in the open loop model firms simultaneously choose capacities and quantities to maximize their individual profit while each firm conjectures a price response to its output decisions the closed loop equilibrium model is an equilibrium problem with equilibrium constraints which belongs to a class of problems that is very hard to solve the open loop equilibrium model is much easier to solve however it is also less realistic with the approximation scheme proposed in this paper we are able to solve the closed loop model reasonably well when market behavior is closer to oligopoly than to perfect competition by smartly employing open loop models which reduces the computational time by two orders of magnitude we achieve this by transforming the open loop equilibrium problem into an equivalent convex quadratic optimization problem which can be solved efficiently finally a case study is presented in order to validate the proposed approximation scheme

learning and time varying macroeconomic volatility abstract this paper presents a dsge model in which agents learning about the economy can endogenously generate time varying macroeconomic volatility economic agents use simple models to form expectations and need to learn the relevant parameters their gain coefficient is endogenous and is adjusted according to past forecast errors the model is estimated using likelihood based bayesian methods the endogenous gain is jointly estimated with the structural parameters of the system the estimation results show that private agents appear to have often switched to constant gain learning with a high constant gain during most of the 1970s and until the early 1980s while reverting to a decreasing gain later on as a result the model can generate a pattern of volatility which is increasing in the 1970s and falling in the second half of the sample with a decline that can roughly match the magnitude of the so called great moderation in the 1984 2007 period the paper also documents how a failure to incorporate learning into the estimation may lead econometricians to spuriously find time varying volatility in the exogenous shocks even when these have constant variance by construction

the role of investment specific technological change in the business cycle this is a quantitative investigation of the importance of technological change speci c to new investment goods for postwar us aggregate uctuations a growth model that incorporates this form of technological change is calibrated to us data and simulated using the relative price of new equipment to identify the process driving investmentspeci c technology shocks the analysis suggests that this form of technological change is the source of about 30 of output uctuations 2000 elsevier science b v all rights reserved

monetary regime change and business cycles abstract this paper proposes a method to structurally estimate a model with a regime shift and evaluates the importance of acknowledging the break in the estimation we estimate a dsge model on swedish data taking into account the regime change in 1993 from exchange rate targeting to inflation targeting ignoring the break leads to spurious estimates accounting for the break suggests that monetary policy reacted strongly to exchange rate movements in the first regime and mostly to inflation in the second the sources of business cycles and their transmission mechanism are significantly affected by the exchange rate regime

on the utilisation controversy a theoretical and empirical discussion of the kaleckian model of growth and distribution this paper examines the utilisation controversy around the kaleckian model of growth and distribution we show that the federal reserve data on capacity utilisation which have been used by both sides of this debate are the wrong kind of data for the issue under examination instead a more appropriate measurement can be derived from the data on the average workweek of capital we argue that the long run dynamic adjustment proposed by kaleckian scholars lacks a coherent economic rationale we provide an alternative path towards the endogeneity of the desired utilisation at the micro and macro levels finally we examine the proposed adjustment mechanism econometrically our results verify the endogeneity of the normal utilisation rate

the quantitative importance of news shocks in estimated dsge models we estimate a dynamic stochastic general equilibrium dsge model with several frictions and both unanticipated and news shocks using quarterly u s data from 1954 to 2004 and bayesian methods we find that unanticipated shocks dominate news shocks in accounting for the unconditional variance of output consumption and investment growth interest rate and the relative price of investment the unanticipated shock to the marginal efficiency of investment is the dominant shock accounting for over 45 of the variance in output growth news shocks account for less than 15 of the variance in output growth within the set of news shocks nontechnology sources of news dominate technology news with wage markup news shocks accounting for about 60 of the variance share of both hours and inflation we find that in the estimated dsge model i the presence of endogenous countercyclical price and wage markups due to nominal frictions substantially diminishes the importance of news shocks relative to a model without these frictions and ii while there is little change in the estimated contributions of technology news when we restrict wealth effects on labor supply the contributions of nontechnology news shocks are relatively more sensitive

macroeconomic volatility and external imbalances abstract does macroeconomic volatility uncertainty affects accumulation of net foreign assets in oecd economies over the period 1970 2012 changes in country specific aggregate volatility are after controlling for a wide array of factors significantly positively associated with net foreign asset position a standard open economy model with time varying macroeconomic uncertainty can quantitatively account for this relationship the key mechanism is precautionary motive more uncertainty induces residents to save more and higher savings are in part channeled into foreign assets data and theory suggest that volatility is an important determinant of the medium long run evolution of external imbalances in developed countries

declining volatility in the u s automobile industry dramatic changes in the volatility of output occurred in the u s auto industry in the early 1980s namely output volatility declined the covariance of inventory investment and sales grew more negative and adjustments to production schedules which in earlier decades stemmed primarily from plants hiring and laying off workers were more often accomplished with changes in average hours per worker after the mid 1980s using a linear quadratic inventory model with intensive and extensive labor adjustments we show how all of these changes could have stemmed from one underlying factor a decline in the persistence of motor vehicle sales jel g31 l25 l62 m11

long run variation in capacity utilization in the presence of a fixed normal rate a generic kalecki robinson model of growth is developed that subject to different closures illustrates the different channels through which the economy can adjust to a change in demand conditions in the long run the closures are shown to have different implications for the behaviour of the rate of capacity utilization and hence whether and how the economy achieves a fully adjusted position equalization of the actual and normal rates of capacity utilization assuming that the normal rate of capacity utilization is exogenously fixed it is then shown that variation in the actual capacity utilization rate can nevertheless occur at least within limits without triggering harrodian instability this result emanates from a discontinuity in the investment function that is grounded in harrod s own macrodynamics so that it is ultimately the combination of harrodian and kaleckian dynamics that gives rise to long run variations in the actual rate of capacity utilization in the presence of a fixed normal rate aggregate and industry level us capacity utilization data are then used to calculate possible bands within which the rate of capacity utilization may vary without triggering harrodian instability a key finding is that the conditions necessary for the latter appear to be relatively rare

solving asset pricing models when the price dividend function is analytic we present a new method for solving asset pricing models which yields an analytic price dividend function of one state variable to illustrate our method we give a detailed analysis of abel s asset pricing model a function is analytic in an open interval if it can be represented as a convergent power series near every point of that interval in addition to allowing us to solve for the exact equilibrium price dividend function the analyticity property also lets us assess the accuracy of any numerical solution procedure used in the asset pricing literature

redistributive shocks and productivity shocks abstract a productivity innovation reduces labor share at impact making it countercyclical it subsequently produces a long lasting increase that peaks five years later at a level larger in absolute terms than the initial drop before slowly returning to average i e labor share overshoots we estimate a bivariate shock process to the production function that under competition in factor markets accounts for this overshooting we pose this process in an otherwise standard real business cycle economy and we find that the contribution of productivity innovations to the variance of hours is 1 of that in the standard rbc model

testing for indeterminacy an application to u s monetary policy reply this paper considers a prototypical new keynesian model in which the equilibrium is undetermined if monetary policy is passive the likelihood based estimation of dynamic equilibrium models is extended to allow for indeterminacies and sunspot fluctuations we construct posterior weights for the determinacy and indeterminacy region of the parameter space and estimates for the propagation of fundamental and sunspot shocks according to the estimated model u s monetary policy post 1982 is consistent with determinacy whereas the pre volcker policy is not we find that before 1979 indeterminacy substantially altered the propagation of shocks

stock market conditions and monetary policy in a dsge model for the u s abstract this paper investigates the interactions between stock market fluctuations and monetary policy within a dsge model for the u s economy first we design a framework in which fluctuations in households financial wealth are allowed but not necessarily required to exert an impact on current consumption this is due to the interaction in the financial markets of long time traders holding wealth accumulated over time with newcomers holding no wealth at all importantly we introduce nominal wage stickiness to induce pro cyclicality in real dividends additional nominal and real frictions are modeled to capture the pervasive macroeconomic persistence of the observables employed to estimate our model we fit our model to post wwii u s data and report three main results first the data strongly support a significant role of stock prices in affecting real activity and the business cycle second our estimates also identify a significant and counteractive response of the fed to stock price fluctuations third we derive from our model a microfounded measure of financial slack the stock price gap which we then contrast to alternative ones currently used in empirical studies to assess the properties of the latter to capture the dynamic and cyclical implications of our dsge model the behavior of our stock price gap is consistent with the episodes of stock market booms and busts occurred in the post wwii as reported by independent analyses and closely correlates with the current financial meltdown typically employed proxies of financial slack such as detrended log indexes or growth rates show limited capabilities of capturing the implications of our model consistent index of financial stress cyclical properties of the model as well as counterfactuals regarding shocks to our measure of financial slackness and monetary policy shocks are also proposed

monetary policy trend inflation and the great moderation an alternative interpretation with positive trend inflation the taylor principle does not guarantee a determinate equilibrium we provide new theoretical results on determinacy in new keynesian models with positive trend inflation and new empirical findings on the federal reserve s reaction function before and after the volcker disinflation to find that i while the fed likely satisfied the taylor principle before volcker the us economy was still subject to self fulfilling fluctuations in the 1970s ii the us economy switched to determinacy during the volcker disinflation and iii the switch reflected changes in the fed s response to macroeconomic variables and the decline in trend inflation jel e12 e23 e31 e32 e52

stochastic volatility and dsge models abstract this paper argues that a specification of stochastic volatility commonly used in dsge models may not be appropriate because the level of a process with this specification does not have any moments we suggest three ways to overcome the problem

long run risks in the term structure of interest rates estimation summary this paper estimates a model in which persistent fluctuations in expected consumption growth expected inflation and their time varying volatility determine asset price variation the model features epstein zin recursive preferences which determine the market price of macro risk factors analysis of the us nominal term structure data from 1953 to 2006 shows that agents dislike high uncertainty and demand compensation for volatility risks also the time variation of the term premium is driven by the compensation for inflation volatility risk which is distinct from consumption volatility risk the central role of inflation volatility risk in explaining the time varying term premium is consistent with other empirical evidence including survey data in contrast the existing long run risks literature emphasizes consumption volatility risk and ignores inflation specific time varying volatility the estimation results of this paper suggest that inflation specific volatility risk is essential for fitting the time series of the us nominal term structure data copyright 2012 john wiley sons ltd

two stage robust generation expansion planning a mixed integer linear programming model this paper presents a new uncertainty handling framework for optimal generation expansion planning gep amalgamating the notions of single stage and two stage robust optimization ro the proposed multiyear robust gep methodology as a tractable mixed integer linear programming optimization problem copes with the inherent planning uncertainties associated with forecasted electricity load demand as well as estimated investment and operation costs through distribution free bounded intervals producing polyhedral uncertainty sets the optimal generation expansion plan obtained from the proposed ro approach is immunized against worst case planning uncertainties considering the adopted degree of conservatism for each uncertainty set therefore the proposed methodology is capable of controlling the robustness of the optimal investment schedule regarding the enforced planning uncertainties simulation results demonstrate the efficacy and efficiency of the proposed ro framework throughout gep studies

the implications of inflation in an estimated new keynesian model abstract this paper studies the steady state and dynamic consequences of inflation in an estimated dynamic stochastic general equilibrium model of the u s economy it is found that 10 percentage points of inflation entail a steady state welfare cost as high as 13 of annual consumption this large cost is mainly driven by staggered price contracts and price indexation the transition from high to low inflation inflicts a welfare loss equivalent to 0 53 of annual consumption the role of nominal real frictions as well as that of parameter uncertainty is also addressed

asset prices and consumption in a model of perpetual youth i construct a general equilibrium overlapping generations model with heterogeneous agents and obtain analytical solutions to asset prices consumption and asset demands individuals have constant absolute risk aversion and a constant probability of dying agents have three stages in their lives in the first stage agents are young and constrained from investing in stocks in the second stage they work and in the third they retire i analyze asset prices numerically and with comparative statics changing any exogenous parameter has large effects on asset prices when there are large demographic changes to the population constrained from investing in stocks

labor and investment frictions in a real business cycle model abstract this paper develops a prototype real business cycle model in which labor and investment frictions may compete directly with technology shocks in accounting for fluctuations in the postwar us economy using ireland s 2004a a method for taking models to the data journal of economic dynamics and control 28 1205 1226 methodology we establish that both types of friction are quantitatively important technology shocks still explain a substantial fraction of the fluctuations in aggregate output as the baseline real business cycle model predicts formal hypothesis tests suggest that changes in the recurrence of shocks frictions and structural parameters all play a role in accounting for the shift in the time series properties of the data between the periods before and after 1980

computing the risky steady state of dsge models this note describes a simple procedure for solving the risky steady state in medium scale macroeconomic models this is the point where agents choose to stay at a given date if they expect future risk and if the realization of shocks is 0 at this date coeurdacier n rey h winant p 2011 the risky steady state the american economic review 101 3 398 401 this new procedure is a direct method which makes use of a second order approximation of the macroeconomic model around its deterministic steady state thus avoiding the need to employ an iterative algorithm to solve a fixed point problem

multivariate estimates of the permanent components of gnp and stock prices the economic assumption that a present value relation holds between consumption and income and between stock prices and dividends or the statistical assumption that the consumption income ratio and the dividend price ratio are stationary imply that the permanent or random walk component in each series of a pair must be the same as the permanent component in the other series of a pair either assumption then allows us to estimate the variance of the permanent component of one series gnp stock prices from the variance of the permanent component of the other consumption dividends or from the covariance of the two series permanent components this paper presents such estimates and finds that the permanent components are about half those estimated by similar univariate methods a series of recent papers has examined the importance of a potential unit root to the behavior of real gnp campbell and mankiw 1986 1987 cochrane 1986 clark 1987 and stock prices fama and french 1986 lo and mai if by 0 the series is stationary the response can be any real number which is the innovation in these estimates instead of forcing us to ask the dichotomous question is there a unit root or not they allow us to continuously measure the importance of a potential unit root the actual estimating technique used in these papers varied somewhat cochrane poterba and summers and lo and mai if a series is stationary the variance of k differences will tend to a precursor to this paper appeared under the title spectral density estimates of unit roots we thank masanao aoki lam hansen masao ogaki and chris sims for helpful suggestions the computer programs and data used in this paper are available on request from the authors

var analysis and the great moderation post world war ii us macroeconomic history is usually divided into two distinct subperiods the former period which extends up to the end of the volcker disinflation is characterized by a significant extent of macroeconomic turbulence with highly volatile inflation and output growth the latter period from the end of the volcker disinflation up to the present day is marked in contrast by significantly smaller volatilities for both inflation and output growth these dramatic changes in the reduced form properties of the us economy over the last several decades char acterize a phenomenon known as the great moderation see in particular chang jin kim and charles nelson 1999 margaret mcconnell and gabriel perez quiros 2000 a vast empirical literature has investigated the source s of the great moderation in an attempt to disentangle the relative contributions of two main explanations good policy and good luck based on time varying or markov switching structural var methods the good luck hypoth esis has been advocated by a number of authors including james h stock and mark w watson 2003 giorgio e primiceri 2005 christopher sims and tao zha 2006 and luca gambetti evi pappa and fabio canova 2008

weak instrument robust tests in gmm and the new keynesian phillips curve we discuss weak instrument robust statistics in gmm for testing hypotheses on the full parameter vector or on subsets of the parameters we use these test procedures to reexamine the evidence on the new keynesian phillips curve model we find that u s postwar data are consistent with the view that inflation dynamics are predominantly forward looking but we cannot rule out the presence of considerable backward looking dynamics moreover the phillips curve has become flatter recently and this is an important factor contributing to its weak identification

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

capacity expansion equilibria in liberalized electricity markets an epec approach this paper presents a novel way to model the generation capacity expansion problem in a liberalized framework via a multi year bilevel equilibrium model in the upper level the competing generation companies maximize their individual profits while the lower level represents the market using a conjectured price response approach which allows us to vary the strategic spot market behavior to see how much the reigning competitive behavior impacts investment decisions the bilevel equilibrium model is formulated as an equilibrium problem with equilibrium constraints transformed into a mixed integer linear program and solved as such using diagonalization in order to verify equilibria we present a case study to apply this new modeling approach and to demonstrate that the proposed equilibrium problem with equilibrium constraints can have multiple solutions whose respective investments can vary

housing credit constraints and macro stability the secondary mortgage market and reduced cyclicality of residential investment author s peek joe wilcox james a abstract as secondary mortgage markets developed and grew over the past two decades fluctuations in residential investment and in mortgage balances were much smaller than they had been prior to the 1980s we hypothesize that by reducing the volatility of the total supply of funds to mortgage markets larger secondary mortgage markets smm dampened the responses of residential investment to income and to interest rates and thereby contributed importantly to the great moderation in volatility of the u s economy our empirical results provide some evidence that the smm did continually reduce the volatility of residential investment over the past two decades by tempering its sensitivities to income and to interest rates

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

investment adjustment costs an empirical assessment we evaluate empirical evidence for costs that penalize changes in investment using us industry data in aggregate models such investment adjustment costs have been introduced to help account for a variety of business cycle and asset market phenomena so far no attempt has been made to estimate these costs directly at a disaggregated level we consider an industry model with investment adjustment costs and estimate its parameters using generalized methods of moments the ndings indicate small costs associated with changing the ow of investment at the industry level the weighted average of the industry elasticities with respect to the shadow price of capital which depends inversely on the adjustment cost parameter is more than seven times larger than the largest estimate based on aggregate data we examine potential sources which may account for the large industry aggregate dierence overall our results suggest

solving asset pricing models with stochastic volatility abstract this paper provides a closed form solution for the price dividend ratio in a standard asset pricing model with stochastic volatility the growth rate of the endowment is a first order gaussian autoregression while the stochastic volatility innovations can be drawn from any distribution for which the moment generating function exists the solution is useful in allowing comparisons among numerical methods used to approximate the nontrivial closed form the closed form solution reveals that when using perturbation methods around the deterministic steady state the approximate solution needs to be sixth order accurate in order for the parameter capturing the conditional standard deviation of the stochastic volatility process to be present

consumption asset pricing with stable shocks exploring a solution and its implications for mean equity returns abstract we study the consumption based asset pricing model due to lucas econometrica 46 1978 1429 the exogenous endowment sequence is modeled as a linear stochastic process driven by stable shocks in an otherwise standard framework the gaussian process emerges as a special case we derive exact analytical solutions for asset prices and returns and provide conditions under which these exist we also study the ability of the model to generate realistic values of observed mean rates of return

the kaleckian model of growth and distribution and its neo ricardian and neo marxian critiques this paper analyzes the newer kaleckian models of growth and distribution and the criticisms that have been addressed to them by neo marxian and neo ricardian authors the models discussed assume overhead labor costs and target return pricing the main issues are the form of the investment function and the notions of normal rates of profit and of normal rates of capacity utilization despite the relevance of and often the similarity between the neo marxian and neo ricardian critiques it is shown that the main features of the kaleckian growth model may still be preserved c 1995 academic press limited copyright 1995 by oxford university press

huggett economies with multiple stationary equilibria abstract i obtain a closed form solution to a huggett economy with constant absolute risk aversion cara utility when the vector of individual state variables follows a var 1 process with an arbitrary shock distribution the stationary equilibrium is unique if the income process is ar 1 but not necessarily so otherwise with gaussian shocks i provide general sufficient conditions for the existence of at least three equilibria when the income process is either arma 1 1 ar 2 or has a persistent transitory pt representation with negatively correlated shocks the possibility of multiple equilibria calls for caution in comparative statics exercises and policy analyses using heterogeneous agent models as an illustration i provide an example in which the welfare implication of changing the income risk goes in opposite directions depending on the choice of equilibrium

solving asset pricing models with gaussian shocks this paper provides a closed form solution for the price dividend ratio in a standard asset pricing model when the growth rate of the endowment is a first order gaussian autoregression it determines the conditions under which this solution is bounded the findings are useful in allowing comparisons among numerical methods used to approximate the nontrivial closed form the solution method is extended to accommodate multivariate and higher ordered autoregressive processes

productivity growth transparency and monetary policy abstract this study examines whether central bank transparency about views of future productivity growth contributes to stabilizing macroeconomic fluctuations in a standard new keynesian model the central bank and private agents make their subjective estimates on the persistence of productivity growth in this situation if private agents believe that the central bank s projections include forecast errors on future productivity growth these beliefs can destabilize private agents own expectations because the central bank s forecast errors may lead to policy mistakes in the future consequently central bank transparency does not necessarily stabilize the variations of the output gap and inflation rate the central bank should respond strongly to the inflation rate if the impact of transparency is uncertain

asset pricing in a lucas fruit tree economy with the best and worst in mind this paper studies a lucas 1978 fruit tree economy under the assumption that the agents are choquet expected utility ceu rather than standard expected utility decision makers more speci cally the agents non additive beliefs about the economy s dividend payment process are modelled as neo additive capacities so that the agents decision behavior emphasizes the best respectively worst possible economic scenarios in contrast to existing models of lucas type economies with ambiguity averse agents epstein and wang 1994 which ensure dynamic consistency through heavy restrictions on admissible ambiguity attitudes my ap

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

the 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

revealing the preferences of the us federal reserve we use bayesian methods to estimate changes in us post war monetary policy in the smets and wouters model we perform the estimations by allowing for a break in monetary policy at the time of volcker s appointment as chairman this enables us to capture changes in the monetary policy regime introduced by volcker during the volcker greenspan period we find support for the assumption that monetary policy in the volcker greenspan period performed optimally under commitment our estimation strategy allows us to estimate the preferences of the us federal reserve in the volcker greenspan period where the main objective of policy appears to be inflation followed by interest rate stabilization output growth and interest rate smoothing we find that the great moderation of output growth is explained by a combination of two factors the decrease in the volatility of the structural shocks and the improved monetary policy conduct inflation stabilization however is mainly due to the change in monetary policy that took place at the beginning of volcker s mandate copyright 2010 john wiley sons ltd

inventories and the business cycle an equilibrium analysis of s s policies we develop an equilibrium business cycle model where nonconvex delivery costs lead firms to follow s s inventory policies calibrated to postwar us data the model reproduces two thirds of the cyclical variability of inventory investment moreover it delivers strongly procyclical inventory investment greater volatility in production than sales and a countercyclical inventory to sales ratio our model challenges several prominent claims involving inventories including the widely held belief that they amplify aggregate fluctuations despite the comovement between inventory investment and final sales gdp volatility is essentially unaltered by inventory accumulation because procyclical inventory investment diverts resources from final production thereby dampening fluctuations in sales

fifth order perturbation solution to dsge models abstract this paper derives a fifth order perturbation solution to dsge models the paper develops a new notation that reduces the notational complexity of high order solutions and yields a faster code the new notation consists of new matrix forms of high order multivariate chain rules and a new representation of the model as a function of one vector variable the algorithm that implements the new notation is between 3 and 55 times faster than dynare depending on model size and solution order

combining var and dsge forecast densities a popular macroeconomic forecasting strategy utilizes many models to hedge against instabilities of unknown timing see among others stock and watson 2004 clark and mccracken 2010 and jore et al 2010 existing studies of this forecasting strategy exclude dynamic stochastic general equilibrium dsge models despite the widespread use of these models by monetary policymakers in this paper we use the linear opinion pool to combine inflation forecast densities from many vector autoregressions vars and a policymaking dsge model the dsge receives a substantial weight in the pool at short horizons provided the var components exclude structural breaks in this case the inflation forecast densities exhibit calibration failure allowing for structural breaks in the vars reduces the weight on the dsge considerably but produces well calibrated forecast densities for inflation

imperfect credibility and inflation persistence in this paper we formulate a dynamic general equilibrium model with staggered nominal contracts in which households and rms use optimal ltering to disentangle persistent and transitory shifts in the monetary policy rule the calibrated model accounts quite well for the dynamics of output and insation during the volcker disinsation and implies a sacri ce ratio very close to the estimated value our approach indicates that insation persistence and substantial costs of disinsation can be generated in an optimizing agent framework without relaxing the assumption of rational expectations or relying on arbitrary modi cations to the aggregate supply relation jel classi cation e31 e32 e52

the structural dynamics of u s output and inflation what explains the changes we examine the dynamics of u s output and inflation using a structural time varying coefficients vector autoregression there are changes in the volatility of both variables and in the persistence of inflation but variations are statistically insignificant technology shocks explain changes in output volatility real demand disturbances variations in the persistence and volatility of inflation we detect important time variations in the transmission of technology shocks to output and demand shocks to inflation and significant changes in the variance of technology and of monetary policy shocks

exact solution of asset pricing models with arbitrary shock distributions abstract the paper provides an exact solution to standard asset pricing models for any distribution of shocks to endowment s growth rate it determines the conditions that guarantee the existence of a stationary bounded equilibrium and examines these conditions for an edgeworth expansion distribution of the shocks the results are extended to the case of multivariate asset pricing models

has monetary policy become more effective we investigate the implications of changes in the structure of the u s economy for monetary policy effectiveness estimating a vector autoregression over the pre and post 1980 periods we provide evidence of a reduced effect of monetary policy shocks in the latter period we estimate a structural model that replicates well the economy s response in both periods and perform counterfactual experiments to determine the source of the change in the monetary transmission mechanism and in the economy s volatility we find that by responding more strongly to inflation expectations monetary policy has stabilized the economy more effectively in the post 1980 period

equilibria in an oligopolistic electricity pool with stepwise offer curves we study the equilibria reached by strategic producers in a pool based network constrained electricity market the behavior of each producer is modeled by a mathematical program with equilibrium constraints mpec whose objective is maximizing profit and whose complementarity constraints describe market clearing the joint solution of all these mpecs constitutes an equilibrium problem with equilibrium constraints epec the equilibria associated with the epec are analyzed by solving the strong stationarity conditions of all mpecs which can be linearized without approximation by mixed integer linear programming milp techniques the resulting mixed integer linear conditions can be reformulated as an optimization problem that allows establishing diverse objectives to differentiate among alternative equilibria

learning and the great moderation we study a stylized theory of the volatility reduction in the u s after 1984 the great moderation which attributes part of the stabilization to less volatile shocks and another part to more difficult inference on the part of bayesian households attempting to learn the latent state of the economy we use a standard equilibrium business cycle model with technology following an unobserved regime switching process after 1984 according to kim and nelson 1999a the variance of u s macroeconomic aggregates declined because boom and recession regimes moved closer together keeping conditional variance unchanged in our model this makes the signal extraction problem more difficult for bayesian households and in response they moderate their behavior reinforcing the effect of the less volatile stochastic technology and contributing an extra measure of moderation to the economy we construct example economies in which this learning effect accounts for about 30 of a volatility reduction of the magnitude observed in the postwar u s data

money demand heterogeneity and the great moderation abstract a forward looking model of the demand for money based on heterogeneous and sluggish portfolio adjustment can simultaneously account for the low short run and high long run semi elasticities reported in the literature the parameter estimates from the model for the short run and long run interest semi elasticities are 1 04 and 13 16 respectively a simulated version of the model suggests that the great moderation can be partially attributed to financial innovations in the late 1970s when moving toward a more flexible portfolio the model can account for almost one third of the observed decline in the volatilities of output consumption and investment

generation capacity expansion in liberalized electricity markets a stochastic mpec approach this paper proposes a bilevel model to assist a generation company in making its long term generation capacity investment decisions considering uncertainty regarding the investments of the other generation companies the bilevel formulation allows for the uncoupling of investment and generation decisions as investment decisions of the single investing generation company are taken in the upper level with the objective to maximize expected profits and generation decisions by all companies are considered in the lower level the lower level represents the oligopolistic market equilibrium via a conjectured price response formulation which can capture various degrees of strategic market behavior like perfect competition the cournot oligopoly and intermediate cases

co planning of investments in transmission and merchant energy storage suitably located energy storage systems are able to collect significant revenue through spatiotemporal arbitrage in congested transmission networks however transmission capacity expansion can significantly reduce or eliminate this source of revenue investment decisions by merchant storage operators must therefore account for the consequences of potential investments in transmission capacity by central planners this paper presents a tri level model to co optimize merchant electrochemical storage siting and sizing with centralized transmission expansion planning the upper level takes the merchant storage owner s perspective and aims to maximize the lifetime profits of the storage while ensuring a given rate of return on investments the middle level optimizes centralized decisions about transmission expansion the lower level simulates market clearing the proposed model is recast as a bi level equivalent which is solved using the column and constraint generation technique a case study based on a 240 bus 448 line testbed of the western electricity coordinating council interconnection demonstrates the usefulness of the proposed tri level model

the lucas critique and the stability of empirical models this paper re considers the empirical relevance of the lucas critique using a dsge sticky price model in which a weak central bank response to inflation generates equilibrium indeterminacy the model is calibrated on the magnitude of the historical shift in the federal reserve s policy rule and is capable of generating the decline in the volatility of inflation and real activity observed in u s data using monte carlo simulations and a backward looking model of aggregate supply and demand we show that shifts in the policy rule induce breaks in both the reduced form coefficients and the reduced form error variances the statistics of popular parameter stability tests are shown to have low power if such heteroskedasticity is neglected in contrast when the instability of the reduced form error variances is accounted for the lucas critique is found to be empirically relevant for both artificial and actual data

the decline in u s output volatility explanations for the decline in u s output volatility since the mid 1980s include better policy good luck and technological change our multiple break estimates suggest that reductions in volatility since the mid 1980s extend not only to manufacturing inventories but also to sales this finding along with a concentration of the reduction in the volatility of inventories in materials and supplies and the lack of a significant break in the inventory sales covariance imply that new inventory technology cannot account for most of the decline in output volatility

perturbations in dsge models an odd derivatives theorem abstract this paper extends a classical result in portfolio theory about the effect of risk on value functions to its effect more generally on policy functions if odd moments of shocks are zero up to some order then the odd order marginal effects on value and policy functions of introducing these shocks are zero as well mathematically all coefficients of corresponding odd order in the perturbation parameter are zero if shocks are symmetric e g normally distributed then this holds for all odd orders the main theorem 1 generalizes past results on perturbations and unifies their economic intuition 2 improves the computation of stochastic coefficients and 3 illustrates how to derive properties of high order perturbations through simple induction

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

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

mean reversion in equilibrium asset prices this paper demonstrates that negative serial correlation in long horizon stock returns is consistent with an equilibrium model of asset pricing when investors display only a moderate desire to smooth their consumption commonly used measures of mean reversion in stock prices calculated from historical returns data nearly always lie within a 60 percent confidence interval of the median of the monte carlo distributions implied by the authors equilibrium model from this evidence the authors conclude that the degree of serial correlation in the data could plausibly have been generated by their model copyright 1990 by american economic association

on the fit of new keynesian models this article provides new tools for the evaluation of dynamic stochastic general equilibrium dsge models and applies them to a large scale new keynesian model we approximate the dsge model by a vector autoregression and then systematically relax the implied cross equation restrictions and document how the model fit changes we also compare the dsge model s impulse responses to structural shocks with those obtained after relaxing its restrictions we find that the degree of misspecification in this large scale dsge model is no longer so large as to prevent its use in day to day policy analysis yet is not small enough to be ignored

a note on some limitations of crra utility abstract in a standard environment for choice under uncertainty with constant relative risk aversion crra the existence of expected utility is fragile with respect to changes in the distributions of random variables changes in prior information or the assumption of rational expectations

some instability puzzles in kaleckian models of growth and distribution a critical survey we tackle the issue of the possible instability of the kaleckian distribution and growth model distinguishing between keynesian and harrodian instability we review various mechanisms that have been proposed by critics of the kaleckian model to tame harrodian instability while bringing back the rate of utilisation to its normal rate we find that the mechanisms that have been suggested are far from convincing therefore we conclude that it may be premature for the critics of the kaleckian model to dismiss the endogeneity of the rate of capacity utilisation in long run growth equilibrium copyright the author 2010 published by oxford university press on behalf of the cambridge political economy society all rights reserved oxford university press

the thrift crisis mortgage credit intermediation and housing activity this paper evaluates the influence of periodic disruptions in the thrift industry on mortgage credit intermediation and housing activity results of the analysis indicate that disruptions in the thrift industry during the early 1980s imposed real costs on the economy by reducing the amount of mortgage credit intermediation estimation findings indicate a sizable mortgage interest rate premium stemming from the loss in thrift intermediation services during the early 1980s those higher mortgage rates served to dampen housing demand in turn exacerbating the cyclical decline in contrast empirical findings for the post recession period of the 1980s indicates a severing of the link between mortgage interest rates and thrift provision of mortgage credit copyright 1995 by ohio state university press

renewable generation expansion under different support schemes a stochastic equilibrium approach abstract following the deregulation of electricity markets a current challenge of policy makers is to facilitate the transition to a sustainable power system at the highest welfare for society in this paper we investigate the efficiency of different support schemes such as a feed in tariff a feed in premium and tradable green certificates with respect to incentivizing the required investments in renewable generation we consider a number of generation expansion problems and formulate stochastic equilibrium models that account for uncertainty in demand and renewable supply the risk aversion of investors and the competitiveness of the market the problem of the policy maker is formulated as a mathematical program with equilibrium constraints mpec and as a non linear complementarity problem ncp for the feed in schemes and the certificate market respectively our models are solved for a small illustrative example and a larger case study based on the danish power system the results confirm that the main driver for the optimal choice of renewable support scheme is the aversion of power producers towards price and volume risk while the competitiveness of the market rarely affects such choice

explaining output volatility the case of taxation this paper presents strong empirical evidence that the observed heterogeneity of output volatility across countries and over time is partly endogenous in particular based on a closed form solution we obtain a long run equilibrium relationship between taxes and output volatility in the stochastic neoclassical growth model by showing that asymptotically the variance of output growth rates is affected by the level of taxes without affecting the mean we estimate the tax semi elasticities on output volatility and provide convincing empirical evidence that taxes are important to understand differences in output volatility among oecd countries

the dynamic effects of neutral and investment specific technology shocks the neoclassical growth model is used to identify the short run effects of neutral technology shocks which affect the production of all goods homogeneously and investment specific shocks which affect only investment goods the real equipment price crucial for identifying the investment shocks experiences an abrupt increase in its average rate of decline in 1982 so the analysis is based on a split sample on the basis of the preferred specification the two technology shocks account for 73 percent of hours and 44 percent of output s business cycle variation before 1982 and 38 percent and 80 percent afterward the shocks also account for more than 40 percent of hours and 58 percent of output s forecast errors over a three to eight year horizon in both samples the majority of these effects are driven by the investment shocks

on the existence of expected utility with crra under stur abstract this note shows that in a standard framework for choice under uncertainty expected utility fails to exist with constant relative risk aversion crra when the endowment follows a stochastic unit root stur process

identifying the sources of instabilities in macroeconomic fluctuations abstract this paper investigates the sources of the substantial decrease in output growth volatility in the mid 1980s by identifying which of the structural parameters in a representative new keynesian and structural var models changed overturning conventional wisdom we show that the great moderation was due not only to changes in shock volatilities but also to changes in monetary policy parameters as well as in the private sector s parameters the great moderation was previously attributed to good luck because the alternative sources of instabilities appear to have offsetting effects on output volatility and therefore were impossible to detect using existing techniques