econometric estimation of foresight tax policy and investment in the united states we develop a method for measuring the foresight agents have we first dichotomize an agent s information at current date t into knowledge up to date t 1 f and expectations after t 1 f we then form a residual based test statistic that allows us to compare prediction errors for econometric models based on different values of f we illustrate the method examining investment around tax reforms to measure the foresight firms have about tax policy in this illustration current investment appears to reflect currently available information but little foresight other than foresight of enacted policy changes

dynamic scoring alternative financing schemes abstract neoclassical growth models predict that reductions in capital or labor income tax rates are expansionary when lump sum transfers are used to balance the government budget this paper explores the consequences of bond financed tax reductions that bring forth a range of possible offsetting policies including future government consumption capital tax rates or labor tax rates through the resulting intertemporal distortions current tax cuts can be expansionary or contractionary the paper also finds that more aggressive responses of offsetting policies to debt engender less debt accumulation and less costly tax cuts

asymmetric price adjustment and economic fluctuations this paper considers a possible explanation for asymmetric adjustment of nominal prices the authors present a menu cost model in which positive trend inflation causes firms relative prices to decline automatically between price adjustments in this environment shocks that raise firms desired prices trigger larger price responses than shocks that lower desired prices the authors use this model of asymmetric adjustment to address three issues in macroeconomics the effects of aggregate demand the effects of sectoral shocks and the optimal rate of inflation copyright 1994 by royal economic society

multiple equilibrium overnight rates in a dynamic interbank market game abstract we analyse a two period model of the interbank market i e the market where banks trade liquidity we assume that banks do not take the interbank interest rate as given but instead negotiate on interest rates and transaction volumes with each other the solution concept applied is the shapley value we show that there are a multiplicity of average equilibrium interest rates of the first period so that the average interest rate in this period does not convey any information on the expected liquidity situation on the interbank market as the banks control not only the transaction volumes but also the interest rates they can leave the interest rates constant and adjust the transaction volumes when for example a liquidity deficit becomes more likely

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

regime dependence of the fiscal multiplier abstract after the financial market meltdown of the years 2007 2008 the obama administration responded with large fiscal stimulus package yet the reaction to this stimulus has been diverse some predicted a multiplier effect in the order of 1 5 others argued that the multiplier will be less than 0 5 such multiplier estimates typically stem from estimated linear vector autoregressions vars or linearized versions of dsge models in this paper we argue that neither conventional var analysis nor linearized dgse models may be appropriate to evaluate demand effects arising from such a stimulus package the reason is as recent research suggests that the timing of demand shocks matters to assess the multiplier s variability we adopt a regime dependent var approach as is shown in detail our model specification is grounded on theoretical considerations the empirical analysis presented here suggests that a regime dependent var specification is favored for u s output and employment data and that the standard one regime var methodology is inappropriate for analyzing multi regime processes although we employ a nonlinear var framework the chosen setup allows the use of largely familiar macroeconometric modeling tools estimating a two regime var we show that the fiscal multiplier varies with the state of the business cycle and the particular specifics of the measure taken for the u s we find for example the fiscal expansion multiplier is much higher in a regime of a low economic activity than in a regime of high activity as we also show it is size dependent

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

twin picks disentangling the determinants of risk taking in household portfolios this paper investigates risk taking in the liquid portfolios held by a large panel of swedish twins we document that the portfolio share invested in risky assets is an increasing and concave function of financial wealth leading to different risk sensitivities across investors human capital which we estimate directly from individual labor income also affects risk taking positively while internal habit and expenditure commitments tend to reduce it our microfindings lend strong support to decreasing relative risk aversion and habit formation preferences furthermore heterogeneous risk sensitivities across investors help reconcile individual preferences with representative agent models

the output and welfare effects of government spending shocks over the business cycle how does the output response to a change in government spending vary over the business cycle what are the welfare eects of spending shocks this paper studies the state dependence of the output and welfare eects of shocks to government purchases in a dsge model with real and nominal frictions and a rich scal nancing structure both the output multiplier the change in output for a one dollar change in government spending and the welfare multiplier the consumption equivalent change in welfare for the same change in spending move signicantly across states but tend to co move negatively with one another in an historical simulation the output multiplier is countercyclical correlation with detrended output of 0 4 and strongly negatively correlated with the welfare multiplier correlation between multipliers of 0 9

the information in the high yield bond spread for the business cycle evidence and some implications the market for high yield below investment grade corporate bonds developed in the middle 1980s we show that since this time the high yield spread has had significant explanatory power for the business cycle we interpret this finding as possibly symptomatic of financial factors at work in the business cycle along the lines suggested by the financial accelerator we also show that over this period the high yield spread outperforms other leading financial indicators including the term spread the paper bill spread and the federal funds rate we conjecture that changes in the conduct of monetary policy over time may account for the reduced informativeness of these alternative indicators all of which are tied closely to monetary policy copyright 1999 by oxford university press

tax disturbances and real economic activity in the postwar united states abstract this paper investigates the macroeconomic effects of cyclical fluctuations in marginal tax rates it finds that systematically including tax variables in a standard real business cycle model substantially improves the model s ability to reproduce basic facts about postwar u s business cycle fluctuations in particular modeling fluctuations in personal and corporate income tax rates increases the model s predicted relative variability of hours and decreases its predicted correlation between hours and average productivity fluctuations in tax rates produce large substitution effects that alter the leisure labor supply decision

transmission of business cycle shocks between the us and the euro area we analyse the transmission of structural shocks between the us and the euro area within a two country vector autoregressive var framework for that purpose we simultaneously identify cost push demand and monetary policy shocks for both countries using sign restrictions our results show that domestic shocks explain the largest share of the forecast error variances for gross domestic product gdp consumer prices and interest rate in both countries in the short run whilst spillovers from the other country and global factors gain importance in the medium run the strength of the shock transmission between the two countries is quite symmetric our approach to the identification of structural shocks allows us to construct confidence bands that account both for estimation and identification uncertainty we find impulse responses to domestic shocks to be significant while spillovers across countries are insignificant

international trade and business cycles is vertical specialization the missing link within academic and policy circles it is a given that international trade is important in transmitting business cycles from one country to another most analyses of the effects of the 1997 1998 asia currency crisis on the world economy focused on the trade linkages between the asian crisis countries and the rest of the world with mounting evidence of a slowdown in u s growth questions have already been raised about the effect of a reduction in u s imports on emerging economies indeed the metaphor when the u s sneezes europe catches a cold is often invoked to highlight the importance of these linkages recent empirical research has reaffirmed the above wisdom by finding that pairs of countries with stronger international trade linkages tend to have more highly correlated business cycles the goal of this paper is to examine whether these findings can be explained by standard international business cycle models we focus on the model by david backus et al 1994 which is the workhorse two good internationalbusiness cycle model in the backus et al 1994 model trade is induced by an armington aggregator which combines domestic and foreign intermediate goods to produce the final good while the aggregator has the drawback of forcing the specialization pattern to be determined in advance flying in the face of trade theory it has been very useful in quantitative and empirical applications we add transportation costs to the model in order to be consistent with the empirical research frankel and rose 1998 clark and van wincoop 2001 which deals with the endogeneity of trade by employing instrumental variables such as distance and adjacency we simulate the model and compute the effect of different transportation costs different trade intensities on the correlation of business cycles our main result is that the standard international business cycle model cannot deliver results that are quantitatively consistent with the recent empirical work in a world of fully integrated asset markets the model delivers a qualitatively counterfactual result as high trade intensity is associated with lower businesscycle correlations under portfolio autarky the model delivers increased correlations as trade intensity increases but the increased correlation is only a fraction of what it is in the data we then introduce the idea that an increasing amount of trade is vertical or fragmented countries increasingly specialize in particular stages of a good s production sequence as opposed to producing the entire good allowing for more of this back and forth trade might lead to greater business cycle correlation responsiveness to stronger trade ties however we find that adding the simplest form of vertical specialization to the model also falls short

some unpleasant properties of loglinearized solutions when the nominal rate is zero does fiscal policy have large and qualitatively different effects on the economy when the nominal interest rate is zero an emerging consensus in the new keynesian nk literature is that the answer to this question is yes evidence presented here suggests that the nk model s implications for fiscal policy at the zero bound may not be all that different from its implications for policy away from it for a range of empirically relevant parameterizations employment increases when the labor tax rate is cut and the government purchase multiplier is less than 1 05

the world is not enough small open economies and regional dependence in this paper we explicitly introduce regional factors into a global dynamic factor model we combine new open economy factor models emphasizing global shocks with the recent findings of regional importance in the business cycle synchronization literature the analysis is applied to a large panel of domestic data for four small open economies we find that global and regional shocks explain roughly 30 and 20 percent respectively of the business cycle variation in all countries while global shocks have most impact on trade variables regional shocks explain a relatively large share of the variation in cost variables

the state dependent effects of tax shocks abstract this paper studies the state dependent effects of shocks to tax rates we begin with a stylized model in which clean analytical expressions are available the model predicts that a tax rate cut is most stimulative for output in periods in which output is relatively high the model is also used to discuss some conceptual issues related to the construction of tax multipliers we then consider a medium scale dsge model with tax rates on labor and capital income and on consumption the model is solved via a third order perturbation consonant with the intuition from the analytical model tax multipliers for all three types of tax rates vary significantly across states and are most stimulative for output in states in which output is high to evaluate the normative desirability of tax cuts as a tool to combat recessions we also study the properties of the tax cut welfare multiplier which measures the change in aggregate welfare conditional on a tax rate change in contrast to output multipliers welfare multipliers are found to be countercyclical a number of extensions and modifications are considered and our conclusions are generally robust

fiscal policy in good and bad times in this paper we analyze whether the effect of fiscal policy differs across the business cycle to tackle this question we use a regime switching error correction framework where nonlinearities are only modeled in the short run and have no impact on the long run equilibrium regime specific shocks to government revenue and government purchases are identified using sign restrictions linear combinations of the impulse responses of these basic shocks are used to construct a deficit spending shock and a deficit financed tax cut shock we find that active spending policies have a stronger impact in recession with multipliers exceeding unity and should be preferred to deficit financed tax cuts

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

on the sources of business cycles in the g 7 abstract this paper examines sources of cyclical movements in output inflation and the term structure of interest rates in the g 7 it employs a novel identification approach which uses the sign of the theoretical cross correlation function in response to shocks to catalog orthogonal disturbances we find that demand shocks are the dominant source of output and inflation fluctuations in several of the g 7 countries the proportion of term structure variability explained by different structural sources does not depend on the horizon apart from the us and canada structural shocks are nearly uncorrelated across countries

iq and income inequality in a sample of sibling pairs from advantaged family backgrounds the bell curve richard herrnstein and murray 1994 presented data on the independent effect of iq on a wide variety of social and economic outcomes for members of the national longitudinal survey of youth nlsy to control for socioeconomic background we constructed an index using the standard three indicators parental education occupation and income among the many threads in the response to the bell curve the following question arose how much would the independent effect of iq have been attenuated if a broader set of family background variables had been used as controls to test this sanders korenman and christopher winship conducted a fixedeffects analysis of the large number of siblings within the nlsy in effect controlling not just for socioeconomic status but for everything in the shared environment of the family the results were that w ith a few exceptions the fixed effects estimates for afqt the cognitive test used in the nlsy are remarkably similar to the standard ols and logit estimates korenman and winship 2000 p 146 the independent effect of iq is robust across methods i subsequently conducted my own analysis of the nlsy siblings for a publication on income inequality and iq murray 1998 in the course of that work another aspect of sibling analysis struck me the procedure which is used in this paper as well begins by identifying every sibling pair in which one sibling had scored in the normal range defined as a tested iq of 90 109 and the other member of the pair had scored somewhere outside that range those in the normal range were used as the reference group against which sibling outcomes were compared i then limited the sample to full biological siblings to take genetics out of the picture and further limited the sample to sibling pairs in which the siblings had lived with both biological parents for at least seven years after birth to minimize differential family backgrounds arising from divorce and remarriage both limits on the sample were essential to preserve the virtues of the sibling comparison but notice what had been done in the process in applying those conditions the sibling sample represented a population in which all parents were wed when the child was born zero illegitimacy and all young children were brought up by both biological parents during their most formative years zero early divorce such a population is one that has achieved much of what we ideally want to achieve through social policy the thought occurred to me why not complete the process having already created a sample without illegitimacy and early divorce why not slay as well the great beast of social policy poverty to achieve that i lopped off the sibling pairs whose parents were anywhere in the bottom 25 percent of the income distribution as of 1978 1979 when the nlsy began this produced a sample of 733 sibling pairs who grew up in households which by 1978 1979 had a median parental family income of 64 586 and a minimum income of 30 486 expressed in 2000 dollars for practical purposes i had by this process nearly achieved the utopia of income distribution as defined by many one in which the lowest income is half the median income i hereby dub these 733 pairs the utopian sample it is utopian not just because it has virtually no illegitimacy divorce and poverty the way it has been selected has also necessarily effected drastic improvements in the neighborhoods peers and educational systems which the youths attended the members of the utopian sample had a big edge in their potential access to college both economically and because the sample is highly selected for the kind of parents who actively encourage their children to continue their educations the same selection factors mean that i have created a sample in american enterprise institute 1150 17th street n w washington dc 20036

international business cycles and the dynamics of the current account abstract this paper analyzes the transmission of productivity shocks across countries and how the responses of investment and the current account differ depending on the degree of propagation of shocks we explore both issues by estimating a structural model for japan the us and europe we postulate as an identifying assumption that the propagation of shocks is proportional to trade we find that there is a strong asymmetry in that shocks to the us propagate quickly to the other two economies while european and japanese shocks have little impact in other countries productivity when we explore the responses of investment and the current account we find that productivity increases lead to domestic investment booms and current account deficits investment in other countries tends to react positively to productivity shocks even when the shock is purely national this second result contradicts the predictions of a standard open economy model with perfect capital mobility where in response to country specific shocks domestic and foreign investment should move in opposite directions we also find quantitative differences among the three countries in the response of the current account these differences are not related to the global or idiosyncratic nature of the shocks

indivisible labor and the business cycle abstract a growth model with shocks to technology is studied labor is indivisible so all variability in hours worked is due to fluctuations in the number employed we find that unlike previous equilibrium models of the business cycle this economy displays large fluctuations in hours worked and relatively small fluctuations in productivity this finding is independent of individuals willingness to substitute leisure across time this and other findings are the result of studying and comparing summary statistics describing this economy an economy with divisible labor and post war u s time series

the emergence of regional business cycle in africa a reality or myth a bayesian dynamic factor model analysis this paper examines the evolution and the underlying forces of the business cycle co movements among seven african a 7 countries over the period 1970 2016 these countries accounted for over 60 of regional gdp have abundant natural resources access to the global capital market and widely viewed as potential drivers of regional or african business cycle we model the national business cycle using real output consumption and investment we employ a dynamic factor model to decompose fluctuations in these macro variables into a regional country specific and idiosyncratic components using bayesian methods we also analyse the relative importance of some notable drivers of business cycle fluctuations found in the literature we find that the idiosyncratic component is dominating cyclical fluctuations in the a 7 countries while country specific and regional factors play a negligible role suggesting the inexistence of a common regional cycle despite deepening intra african trade among the driving variables the terms of trade shocks exert greater influence on the a 7 business cycle while exchange rate movements and changes in money supply explain sizeable fluctuations in consumption and investment in most of the a 7 countries shocks associated with changes in relative domestic oil prices monetary and fiscal policies cause large output fluctuations

some fiscal calculus what is the impact of fiscal policy on the econ omy how large are the multipliers of govern ment spending and tax cuts this old question has recently received considerable attention in par ticular in the context of the american recovery and reinvestment act arra of 2009 i contribute to answering that question by calculating fiscal multipliers in a baseline neo classical growth model with endogenous labor supply and fiscal policy allowing for govern ment spending transfers government debt and distortionary taxes on labor and capital income the policy experiments are conducted holding transfers consumption taxes and capital income taxes fixed i e changes in taxation require changes in the distortionary labor tax the model is simple and fairly standard as an additional contribution i provide the model in an elegant and tractable form starting from a fairly general formulation and pointing out the key functional form properties for characterizing the dynamics the formulation of the model here or versions

iq in the production function evidence from immigrant earnings the cross country growth literature especially sala i martin 1997 sala i martin doppelhofer and miller 2004 has found that traditional education measures rarely have a robust relationship with growth and productivity elementary education being a rare exception by contrast a new empirical growth literature jones and schneider 2006 lynn and vanhanen 2002 ram 2007 weede 2004 weede and kampf 2002 has shown that a nation s average iq has a remarkably robust relationship with its productivity figure 1 that a test designed by psychologists should have such a robust relationship with economic variables is a puzzle that demands explanation for instance jones and schneider showed that national average iq was more robust than other human capital variables and was statistically significant at the 1 level in all 455 growth regressions that controlled for all 18 factors that passed sala i martin doppelhofer and miller s 2004 robustness tests of course as with all the growth regression literature a key difficulty is disentangling cause and effect thus in this article we run no growth regressions whatsoever instead we perform a simple calibration of the iq productivity relationship based on widely agreed upon microeconomic parameters that means we can directly estimate one causal channel running from cognitive ability to productivity in the process we learn the following 1 if one knows the average iq of a nation s citizens as estimated by lynn and vanhanen 2002 2006 one can predict the average wages that immigrants from that country will earn upon their arrival in the united states whether or not one controls for immigrant education and even if the test is completely visual rather than verbal in other words national average iq predicts part of what hendricks 2002 calls unmeasured worker skill 2 we find that a 1 point increase in national average iq predicts 1 higher immigrant wages precisely the value found repeatedly in microeconometric studies note that by construction 1 iq point approximately equal to 1 15th of a standard deviation within any large national population together points 1 and 2 provide further evidence that cross country iq tests are valid predictors of worker productivity 3 when iq is added to the production function in the form implied by traditional externality free human capital theory differences in national average iq are quantitatively significant in explaining cross country income differences that said our productivity accounting exercise does not resolve the puzzle of why high iq countries are 15 times richer than low iq countries in a related vein hanushek and kimko 2000 use national math and science test scores to verify that cognitive skills appear to matter more for groups than for individuals like us they use immigrants to the united states as a way to test whether immigrants bring their home country productivity levels along with them when they immigrate to the united states when they interpret their results within a solow type framework they conclude that the cross country growth equation results are much larger than the corresponding results for individual earnings in sum our article rigorously explores the quantitative magnitude of the puzzle uncovered by hanushek and kimko 2000 and hanushek and woessman 2007 but by using iq tests rather than other widely used math and science test scores we can often double our sample size while simultaneously using the most widely analyzed best understood form of cognitive test we begin with an overview of the recent psychological literature on the validity of iq tests and then proceed to our discussion of the link between iq and immigrant wages the discussion of iq and immigrant wages yields a key parameter gamma the iq semi elasticity of wages which we use in our development accounting exercise we then discuss the questions of reverse causality and trends in the iq productivity relationship over the past 40 yr and conclude by discussing how our results fit into the growth literature

what caused the early millennium slowdown evidence based on vector autoregressions this paper uses a simple var for the usa and euro area to analyse the underlying shocks of the early millennium slowdown i e supply demand monetary policy and oil price shocks the results of two identification strategies are compared one is based on traditional zero restrictions and as an alternative an identification scheme based on more recent sign restrictions is proposed the main conclusion is that the recent slowdown is caused by a combination of several shocks negative aggregate supply and aggregate spending shocks the increase of oil prices in 1999 and restrictive monetary policy in 2000 these shocks are more pronounced in the usa than the euro area the results are somewhat different depending on the identification strategy it is illustrated that traditional zero restrictions can have an influence on the estimated impact of certain shocks copyright 2005 john wiley sons ltd

let s get real a factor analytical approach to disaggregated business cycle dynamics this paper develops a method for analysing the dynamics of large cross sections based on a factor analytic model we use law of large numbers arguments to show that the number of common factors can be determined by a principal components method the economy wide shocks can be identified by means of simple structural var techniques and that the parameters of the unobserved factor model can be estimated consistently by applying ols equation by equation we distinguish between a technological and a non technological shock identification is obtained by minimizing the negative realizations of the technology shock empirical results on 4 digit industrial output and productivity for the u s economy from 1958 to 1986 show that 1 at least two economy wide shocks both having a long run effect on sectoral output are needed to explain the common dynamics 2 although the technological shock accounts for at least 50 of the aggregate dynamics of output it cannot by itself explain dynamics at business cycle frequencies 3 sector specific shocks explain the main bulk of total variance but generate mainly high frequency dynamics 4 both the technological and the non technological component of output show a peak for positive sectoral comovements of output at business cycle frequencies 5 technological shocks are strongly correlated with the growth rates of the investment in machinery and equipment sectors and their inputs many interesting questions about cyclical fluctuations and economic growth can be answered only by studying the dynamic behaviour of sectoral variables when data contain information on time for a large cross section of sectors traditional econometric techniques used in the macroeconomic literature such as vector autoregressive var and vector autoregressive moving average varma models are not appropriate since they require the estimation of too many parameters this is why new methods which allow for the reduction of the parameter space need to be developed the objective of this paper is both methodological and descriptive at the methodological level we develop a simple framework for the dynamic analysis of large cross sections the basic model is a dynamic factor analytic model as in sargent and sims 1977 the sectoral variables are decomposed into two unobservable components a common component driven by macroeconomic shocks and a purely sectoral component when

international business cycles the authors estimate a dynamic two country model in which economic fluctuations are driven by a worldwide supply shock country specific supply shocks and relative fiscal money and preference shocks identification is achieved using only long run restrictions based on a theoretical model the main results are 1 supply shocks particularly country specific ones are very important in generating international business cycles and 2 although the post 1973 flexible exchange rate period has been inherently more volatile there are no differences in transmission properties of economic disturbances across exchange rate regimes for the endogenous variables they focus on copyright 1993 by american economic association

quantifying tax effects under policy foresight abstract studies of tax effects make the conventional information assumption that changes in period t taxes become known at t legislative lags however imply that news arrives before tax changes take place under policy foreknowledge the conventional information structure is therefore misspecified simulations of a standard neoclassical growth model suggest that foresight of only one quarter can distort substantially the estimates of tax effects obtained under the no foresight assumption also it is crucial to model capital and labor taxes separately anticipated changes in these two tax policies have opposite effects on consumption investment labor and output before policy realization

business cycle transmission from the us to germany a structural factor approach abstract this paper investigates the transmission of us macroeconomic shocks to germany using a large dimensional structural dynamic factor model this framework allows us to investigate many transmission channels simultaneously including new channels such as stock markets foreign direct investment bank lending and the confidence channel we find that us shocks affect the us and germany largely symmetrically trade seems to be the most relevant transmission channel monetary policy reactions to strong price movements seem to play a role as well no clear conclusion can be drawn yet on the role of financial markets and the confidence channel negative domestic influences apparently more than offset positive us influences in the german economy between 1995 and 2000 but the us recession in 2001 appeared to be the main culprit in the german slump

macroeconomic effects from government purchases and taxes for u s annual data that include world war ii the estimated multiplier for temporary defense spending is 0 4 0 5 contemporaneously and 0 6 0 7 over 2 years if the change in defense spending is permanent gauged by ramey s defense news variable the multipliers are higher by 0 1 0 2 since all estimated multipliers are significantly less than 1 greater spending crowds out other components of gdp particularly investment the lack of good instruments prevents estimation of reliable multipliers for nondefense purchases multipliers in the literature of two or more likely reflect reverse causation from gdp to nondefense purchases increases in average marginal income tax rates measured by a newly constructed time series have significantly negative effects on gdp when interpreted as a tax multiplier the magnitude is around 1 1 the combination of the estimated spending and tax multipliers implies that the balanced budget multiplier for defense spending is negative we have some evidence that tax changes affect gdp mainly through substitution effects rather than wealth effects

fiscal foresight and information flows news or foresight about future economic fundamentals can create rational expectations equilibria with non fundamental representations that pose substantial challenges to econometric efforts to recover the structural shocks to which economic agents react using tax policies as a leading example of foresight simple theory makes transparent the economic behavior and information structures that generate non fundamental equilibria econometric analyses that fail to model foresight will obtain biased estimates of output multipliers for taxes biases are quantitatively important when two canonical theoretical models are taken as data generating processes both the nature of equilibria and the inferences about the effects of anticipated tax changes hinge critically on hypothesized information flows different methods for extracting or hypothesizing the information flows are discussed and shown to be alternative techniques for resolving a non uniqueness problem endemic to moving average representations

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

the reaction of consumer spending and debt to tax rebates evidence from consumer credit data we use a new panel data set of credit card accounts to analyze how consumers responded to the 2001 federal income tax rebates we estimate the monthly response of credit card payments spending and debt exploiting the unique randomized timing of the rebate disbursement we find that on average consumers initially saved some of the rebate by increasing their credit card payments and thereby paying down debt but soon afterward their spending increased counter to the permanent income model spending rose most for consumers who were initially most likely to be liquidity constrained whereas debt declined most so saving rose most for unconstrained consumers

financial globalization and real regionalization over the period 1972 1986 the correlations of gdp employment and investment between the united states and an aggregate of europe canada and japan were respectively 0 76 0 66 and 0 63 for the period 1986 to 2000 the same correlations were much lower 0 26 0 03 and 0 07 real regionalization at the same time u s international asset trade has significantly increased for example between 1972 and 1999 united states gross fdi and equity assets in the same group of countries rose from 4 to 23 percent of the u s capital stock financial globalization we argue that these two trends are intimately related we document that the correlation of real shocks between the u s and the rest of the world has declined we then present a model in which international financial market integration occurs endogenously in response to less correlated shocks financial integration further reduces the international correlations in gdp and factor supplies we find that both less correlated shocks and endogenous financial market development are needed to account for all the changes in the international business cycle

the macroeconomic effects of distortionary taxation abstract prescott 1986 estimates that technology shocks account for 75 of the fluctuations in the postwar u s economy this paper reestimates the contribution of technological change for a standard business cycle model that includes a public sector and fiscal disturbances i find that a significant fraction of the variance of aggregate consumption investment output capital stock and hours of work can be explained by disturbances in labor and capital tax rates and government consumption i also use the model to quantify the welfare costs of capital and labor taxation for both the time series and welfare calculations maximum likelihood estimates of taste technology and policy parameters are used

how does globalization affect the synchronization of business cycles this paper examines the impact of rising trade and financial integration on international business cycle comovement among a large group of industrial and developing countries the results provide at best limited support for the conventional wisdom that globalization has increased the degree of synchronization of business cycles the evidence that trade and financial integration enhance global spillovers of macroeconomic fluctuations is mostly limited to industrial countries one striking result is that on average cross country consumption correlations have not increased in the 1990s precisely when financial integration would have been expected to result in better risk sharing opportunities especially for developing countries this abstract was borrowed from another version of this item

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

fiscal policy in an expectations driven liquidity trap we study the effects of fiscal policy interventions in a liquidity trap in a model with nominal rigidities and an interest rate rule in a liquidity trap caused by a self fulfilling state of low confidence higher government spending has deflationary effects that reduce the spending multiplier when the zero lower bound is binding instead cuts in marginal labor tax rates are inflationary and become more expansionary when the zero lower bound is binding these findings contradict popular views about the effects of fiscal policy in a liquidity trap

factor forecasting using international targeted predictors the case of german gdp abstract papers on factor forecasting are often focused on national data only this paper highlights the role of international data for forecasting german gdp and shows how targeted predictors as proposed by bai and ng forecasting economic time series using targeted predictors journal of econometrics 146 2008 304 317 can improve forecast accuracy

nominal wage stickiness and aggregate supply in the great depression building on earlier work by eichengreen and sachs we use data for 22 countries to study the role of wage stickiness in propagating the great depression recent research suggests that monetary shocks transmitted internationally by the gold standard were a major cause of the depression accordingly we use money supplies and other aggregate demand shifters as instruments to identify aggregate supply relationships we find that nominal wages adjusted quite slowly to falling prices and that the resulting increases in real wages depressed output these findings leave open the question of why wages were so inertial in the face of extreme labor market conditions

state dependent fiscal multipliers calvo vs rotemberg abstract this paper studies the properties of the fiscal multiplier in both the calvo 1983 and rotemberg 1982 variants of the new keynesian model though identical to first order the two variants of the model are not the same globally or to higher order we solve both versions of the model using a third order approximation and compute the distributions of fiscal multipliers by drawing from the ergodic distributions of states the multiplier is significantly more variable across states in the rotemberg model these differences are magnified when the nominal interest rate is pegged instead of governed by an active taylor rule

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

asymmetric effects of exogenous tax changes abstract we study whether output responds symmetrically to tax increases and decreases in postwar us data using the identification strategy in romer and romer 2010 we find evidence of important asymmetries the output response to a tax increase is statistically insignificant but output shows a significantly positive and permanent increase following a tax decrease we show that this asymmetry appears to be driven by individual income tax changes and is transmitted to the economy through asymmetric response in aggregate consumption to tax increases and tax decreases we also present a simple model that rationalizes our empirical findings and illustrates how asymmetric output and consumption responses to sign based tax changes can be generated by plausible consumption adjustment costs

determinants of business cycle comovement a robust analysis abstract this paper investigates the determinants of business cycle comovement between countries our dataset includes over 100 countries both developed and developing we search for variables that are robust in explaining comovement using the approach of leamer amer econom rev 73 1983 31 variables considered are i bilateral trade between countries ii total trade in each country iii sectoral structure iv similarity in export and import baskets v factor endowments and vi gravity variables we find that bilateral trade is robust however two variables that the literature has argued are important for business cycles industrial structure and currency unions are found not to be robust

currency versus banking in the financial crisis of 1931 during the 1920s germany was the world s largest capital importer financing reparations through u s credits we examine financial channels in crisis transmission between these two countries around the german financial crisis of 1931 we specify a structural dynamic factor model to identify financial and monetary factors separately for each of the two economies we find substantial crisis transmission from germany to the united states via the financial channel while monetary or financial crisis transmission from the united states to germany was weak we also find major real effects of the 1931 crisis on both economies again transmitted via the financial channel

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

a primer on financial contagion abstract this paper presents a theoretical framework to highlight possible channels for the international transmission of financial shocks we first review the different definitions and measures of contagion adopted by the literature we then use a simple multi country asset pricing model to classify the main elements of the current debate on contagion and provide a stylized account of how a crisis in one country can spread to the world economy in particular the model shows how crises can be transmitted across countries without assuming ad hoc portfolio management rules or market imperfections finally tracking our classification we survey the results of the empirical literature on contagion

the role of international factors in the business cycle a multi country study abstract empirical research has been conducted on the various theories of the business cycle over many countries however very little research has attempted to undertake a multi country disaggregate investigation into the sources of output change this paper decomposes fluctuations in industry output in a particular country into 1 a nation specific shock 2 an industry specific shock 3 a common shock and 4 an idiosyncratic factor using a dynamic factor analysis state space approach the paper finds that the industry specific impulse explains a significant but small part of the variance of the forecast error this provides limited support for the disaggregated real business cycle paradigm

the g7 business cycle in a globalized world abstract using a factor structural var for 14 countries out of the g20 group we document that output innovations originating outside the g7 account for shares of 10 to almost 25 percent in the business cycle fluctuations of g7 gdp growth using auxiliary regressions we additionally find that these innovations contribute noticeably relative to g7 output innovations to short term fluctuations in important other national g7 variables such as employment the current account balance inflation and inflation volatility and in global macroeconomic indicators like the oil price world stock market returns and exchange rate volatility the results indicate that in a globalized world spillovers from emerging markets and industrial countries other than the g7 play a relevant role for major aspects of the g7 and world business cycle

the changing international transmission of financial shocks evidence from a classical time varying favar we study the changing international transmission of financial shocks over the period 1971 2012 global financial shocks are measured as unexpected changes of a u s financial conditions index fci developed by hatzius et al 2010 we model the fci jointly with a large international data set through a time varying parameter factor augmented var and find that financial shocks have a considerable impact on growth in the nine countries considered moreover financial shocks during the global financial crisis are found to be large by historical standards they explain approximately 20 of gdp growth variation on average over 2008 9 compared to an average of 5 prior to the crisis

monetary policy in a data rich environment abstract most empirical analyses of monetary policy have been confined to frameworks in which the federal reserve is implicitly assumed to exploit only a limited amount of information despite the fact that the fed actively monitors literally thousands of economic time series this article explores the feasibility of incorporating richer information sets into the analysis both positive and normative of fed policymaking we employ a factor model approach developed by stock j h watson m w diffusion indices journal of business economic statistics 2002 20 2 147 forecasting inflation 1999 journal of monetary economics 44 2 293 that permits the systematic information in large data sets to be summarized by relatively few estimated factors with this framework we reconfirm stock and watson s result that the use of large data sets can improve forecast accuracy and we show that this result does not seem to depend on the use of finally revised as opposed to real time data we estimate policy reaction functions for the fed that take into account its data rich environment and provide a test of the hypothesis that fed actions are explained solely by its forecasts of inflation and real activity finally we explore the possibility of developing an expert system that could aggregate diverse information and provide benchmark policy settings

us monetary policy and the euro area abstract this study documents empirically that contractionary us monetary policy may generate short term expansionary spillover effects in individual euro area ea member countries economic activity increases mainly via the trade channel also domestic credit and stock markets expand highlighting the importance of the financial channel however the international repercussions are transitory and distributed unevenly within the ea the effect diminishes as ea interest rates increase with a few quarters delay while the effects are heterogenous and rather large before 1999 responses become more homogeneous and smaller in size after the implementation of the euro still country specific asymmetries remain

comovements and heterogeneity in the euro area analyzed in a non stationary dynamic factor model this paper establishes stylized facts on comovements and heterogeneity of individual euro area countries output and price developments in the past two decades for this purpose a non stationary structural dynamic factor model is fitted to a large dataset of euro area macroeconomic variables the main results are as follows both common factors and idiosyncratic components are important in explaining individual countries output and price developments in the euro area and are also both very persistent idiosyncratic shocks and adjustments to these shocks are mainly responsible for cross country heterogeneity the asymmetric transmission of common shocks plays a minor role finally there is no strong evidence that some common shocks lead to greater heterogeneity than others copyright 2009 john wiley sons ltd

trade interdependence and the international business cycle a stochastic general equilibrium model of the world economy is developed to analyze the contribution of trade interdependence to international business cycles we test some of the implications of the model using data from ten major industrial countries and a variety of detrending techniques to calculate the cyclical component of output we find that the significance of trade in the transmission of economic disturbances across countries is not robust to the choice of the detrending method in general the role of trade interdependence is moderate and seem to have been stronger in the period before 1973

sources and propagation of international output cycles common shocks or transmission abstract this paper studies the generation and transmission of international cycles in a multi country model with production and consumption interdependencies two sources of disturbance are considered and three channels of propagation are compared technology disturbances which are mildly correlated across countries are more successful than government expenditure disturbances in reproducing actual data the presence of a common component to the shocks and of production interdependencies appear to be crucial in quantitatively matching the properties of the data

the role of automatic stabilizers in the u s business cycle most countries have automatic rules in their tax and transfer systems that are partly intended to stabilize economic uctuations this paper measures how eective they are at lowering the volatility of u s economic activity we identify seven potential stabilizers in the data and include four theoretical channels through which they may operate in a business cycle model calibrated to the u s data the model is used to compare the volatility of output in the data with counterfactuals where some or all of the stabilizers are shut down our rst nding is that proportional taxes like sales property and corporate income taxes contribute little to stabilization our second

risk sharing and industrial specialization regional and international evidence the authors provide empirical evidence that risk sharing enhances specialization in production to the best of their knowledge this well established and important theoretical proposition has not been tested before the empirical procedure is summarized as follows first the authors construct a measure of specialization in production and calculate an index of specialization for each of the european community ec and non ec oecd countries u s states canadian provinces japanese prefectures latin american countries and regions of italy spain and the united kingdom then they estimate the degree of capital market integration a measure of risk sharing within each of these groups of regions the ec countries the non ec oecd countries the united states canada japan italy spain and the united kingdom and rely on another author s estimate for latin america finally they perform a regression of the specialization index on the degree of risk sharing controlling for relevant economic variables they find a positive and significant relation between the degree of specialization of individual members of a group of countries provinces states or prefectures and the amount of risk that is shared within the group the authors perform regressions using variables such as shareholder rights and the size of the financial sector relative to gdp as instruments for the amount of inter regional risk sharing these regressions confirm that risk sharing facilitated by a favorable legal environment and a developed financial system is a direct causal determinant of industrial specialization this abstract was borrowed from another version of this item

monetary factors in the great depression this paper examines the role of monetary policy in the early stages of the great depression and considers the mechanism whereby this policy may have affected real activity i conclude that the depression was preceded by a dramatic shift towards a highly contractionary monetary policy the economic impact of this policy seems unlikely to have come through the conventional keynesian channels of a shortage of liquidity and high ex ante real interest rates but instead may have operated through unanticipated deflation and after 1930 through the disruption of financial intermediation as a consequence of the banking panics

temporary investment tax incentives theory with evidence from bonus depreciation even modest reductions in the after tax cost of capital purchases provide strong incentives for increased investment indeed for tax subsidies that are temporary and for capital goods that are very long lived the incentive to invest when the after tax price is temporarily low is essentially infinite firms that would have purchased new capital equipment in the future instead make their purchases during the period of the subsidy for tax increases the effects are the opposite firms that would have normally invested now delay until the tax rate returns to normal we present a model of the equilibrium effects of temporary investment tax incentives the model reveals a simple relationship between the shadow price of investment goods and the size of a temporary investment tax incentive specifically for sufficiently long lived capital goods goods with very low rates of economic depreciation and for sufficiently short lived investment tax subsidies the shadow value of capital should be nearly unchanged and thus the pre tax shadow price of capital goods should fully reflect the magnitude of the tax subsidy this result holds regardless of the elasticity of investment supply and regardless of the underlying demand for capital instead it relies only on the firm s ability to arbitrage predictable movements in the after tax price of long lived capital over time two conclusions immediately follow first observ ing price increases following a temporary tax incentive is not evidence that investment supply is relatively inelastic a temporary investment tax subsidy can substantially affect investment even if it bids up the price of investment sharply second because economic theory dictates that the shadow price of investment moves one for one with a temporary tax subsidy the elasticity of supply can be inferred from quantity data alone recent changes in us tax law allow us to use the model and its implications to estimate struc tural parameters that govern the supply of investment the 2002 and 2003 tax bills provided temporarily accelerated tax depreciation called bonus depreciation for certain types of qualified capital goods under the 2002 bill firms could immediately deduct 30 percent of investment purchases and then depreciate the remaining 70 percent under standard depreciation schedules

the transmission mechanism in a changing world this paper aims at improving the understanding of the transmission of shocks across countries and how this transmission may have changed over time by employing a model that allows for parameter changes across regimes we show that transmission of shocks from the us to european countries may depend on the values of transition variables such as financial prices exchange rates international capital flows trade links and monetary policy instruments we also show that transmission mechanisms estimated with the proposed models have good performance in describing the 2001 downturn in some european countries as an effect of a us shock more generally the models have a good forecasting performance over short horizons

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

macroeconomic forecasting using diffusion indexes this article studies forecasting a macroeconomic time series variable using a large number of predictors the predictors are summarized using a small number of indexes constructed by principal component analysis an approximate dynamic factor model serves as the statistical framework for the estimation of the indexes and construction of the forecasts the method is used to construct 6 12 and 24 monthahead forecasts for eight monthly u s macroeconomic time series using 215 predictors in simulated real time from 1970 through 1998 during this sample period these new forecasts outperformed univariate autoregressions small vector autoregressions and leading indicator models

competitive devaluation and the great depression a theoretical reassessment abstract historical accounts indict the devaluations of the 1930s for worsening the great depression to assess the consistency of these arguments we develop a two country model of the gold exchange standard its analysis reveals that devaluation under a gold standard need not be beggar thy neighbor contrary to the thrust of the existing literature competitive devaluations like those of the 1930s could have hastened recovery from the great depression