optimal interest rate rules asset prices and credit frictions we study optimal taylor type interest rate rules in an economy with credit market imperfections our analysis builds on the agency cost framework of carlstrom and fuerst 1997 agency costs net worth and business fluctuations a computable general equilibrium analysis american economic review 87 893 910 which we extend in two directions first we embed monopolistic competition and sticky prices second we modify the stochastic structure of the model in order to generate a countercyclical premium on external finance this is achieved by linking the mean distribution of investment opportunities faced by entrepreneurs to aggregate total factor productivity we model monetary policy in terms of simple welfare maximizing interest rate rules we find that monetary policy should respond to increases in asset prices by lowering interest rates however when monetary policy responds strongly to inflation the marginal welfare gain of responding to asset prices vanishes within the class of linear interest rate rules that we analyze a strong anti inflationary stance always attains the highest level of welfare

limited participation and exchange rate dynamics does theory meet the data the paper explores the empirical dimensions of a new open economy macronomy model characterized by credit market frictions we find that these frictions are essential for the model to match a large set of moments of german data moreover the simulated impulse response functions to supply and nominal shocks are consistent with var findings since the model is estimated on moments rather than on conditional irfs this underlines the ability of the model to match the data finally monetary shocks do not seem to be the primary driving force behind the aggregate dynamics which is consistent with the var literature

sentiments in svars this paper investigates the contribution of sentiments shocks to us fluctuations in a structural var setup with long medium and short run restrictions sentiments shocks are identified as shocks orthogonal to fundamentals that accounts for most of the variance of confidence we assess our identification procedure from simulation experiments and show that it performs pretty well from actual data we obtain that contrary to news shocks on total factor productivity sentiments shocks explain very little of quantities and prices sentiments shocks mostly appear as an idiosyncratic component of confidence these results are robust to various perturbations of the benchmark model

the quantitative analytics of the basic neomonetarist model this paper constructs a dynamic macroeconomic model with less than perfect price flexibility which has a classical side consistent with real business cycle theory augmented by investment adjustment costs increasing returns to scale and a new flexible formalization of imperfect competition something akin to the classical dichotomy is justified by a mode of approximation appropriate for a model in which one state variable adjusts quickly while another state variable adjusts slowly even with investment adjustment costs monetary expansions are found to raise the real interest rate the determinants of real rigidity and the macroeconomic rate of price adjustment are investigated copyright 1995 by ohio state university press

how robust are popular models of nominal frictions this paper analyzes three popular models of nominal price and wage frictions to determine which best ts post war u s data we construct a dynamic stochastic general equilibrium dsge model and use maximum likelihood to estimate each model s parameters because previous research nds that the conduct of monetary policy and the behavior of in ation changed in the early 1980s we examine two distinct sample periods using a bayesian pseudo odds measure as a means for comparison a sticky price and wage model with dynamic indexation best ts the data in the early sample period whereas either a sticky price and wage model with static indexation or a sticky information model best ts the data in the late sample period our results suggest that price and wage setting behavior may be sensitive to changes in the monetary policy regime if true the evaluation of alternative monetary policy rules may be even more complicated than previously believed

endogenous money or sticky prices comment on monetary non neutrality and inflation dynamics abstract we show that the highly persistent inflation dynamics and its lead lag relationship with output can be explained by a standard flexible price rbc model augmented with endogenous monetary policy endogenous monetary policy acting upon the illusion that prices are sticky and money is effective can create price movements that appear to indicate price stickiness although there is none in the economy

interest rates inflation and federal reserve policy since 1980 this paper characterizes federal reserve policy since 1980 as one that actively manages short term nominal interest rates in order to control inflation and evaluates this policy using a dynamic stochastic sticky price model of the united states economy the results show that the fed s policy insulates aggregate output from the effects of exogenous demand side disturbances and by calling for a modest but persistent reduction in short term interest rates following a positive technology shock helps the economy to respond to supply side disturbances as it would in the absence of nominal rigidities

new keynesian models durable goods and collateral constraints abstract econometric evidence suggests that in response to monetary policy shocks durable and non durable spending co move positively and durable spending exhibits a much larger sensitivity to the shocks a standard two sector new keynesian model with perfect financial markets is at odds with these facts the introduction of a borrowing constraint where durables play the role of collateral assets helps in reconciling the model with the empirical evidence

money and the natural rate of interest structural estimates for the united states and the euro area abstract we examine the role of money in three environments the new keynesian model with separable utility and static money demand a nonseparable utility variant with habit formation and a version with adjustment costs for holding real balances the last two variants imply forward looking behavior of real money balances with forecasts of future interest rates entering current portfolio decisions we conduct a structural econometric analysis of the u s and euro area economies fiml estimates confirm the forward looking character of money demand a consequence is that real money balances are valuable in anticipating future variations in the natural interest rate

an equilibrium theory of nominal and real exchange rate comovement abstract this study develops a quantitative equilibrium theory to offer an explanation of one of the most puzzling aspects of empirical exchange rate behavior the high degree of nominal and real exchange rate comovement technology shocks coupled with the accomodative response of monetary policy to output fluctuations are primarily responsible for the covariation between nominal and real exchange rates shocks to the marginal efficiency of investment also play an important role

money new keynesian macroeconomics and the business cycle abstract we show in this paper that the typical modern business cycle cannot be reduced to the real business cycles archetype a monopolistic competition model with price adjustment costs affected by technological and monetary shocks better mimics the economic fluctuations in two countries with very different cyclical properties namely france and the united states in our model monetary shocks are necessary to reproduce the standard deviation of output the money output correlation the labour productivity worked hours relative standard deviation the labour productivity worked hours correlation and the mark up output correlation with two independent shocks one real more specifically defined than the solow residual and one nominal the model gives an answer to some empirical puzzles which were left unexplained by traditional rbc models

another look at sticky prices and output persistence abstract price rigidity is the key mechanism for propagating business cycles in traditional keynesian theory yet the new keynesian literature has failed to show that sticky prices by themselves can effectively propagate business cycles we show that price rigidity in fact can by itself give rise to a strong propagation mechanism in standard models provided that investment is also subject to a cash in advance constraint reasonable price stickiness can generate highly persistent hump shaped movements in output under either monetary or non monetary shocks hence whether or not price rigidity is responsible for output persistence is not a theoretical question but an empirical one

inference in nonlinear econometric models with structural change this paper extends the classical test for structural change in linear regression models see chow 1960 to a wide variety of nonlinear models estimated by a variety of different procedures wald lagrange multiplier like and likelihood ratio like test statistics are introduced the results allow for heterogeneity and temporal dependence of the observations in the process of developing the above tests the paper also provides a compact presentation of general unifying results for estimation and testing in nonlinear parametric econometric models

monetary aggregates and output series title working paper frb title monetary aggregates and output date publication federal reserve bank of cleveland working paper no 9813 author s scott freeman finn kydland type working paper frb topics s us economy

equilibrium indeterminacy and asset price fluctuation in japan a bayesian investigation this paper investigates sources of asset price fluctuation in japan using an estimated financial accelerator model for explicit treatment of expectational beliefs characterized by sunspots the model is analyzed over the parameter space where the equilibrium can be indeterminate we show that indeterminacy arises if the financial accelerator effect is sufficiently large according to our bayesian estimation results japan s economy was affected by sunspot shocks however the contribution of the sunspots to asset price volatility was low rather net worth and cost shocks drove the asset price fluctuation we find however that the sunspots substantially affected capital investment

imperfectly mobile households and durable local public goods does the capitalization mechanism work abstract a complication in the decision making of local governments is that a community s residents may move before the future benefits associated with current tax and expenditure policies are fully realized it has been argued that the capitalization of these benefits into current property values can induce local governments to behave efficiently this paper drops two assumptions behind the capitalization hypothesis perfect labor mobility and the absence of uncertainty about the future benefits it is shown that these benefits may be overcapitalized or undercapitalized depending on a critical aspect of the uncertainty consequently there is underinvestment in some projects but overinvestment in others

rule of thumb consumers productivity and hours in this paper we study the transmission mechanism of productivity shocks in a model with rule of thumb consumers in the literature this nancial friction has been studied only with reference to scal shocks we show that the presence of rule of thumb consumers is also very helpful in accounting for recent empirical evidence on productivity shocks rule of thumb agents together with nominal and real rigidities play an important role in reproducing the negative response of hours and the delayed responses of output and

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

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

sectoral price rigidity and aggregate dynamics abstract this paper studies the business cycle implications of sectoral heterogeneity in price rigidity using a highly disaggregated multi sector model the model is estimated by the simulated method of moments using a mix of aggregate and sectoral u s data the frequencies of price changes implied by our estimates are consistent with those reported in micro based studies we show that heterogeneity in price rigidity is the primary factor explaining the heterogeneity in the responses of sectoral output and inflation to a monetary policy shock we also find that ignoring sectoral heterogeneity in price rigidity leads to the mismeasurement of the relative importance of aggregate and sector specific shocks in aggregate and sectoral fluctuations

evaluating tourism s economic effects new and old approaches abstract techniques such as multiplier analysis and input output analysis are still very commonly used to make estimates of the economic impact of changes in tourism expenditure these techniques have serious limitations and as a result alternative techniques have been developed to address the problems computable general equilibrium cge models are now extensively used especially in australia the uk the us and canada to estimate economic impacts of a wide variety of changes and policies across most sectors cge techniques have been used in the tourism context but so far not extensively economic evaluation in tourism thus fails to achieve best practice the paper presents arguments in support of cge modelling as the preferred technique in analysing the economic impacts of tourism and discusses its potential to drive future research in this area that is more relevant to real world tourism destinations

money and output friedman and schwartz revisited more than fifty years ago friedman and schwartz examined historical data for the united states and found evidence of pro cyclical movements in the money stock which led corresponding movements in output we find similar correlations in more recent data these appear most clearly when divisia monetary aggregates are used in place of the federal reserve s official simple sum measures when we use information in divisia money to estimate a structural vector autoregression identified monetary policy shocks appear to have large and persistent effects on output and prices with a lag that has lengthened considerably since the early 1980s

deficits and inflation an open economy model of the united states the deficit debate is a recurring theme in academic and political circles the controversy is over the effect of deficits on inflation and interest rates the existing body of empirical evidence does not resolve the controversy this paper focuses on the inflationary impact of deficits the model used is derived from a comprehensive is lm analysis which incorporates a foreign trade sector and a general price adoptive expectation adjustment mechanism we test the model using time series data for the united states from our results we conclude that nia deficits have no significant bearing on the rate of inflation

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

monetary aggregates and the business cycle a monetary aggregate consisting predominantly of zero maturity deposits called mzm tends to systematically lead output in the us business cycle such fluctuations are observed both before and after the 1979 monetary policy change similar dynamics are obtained in a model with multi stage production and purchase size heterogeneity when agents optimally choose their mix of cash checkable and time deposits used in transactions the causality in the model runs from real activity to money rather than the other way around although the monetary base is endogenous through a taylor type rule the lead in mzm is primarily driven by deposit creation

forecasting canadian time series with the new keynesian model this paper assesses the out of sample forecasting accuracy of the new key nesian model for canada we estimate a variant of the model on a series of rolling sub samples computing out of sample forecasts one to eight quarters ahead at each step we compare these forecasts with those arising from vector autoregression var models us ing econometric tests of forecasting accuracy we show that the forecasting accuracy of the new keynesian model compares favourably with that of the benchmarks particularly as the forecasting horizon increases these results suggest that the model could become a useful forecasting tool for canadian time series jel classification e32 e37

home bias exchange rate disconnect and optimal exchange rate policy abstract this paper examines how much the central bank should adjust the interest rate in response to real exchange rate fluctuations the paper first demonstrates in a two country dynamic stochastic general equilibrium dsge model that home bias in consumption is important to replicate the exchange rate volatility and exchange rate disconnect documented in the data when home bias is high the shock to uncovered interest rate parity uip can substantially drive up exchange rate volatility while leaving the volatility of real macroeconomic variables such as gdp almost untouched the model predicts that the volatility of the real exchange rate relative to that of gdp increases with the extent of home bias this relation is supported by the data a second order accurate solution method is employed to find the optimal operational monetary policy rule our model suggests that the monetary authority should not seek to vigorously stabilize exchange rate fluctuations in particular when the central bank does not take a strong stance against the inflation rate exchange rate stabilization may induce substantial welfare loss the model does not detect welfare gain from international monetary cooperation which extends obstfeld and rogoff s obstfeld m rogoff k 2002 global implications of self oriented national monetary rules quarterly journal of economics may 503 535 findings to a dsge model

monopolistic competition as a foundation for keynesian macroeconomic models a general equilibrium macroeconomic model based on monopolistic competition is presented the model exhibits a traditional multiplier in the short run but due to free entry the multiplier disappears in the long run by construction all agents are fully rational the keynesian results are a consequence of the assumption of monopolistic competition which creates a divergence between optimal private behavior and optimal social behavior

inside money monetary contractions and welfare this paper presents an explicit physical environment in which optimizing agents choose the composition of their money balances because of their choices changes in the nominal sum of inside and outside money precede changes in output nevertheless changes in the supply of fiat money do not affect subsequent out put moreover an equilibrium with a fixed supply of valued fiat money is pareto optimal despite the cyclical fluctuations of output and of the total money stock monnaie interne contractions monetaires et bien etre ce memoire definit un environne ment physique explicite dans lequel les agents economiques recherchent l optimum en choisissant la composition de leurs actifs monetaires en consequence de leurs choix des changements dans la somme nominale de monnaie interne et de monnaie externe prec dent les changements dans le niveau de production neanmoins des changements dans l offre de monnaie fiduciaire n affectent pas le niveau de production subsequent de plus l equilibre quand l offre de monnaie fiduciaire est fixe est un optimum de pareto malgre les fluctuations dans le niveau de production et dans le stock total

tobin s imperfect asset substitution in optimizing general equilibrium in this paper we present a dynamic optimizing model that allows explicitly for imperfect substitutability between different financial assets this is specified in a manner which captures tobin s 1969 view that an expansion of one asset s supply affects both the yield on that asset and the spread or risk premium between returns on that asset and alternative assets our estimates of this model on u s data confirm that some of the observed deviations of long term rates from the expectations theory of the term structure can be traced to movements in the relative stocks of financial assets the richer aggregate demand and asset specifications imply that there exists an additional channel of monetary policy our results suggest that central bank operations exercise a modest influence on the relative prices of alternative financial securities and so exert an extra effect on long term yields and aggregate demand separate from their effect on the expected path of short term rates

fiscal stimulus and the role of wage rigidity abstract in this paper we study the impact of an expansion in public spending in an economy characterized by limited asset market participation and sticky wages the flexible wage version of the model implies strong expansionary effects on output and consumption but also a counterfactual increase in real wages the introduction of sticky wages besides being a realistic addition solves this problem and preserves the expansionary effects on output and consumption moreover once we introduce segmentation in the labor market sticky wages are even essential to obtain expansionary effects

factor adjustment costs a structural investigation abstract this paper assesses various capital and labor adjustment costs functions estimating a general equilibrium framework with bayesian methods using us aggregate data the estimation finds that the adjustment costs are convex in both capital and labor and allowing for their joint interaction is important the structural model enables us to identify the response of factor adjustment costs to exogenous disturbances and to establish that shocks to technology and the job separation rate are key drivers of adjustment costs the analysis shows that factor adjustment costs enable the model to explain fluctuations in the firm s market value in the data

the industrial organization of congress or why legislatures like firms are not organized as markets this paper provides a theory of legislative institutions that parallels the theory of the firm and the theory of contractual institutions like market institutions legislative institutions reflect two key components the goals or preferences of individuals here representatives seeking reelection and the relevant transactions costs we present three conclusions first we show how the legislative institutions enforce bargains among legislators second we explain why given the peculiar form of bargaining problems found in legislatures specific forms of nonmarket exchange prove superior to market exchange third our approach shows how the committee system limits the types of coalitions that may form on a particular issue

inventories sticky prices and the persistence of output and inflation post war business cycle fluctuations of output and inflation are remarkably persistent many recent sticky price models however grossly underpredict this persistence we assess whether adding inventories to a standard sticky price model raises the persistence of output and inflation for this addition we consider a shopping cost model in the model consumers find shopping activities costly and the cost of shopping depends on the stock of goods available in this context producers manage inventories to smooth production and to affect the cost of shopping we find that the shopping cost model generates a persistence for output and inflation that matches the persistence observed in the post 1985 us data

constructing and estimating a realistic optimizing model of monetary policy abstract a dynamic stochastic general equilibrium dsge model with real and nominal both price and wage rigidities succeeds in capturing some key nominal features of u s business cycles additive technology shocks as well as multiplicative shocks are introduced and shown to be crucial monetary policy is specified as an interest rate targeting rule following developments in the structural vector autoregression var literature the interaction between real and nominal rigidities is essential to reproduce the liquidity effect of monetary policy the model is estimated by maximum likelihood on u s data and its fit is comparable to that of an unrestricted first order var besides producing reasonable impulse responses and second moments this model replicates a feature of u s business cycles never captured by previous research with dsge models that an increase in interest rates predicts a decrease in output two to six quarters in the future

prices output and hours an empirical analysis based on a sticky price model abstract i show that a simple sticky price model based on rotemberg 1982 is consistent with a variety of facts concerning the correlation of prices hours and output it is consistent with the negative correlation between forecastable movements in prices and output as well as the smaller negative correlation between forecastable movements in prices and hours it is also consistent with the positive correlations of unexpected movements in prices output and hours these patterns are harder to reconcile with the flexible price version of the model in particular they require that money respond differently to forecastable and to unforecastable real shocks

the dynamic effects of forward guidance shocks we examine the macroeconomic effects of forward guidance shocks at the zero lower bound empirically we identify forward guidance shocks using unexpected changes in futures contracts around moneta

technology shocks capital utilization and sticky prices abstract we quantitatively evaluate a business cycle environment featuring endogenous capital utilization and nominal price rigidity that illustrates a negative relationship between labor hours and technology tfp shocks and a positive relationship between hours and investment mei shocks sticky prices induce firms to suppress changes in output due to tfp shocks through changes in the utilization rate of the existing capital stock and labor demand mei shocks have an indirect impact on output via their link with capital utilization and are shown to be the dominant driver of post 1979 us business cycles

the transmission of monetary policy in a multisector economy this article constructs and estimates a sticky price dynamic stochastic general equilibrium model with heterogeneous production sectors firms in different sectors vary in their price rigidity production technology and the combination of material and investment inputs in particular firms buy inputs from all sectors using the actual input output matrix and capital flow table of the u s economy by relaxing the standard assumption of symmetry this model allows idiosyncratic sectoral dynamics in response to monetary policy shocks the model is estimated by the generalized method of moments using sectoral and aggregate u s time series

explaining business cycles a multiple shock approach abstract aiyagari 1992 and prescott 1986 1991 claim that a large fraction of the variance of united states quarterly detrended real gnp is attributable to an unobservable shock to total factor productivity this paper argues that the importance of a productivity shock in explaining the variance of output is fundamentally indeterminate any model that is in accord with the several time series that make up united states macroeconomic data must feature multiple shocks that are correlated at all leads and lags sorting out the separate effects of these various shocks on a single variable such as real gnp is impossible we illustrate this argument using a multiple shock version of the king plosser rebelo 1988 benchmark real business cycle model

a new comparative approach to macroeconomic modeling and policy analysis in the aftermath of the global financial crisis the state of m acroeconomic modeling and the use of macroeconomic models in policy analysis has come under heavy criticism macroeconomists in academia and policy institutions are blamed for relying too much on a particular class of macroeconomic models that did not sufficiently this paper propose s a comparative approach to macroeconomic policy analysis that is open to competing modeling paradigms macroeconomic model comparison projects have helped produce some very influenti al insights such as the taylor rule however they have been infrequent and costly because they require the input of many teams of researchers and multiple meetings to obtain a limited set of comparative findings this paper provides a new comparative approach to model based research and policy analysis that enables individual researchers to conduct model comparisons easily frequently at low cost and on a large scale using this approach a model archive is built that incl udes many well known empirically estimated models that may be used for quantitative analysis of monetary and fiscal stabilization policies a computational platform is created that allows straightforward comparisons of models implications its application is illustrated by compa ring different monetary and fiscal policies across selected models researchers can easily include new models in the data base and compare the effects of novel extensions to established benchmarks thereby fostering a comparative instead of insular approach to model development

the political economy of benefits and costs a neoclassical approach to distributive politics this essay offers a rational political explanation for the notorious inefficiency of pork barrel projects with an optimization model of legislative behavior and legislative institutions the model emphasizes the economically arbitrary from a welfare point of view importance of the geographic incidence of benefits and costs owing to the geographic basis for political representation we explore the implications of a legislator s objective function and derive conditions under which a representative legislature will select an omnibus of projects each of which exceeds the efficient scale

a dynamic theory of public spending taxation and debt this paper presents a dynamic political economy theory of public spending taxation and debt policy choices are made by a legislature consisting of representatives elected by geographically defined districts the legislature can raise revenues via a distortionary income tax and by borrowing these revenues can be used tofinance a national public good and district specific transfers interpreted as pork barrel spending the value of the public good is stochastic reflecting shocks such as wars or natural disasters in equilibrium policy making cycles between two distinct regimes business as usual in which legislators bargain over the allocation of pork and responsible policy making in which policies maximize the collective good transitions between the two regimes are brought about by shocks in the value of the public good in the long run equilibrium tax rates are too high and too volatile public good provision is too low and debt levels are too high in some environments a balanced budget requirement can improve citizen welfare

sticky price models and the natural rate hypothesis abstract a major criticism of standard specifications of price adjustment in models for monetary policy analysis is that they violate the natural rate hypothesis by allowing output to differ from potential in steady state in this paper we estimate a dynamic optimizing business cycle model whose price setting behavior satisfies the natural rate hypothesis the price adjustment specifications we consider are the sticky information specification of mankiw and reis sticky information versus sticky prices a proposal to replace the new keynesian phillips curve quarterly journal of economics 117 1295 1328 and the indexed contracts of christiano et al nominal rigidities and the dynamic effects of a shock to monetary policy journal of political economy 113 1 45 our empirical estimates of the real side of the economy are similar whichever price adjustment specification is chosen consequently the alternative model specifications deliver similar estimates of the u s output gap series but the empirical behavior of the gap series differs substantially from standard gap estimates

inside money output and causality the authors present an explicit general equilibrium model consistent with these observations 1 innovations in the nominal money stock are positively correlated with and precede granger cause innovations in output 2 these innovations in the nominal money stock represent innovations in inside not outside money and 3 when interest rates are included in vector autoregressions their innovations not money s are seen to precede output changes in the money stock represent an endogenous reaction to some third factor and do not cause subsequent changes in output therefore a change in the current fiat money stock will not lead to any change in output copyright 1991 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

money prices interest rates and the business cycle the mechanisms governing the relationship of money prices and interest rates to the business cycle are the most studied and most disputed topics in macroeconomics in this paper we first document key empirical aspects of this relationship we then ask how well three benchmark rational expectations macroeconomic models a real business cycle model a sticky price model and a liquidity effect model account for these central facts while the models have diverse successses and failures none can account for the fact that real and nom inal interest rates are inverted leading indicators of real economic activity that is none of the models captures the post war u s business cycle fact that a high real or nominal interest rate in the current quarter predicts a low level of real economic activity two to four quarters in the future i introduction the positive correlation of monetary aggregates and real economic activity over the course of many business cycles is a key empirical fact about the u s economy indeed the dynamic dimension of this covariation is so strong and stable that a monetary variable has long been included in the commerce department s index of leading economic indica tors while this pattern of cyclical comovement is widely agreed upon its interpretation is not some macroeconomists view money as purely passive with a positive response to varying levels of economic activity producing the positive correlation others view changes in the quantity of money as an important perhaps dominant source of economic fluctua tions frequently the real effects of monetary changes are suggested to arise from frictions in commodity labor or financial markets in economic theories that describe the influence of these frictions the transmission mechanism from monetary changes to real activity is typically viewed as involving interest rates and the price level the primary goal of this paper is to evaluate three models that explain the link between money prices interest rates and the business cycle we do this in three steps first we docu ment the cyclical behavior of these variables in the united states over the postwar period second we construct three quantitative rational expectations models of macroeconomic activity i a real business cycle model with endogenous money ii a model of commodity market frictions with mon etary non neutralities arising from gradual adjustment of goods prices and iii a model of financial market frictions with monetary non neutralities arising from gradual adjust ments of portfolios finally we compare the models predic tion for the business cycle behavior of money prices and interest rates with the data in exploring the predictions of these models we take the stock of money to be one of several exogenous variables in the system all of our models are capable of generating a forecasting role for money relative to real economic activity similar to that found in the u s data in the real business model monetary changes can forecast real activity because productivity is related to many underlying sources of shocks and because these real shocks also affect the money stock in the models with sticky prices and liquidity effects short hand names for the models with frictions in the com modity and financial markets monetary changes have an additional direct positive effect on aggregate output the outline of the paper is as follows section ii describes the data and documents its business cycle characteristics section iii outlines the three macroeconomic models and develops the particular quantitative versions of the models used in our analysis our main empirical results are pre sented in section iv and section v summarizes our results and concludes

monetary policy and asset prices with belief driven fluctuations abstract we present a heterogeneous agents new keynesian model subject to a cost channel of monetary policy transmission constant turnover between long time traders and newcomers in market activities combined with restricted trading opportunities introduces a feedback from the stock market to real activity making stock prices non redundant for the business cycle we show that strict inflation targeting can lead to equilibrium indeterminacy even if the policy rule satisfies the taylor principle a belief driven shock to stock price generates relative volatilities of key financial variables which are very close to what is observed in u s data this result hints to the possibility that the financial instability witnessed since the mid to late 1990s was the result of waves of rational exuberance and pessimism in financial markets our analysis suggests that a mild response to stock prices in the central bank s policy rule can restore equilibrium determinacy and therefore rule out non fundamental volatility

a quantitative framework for assessing public investment in tourism an application to haiti abstract this study develops a linked regional computable general equilibrium and micro simulation rcge ms model to assess the regional economy wide and poverty impacts of a us 36 million investment in tourism in the south of haiti the first social accounting matrix for haiti with a base year of 2012 2013 was constructed to calibrate the model this research addresses three key gaps identified in the tourism impact assessment literature first a destination specific tourism demand and value chain analysis was used to calibrate the shocks implemented in the model second the rcge ms approach moves beyond the representative household configuration to enable more robust analysis of tourism investment impacts on poverty and income inequality third results of this modeling were used to inform a social cost benefit analysis to provide greater transparency in the evaluation of trade offs between investment alternatives results of this analysis showed a positive impact on sectoral activity especially for the hotel and restaurant sector 182 1 in 2040 and a 2 0 increase in gross regional product by 2040 the south s exports fell 4 7 below baseline and imports were 6 1 higher due to the inflow of foreign exchange the appreciation of the regional real exchange rate increased demand for most goods and services and limited regional productive capacity the rate of unemployment fell from 26 to 23 the investment helped lift some of the region s poorest out of poverty reducing the poverty headcount by 1 6 percentage points driving this result was an increase in employment wages and non labor income the linked rcge ms approach proves to be a powerful tool for assessing how tourism investments affect regional economic activity and revealing the mechanisms through which tourism can contribute to increased employment opportunities and poverty reduction

money and output a test of reverse causation this paper attempts to explain the correlation between money and output at various leads and lags with a model in which money is largely neutral and endogenously responds to output money is endogenous because both monetary policy and deposit creation are endogenous parameters are selected according to the simulated moments estimation technique while the estimated model succeeds along some dimensions in matching properties of postwar u s data its failure to match key patterns of lead lag correlations seems to cast doubt on the ability of endogenous money determination by itself to quantitatively account for the observed money output correlations copyright 1996 by american economic association

an optimizing is lm specification for monetary policy and business cycle analysis we ask whether relations of the is lm type can sensibly be used for the aggregate demand portion of a dynamic optimizing general equilibrium model intended for analysis of issues regarding monetary policy and cyclical fluctuations the main result is that only one change the addition of a term regarding expected future income is needed to make the is function match a fully optimizing model whereas no changes are needed for the lm function this modification leads to a dynamic forward looking model of aggregate demand that is tractable and usable with a wide variety of aggregate supply specifications theoretical applications concerning price level determinacy and gradual price adjustment are included

money and information in a new neoclassical synthesis framework we consider an otherwise standard new neoclassical synthesis theoretical framework that allows a role for money money in our model has an informational role which facilitates the estimation of the unobserved shocks that drive potential output and thus the state of the economy for this purpose we estimate a small scale sticky price model using bayesian techniques our findings support the view that money has information value this is reflected in higher precision in terms of unobserved model concepts such as the natural rate of output moreover our results highlight how modelling money demand can provide insights about structural features of the economy that may be important for the design of interest rate rules focusing on money also allows for a step towards resolving the price puzzle money demand shocks can confound monetary policy shocks to generate a perverse price response in vector autoregressions var

unemployment insurance in a sticky price model with worker moral hazard abstract this paper studies the role of unemployment insurance in a sticky price model that features an efficiency wage view of the labor market based on unobservable effort the risk sharing mechanism central to the model permits but does not force agents to be fully insured structural parameters are estimated using a maximum likelihood procedure on us data formal hypothesis tests reveal that the data favor a model in which agents only partially insure each other against employment risk the results also show that limited risk sharing helps the model capture many salient properties of the business cycle that a restricted version with full insurance fails to explain

public debts and fiscal politics how to decide the phenomenal growth in our public deficits over the past twenty years is a matter of public and professional concern see symposium 1989 while this concern may indeed be well founded particularly given current deficit levels public deficits are not always bad certainly in times of deep recessions short term deficit financing can stimulate aggregate demand increase national income and reduce unemployment in a keynesian fashion see richard startz 1989 second long term deficit financing may be needed to sustain a long term path of optimal consumption see peter diamond 1965 third public deficits including pay as yougo social security can offer welfare gains for significant subsets of consumers who have been liquidity constrained r glenn hubbard and kenneth judd 1986 who have been unable to purchase indexed private annuities alan blinder 1988 or who have been unable to sufficiently diversify their investment portfolios away from human capital robert merton 1983 finally robert barro 1979 has argued that public deficits may be an important policy instrument to insure intertemporal welfare maximization when public expenditures are stochastic and public taxes are economically inefficient taxes can be smoothed to reduce the lifetime excess burden of public financing the concern today is not that we have deficits but rather that we may be overdoing a good thing if this is the issue then we need to ask why and what can be done about it this is my agenda here i the political economy of recent deficits

monetary policy and asset prices a markov switching dsge approach summary this paper estimates a markov switching dynamic stochastic general equilibrium model by incorporating stock prices in monetary policy rules in order to identify the federal reserve s stance toward them based on the data from 1984 q1 to 2009 q2 i find that historical evidence of the policy reaction toward stock prices is weak except for the stock market bubble of the 1990s a counterfactual exercise shows that the rapid growth in stock prices during that period would have been significantly higher if monetary policy had been independent of the stock market however unconditional macroeconomic volatility increases with the degree of policy responsiveness toward stock prices copyright 2017 john wiley sons ltd

the swings of u s inflation and the gibson paradox in recent business cycles u s inflation has experienced a reduction of volatility and a severe weakening in the correlation to the nominal interest rate gibson paradox we examine these facts in an estimated dynamic stochastic general equilibrium model with money our findings point at a flatter new keynesian phillips curve higher price stickiness and a lower persistence of markup shocks as the main explanatory factors in addition a higher interest rate elasticity of money demand an increasing role of demand side shocks and a less systematic behavior of fed s monetary policy also account for the recent patterns of u s inflation dynamics jel e32 e47

money s role in the monetary business cycle a small structural model of the monetary business cycle implies that real money balances enter into a correctly specified forward looking is curve if and only if they enter into a correctly specified forward looking phillips curve the model also implies that empirical measures of real balances must be adjusted for shifts in money demand to accurately isolate and quantify the dynamic effects of money on output and inflation maximum likelihood estimates of the modelos parameters take both these considerations into account but still suggest that money plays a minimal role in the monetary business cycle

technology shocks and aggregate fluctuations in an estimated hybrid rbc model this paper contributes to the on going empirical debate regarding the role of the rbc model and in particular of technology shocks in explaining aggregate fluctuations to this end we estimate the model s posterior density using markov chain monte carlo mcmc methods within this framework we extend ireland s 2001 2004 hybrid estimation approach to allow for a vector autoregressive moving average varma process to describe the movements and co movements of the model s errors not explained by the basic rbc model the results of marginal likelihood ratio tests reveal that the more general model of the errors significantly improves the model s fit relative to the var and ar alternatives moreover despite setting the rbc model a more difficult task under the varma specification our analysis based on forecast error and spectral decompositions suggests that the rbc model is still capable of explaining a significant fraction of the observed variation in macroeconomic aggregates in the post war u s economy

does inflation increase after a monetary policy tightening answers based on an estimated dsge model abstract this paper estimates the importance of the cost channel of monetary policy in a new keynesian model of the business cycle a model with nominal and real rigidities is extended by assuming that a fraction of firms need to borrow money to pay their wage bill hence a monetary policy tightening increases effective unit labor costs of production and might imply an increase in inflation the paper examines the conditions under which the model can generate a positive response of inflation to a monetary contraction and estimates the model s parameters using bayesian methods the paper shows that the estimated demand side effects of monetary policy dominate the estimated supply side effect even if restrictions are imposed that make occurrence of a positive inflation response to a monetary contraction more likely

the effectiveness of institutional borrowing restrictions empirical evidence from spanish municipalities the need for restrictions on borrowing by subnational governments is a generally accepted notion that is justified both by public choice theory and by the fact that such restrictions are in force in the majority of decentralized countries furthermore recent breaches of the stability and growth pact of the european union have led to the introduction of legislative tools aimed at balancing the budget at all levels of government have come to the forefront of interest in european public finance research this paper is concerned with the financial situation and debt level of spanish municipalities from 1988 to 2000 we have two main objectives the first is to assess the value of mandatory limitations on municipal borrowing and past trends in the borrowing policies adopted by spanish local authorities the second is to develop an econometric model using panel data stratified by population size to measure indebtedness in spanish municipalities these measures enable us to formulate a series of hypotheses to explain municipal borrowing practices which are then tested empirically the evidence thus obtained appears to support the effectiveness of institutional borrowing restrictions to introduce some financial discipline in the borrowing policies adopted by local governments in spain

evidence on the flexibility of prices we consider two competing theories that provide potentially important explanations of price rigidity the first theory argues that prices are sticky at the aggregate level because of the cumulative effects of relatively short adjustment lags at the firm level in contrast the second theory argues that aggregate prices are slow to adjust because individual prices are slow to adjust we estimate a structural model in which imperfectly competitive firms set prices in order to maximize profits subject to quadratic costs of price adjustment the results suggest that to the extent that aggregate price rigidity exists it can be explained by sluggishness of individual price adjustment however prices at both the aggregate and individual level are found to adjust rapidly to nominal cost innovations copyright 1994 by mit press

endogenous money or sticky prices abstract what explains the correlations between nominal and real variables in the postwar us data are these correlations indicative of significant nominal rigidity or do they simply reflect the particular way that monetary policymakers react to developments in the real economy to answer these questions this paper uses maximum likelihood to estimate a model of endogenous money this model allows but does not require nominal prices to be sticky the results show that nominal price rigidity over and above endogenous money plays a role in accounting for key features of the data

does collective wage bargaining restore efficiency in a search model with large firms existing search and bargaining models show that firms hire an inefficiently large number of workers we ask whether decentralised collective wage bargaining may result in a second best allocation collective bargaining restores efficiency when the bargained wage is independent of employment conditions that we characterise firms then behave as if collective bargaining was over both wages and employment thus linking the large firm search and bargaining environment to the efficient bargaining model mcdonald and solow 1981 under more realistic conditions workers can bargain for a share of output so that the wage is then a function of employment in equilibrium firms are too large and firm entry is inefficient

changing macroeconomic dynamics at the zero lower bound this article develops a change point var model that isolates four major macroeconomic regimes in the us since the 1960s the model identifies shocks to demand supply monetary policy and spread yield using restrictions from a general equilibrium model the analysis discloses important changes to the statistical properties of key macroeconomic variables and their responses to the identified shocks during the crisis period spread shocks became more important for movements in unemployment and inflation a counterfactual exercise evaluates the importance of lower bond yield spread during the crises and suggests that the fed s large scale asset purchases helped lower the unemployment rate by about 0 6 percentage points while boosting inflation by about 1 percentage point

has exchange rate pass through really declined evidence from canada several empirical studies suggest that exchange rate pass through has declined in recent years among industrialized countries results for canada also indicate that import and consumer prices have become less responsive to exchange rate movements in the 1990s these findings are based on reduced form regressions that are typically motivated by partial equilibrium models of pricing this paper uses instead a structural general equilibrium approach to test the premise that exchange rate pass through has decreased in canada our approach consists in estimating a dynamic stochastic generalequilibrium model for canada over two sub samples which cover the periods before and after the adoption of inflation targeting by the bank of canada we then use impulseresponse analysis to assess the stability of exchange rate pass through across the two sub samples our results indicate that pass through to canadian import prices has been rather stable while pass through to canadian consumer prices has declined in recent years counterfactual experiments reveal that the change in monetary policy regime is largely responsible for this decline

a dynamic equilibrium model of inflation and unemployment a stochastic general equilibrium model is constructed which is capable of examining the covariance properties between inflation and unemployment both conditioned and unconditioned upon the state o

neutral technology shocks and the dynamics of labor input results from an agnostic identification this article studies the dynamic response of labor input to neutral technology shocks it uses benchmark dynamic stochastic general equilibrium models enriched with labor market search and matching frictions and investment specific technological progress that enables a new agnostic identification scheme based on sign restrictions on a structural vector autoregression svar the estimation supports an increase of labor input in response to neutral technology shocks this finding is robust across different perturbations of the svar model

money in the production function a new keynesian dsge perspective this article checks whether money is an omitted variable in the production process by proposing a microfounded new keynesian dynamic stochastic general equilibrium model in this framework real money balances enter the production function and money demanded by households is differentiated from that demanded by firms using a bayesian analysis our model weakens the hypothesis that money is a factor of production however the demand of money by firms appears to have a significant impact on the economy even if this demand has a low weight in the production process

do banking shocks matter for the u s economy abstract the quantitative significance of shocks to the financial intermediary fi has not received much attention up to now we estimate a dsge model with what we describe as chained credit contracts using bayesian technique in the model credit constrained fis intermediate funds from investors to credit constrained entrepreneurs through two types of credit contract we find that the shocks to the fis net worth play an important role in the investment dynamics accounting for 17 of its variations in particular in the great recession they are the key determinants of the investment declines accounting for 36 of the variations

two illustrations of the quantity theory of money breakdowns and revivals by extending his data we document the instability of low frequency regression coefficients that lucas 1980 used to express the quantity theory of money we impute the differences in these regression coefficients to differences in monetary policies across periods a dsge model estimated over a subsample like lucas s implies values of the regression coefficients that confirm lucas s results for his sample period but perturbing monetary policy rule parameters away from the values estimated over lucas s subsample alters the regression coefficients in ways that reproduce their instability over our longer sample jel c51 e23 e31 e43 e51 e52 robert e lucas jr 1980 used near unit slopes of univariate regressions of moving averages of inflation and interest rates on money growth for the united states for the period 1953 1977 to illustrate two central implications of the quantity theory of money that a given change in the rate of change in the quantity of money induces i an equal change in the rate of price inflation and ii an equal change in nominal rates of interest lucas said that those two quantity theoretic propositions

wage inequality and the distribution of education abstract this paper analyzes the relationship between education and wage inequality in metropolitan brazil the study is based on data from ten brazilian annual household surveys pnads which are available for the period 1976 1986 the universe of analysis is limited to occupied prime age males the inequality measure used was theil s second measure which is analytically convenient for a study of the determinants of inequality it is shown that there exist sharp differences in wage inequality across metropolitan areas to identify whether these large regional differences in inequality are directly associated with differences in educational levels or with differences in the steepness of the wage education profiles some simulations are conducted the results indicate that regional differences in the distribution of education are not able to explain much of the regional differences in wage inequality as a matter of fact the differences in wage inequality were shown to be intrinsically associated with differences in the steepness of the wage education profiles

identification of technology shocks in structural vars the usefulness of svars for developing empirically plausible models is actually subject to controversies in macroeconomics we propose a two step svars based procedure which consistently estimates the effect of permanent technology shocks on aggregate variables simulation experiments from a standard business cycle model and a sticky prices model show that our approach outperforms standard svars the two step procedure when applied to actual data predicts a significant short run decrease of hours after a technology improvement followed by a hump shaped positive response additionally the rate of inflation and the nominal interest rate displays a significant decrease after this shock

two illustrations of the quantity theory of money of two central implications of the quantity theory of money that a given change in the rate of change in the quantity of money induces i an equal change in the rate of price inflation and ii an equal change in nominal rates of interest the illustrations were obtained by comparing moving averages of the three variables in question using quarterly u s time series for the period 1953 77 readers may find the results of interest as additional confirmation of the quantity theory as an example of one way in which the quantity theoretic relationships can be uncovered via atheoretical methods from time series which are subject to a variety of other forces or as a measure of the extent to which the inflation and interest rate experience of the postwar period can be understood in terms of purely classical monetary forces the theoretical background of the study is reviewed very briefly as it is familiar material in the next section the data processing methods are described and rationalized in section ii the illustrations