cyclical comovements in industrial labor and product markets theory and evidence i introduction cyclical fluctuations among economic variables are at the heart of the study of business cycles the explanations for the real and inflationary effects of business cycles can be classified into equilibrium and new keynesian alternatives the equilibrium explanation of business cycles pioneered by lucas 1973 relies on imperfect information about sources of demand shifts that provide an explanation for the output inflation tradeoff in the face of aggregate demand shifts in contrast the common theme of the new keynesian explanation of business cycles concerns nominal rigidity that interferes with market forces in determining the allocation of cyclical shifts among nominal and real magnitudes the form of rigidity varies between sticky price and sticky wage new keynesian explanations the former see e g ball mankiw and romer 1988 advocates the presence of menu costs that determine the frequency of price adjustment and in turn the output inflation tradeoff in contrast contractual wage rigidity see e g gray 1978 advocates the presence of implicit or explicit agreements that determine the frequency of wage and salary negotiations across the economy wage flexibility determines in turn the output inflation tradeoff during business cycles the detailed treatment of cyclical conditions in the labor market is among the primary differences between the contractual wage rigidity explanation and contending explanations of business cycles conditions in the labor market determine cyclical fluctuations in wages and labor employment the resulting tradeoff between wage inflation and unemployment is crucial in determining the price and quantity effects of cyclical fluctuations in contrast conditions in the labor market are not crucial to competing explanations of business cycles in the context of the lucas imperfect information model agents are assumed to be self employed for simplicity this eliminates the need for an explicit treatment of the cyclical fluctuations of wages in the context of the sticky price new keynesian models wages may vary according to conditions in a walrasian labor market or in the form of installment payments that do not fluctuate with the cycle accordingly conditions in the labor market do not explain the output inflation tradeoff during business cycles because business cycles are inherently complex economic phenomena theories tend to be highly controversial this in turn has stimulated the interest of macroeconometric researchers to establish the empirical validity of business cycle theories 1 efforts have focused on testable hypotheses that establish the empirical validity of the alternative explanations in this investigation we seek to contribute to these efforts more specifically the analysis of the paper will seek to evaluate the validity of the unique implications of the sticky wage explanation of business cycles concerning correlations between labor market conditions and the output inflation tradeoff towards this objective we investigate a sample of 28 private u s industries first we use time series data to estimate the cyclical responses of output inflation nominal and real wages to demand and supply shocks impinging on the stochastic structure of each industry the nominal and real wage responses to the various shocks will serve as a measure of the degree of wage flexibility further according to the contractual wage rigidity theory wage rigidity can be influenced by the duration of wage contracts as well as the presence of wage indexation without wage indexation longer contracts are associated with a larger cyclical response of the real wage to demand and supply shocks thus the labor market is hypothesized to be a primary source that influences the output inflation tradeoff across industries secondly we use our time series estimates indicating the cyclical response of wages output and prices to various shocks as a source of data enabling us to provide a comprehensive cross sectional evaluation of the contractual wage rigidity hypothesis

variation in the fiscal multiplier with the method of financing evidence across industrial countries government spending has often varied with the business cycle to stimulate the economy and to revive economic conditions however the state of public finances has often necessitated higher borrowing to finance widening fiscal deficits indeed recent austerity packages around the globe have crystalized the importance of fiscal consolidation against the backdrop of rising public debt to shed light on recent debates regarding fiscal multipliers the article estimates variation in these multipliers with the method of financing using annual data for a sample of industrial countries there is a large variation in the effects of expansionary and contractinary government spending shocks on economic variables within and across countries the significant effects of negative government spending shocks fiscal contraction appear more prevalent than those of expansionary shocks on real output growth price inflation and nominal wage inflation consistent with theory s predictions the fiscal multiplier is more lik

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

credit rationing and credit view empirical evidence from an ethical bank in italy attempts have been made in the empirical literature to identify credit rationing and its determinants using balance sheet data or evidence from corporate surveys however observational equivalence identification problems and interview biases are serious problems in these studies we analyze directly the determinants of credit rationing in credit files by examining the differencebetweentheamountsdemandedbyandsuppliedtoeachborrower as shown by official bank records our findings provide microeconomic evidence that supports the credit view hypothesis by showing that the european central bank refinancing rate is significantly and positively related to partial but not total credit rationing this finding is consistent with the hypothesis that this variable affects the total volume of bank loans

fiscal policy in good times and bad in the 1980s several countries with large government debt or deficit implemented substantial and in some cases drastic deficit cuts contrary to widespread expectations in many cases private consumption boomed rather than contracted this paper shows that in times of fiscal stress shocks to government revenues and especially expenditure have very different effects on private consumption than in normal times

fiscal policy in general equilibrium this paper studies four classic fiscal policy experiments within a quantitatively restricted neoclassical model the authors main findings are as follows 1 permanent changes in government purchases can lead to short run and long run output multipliers that exceed one 2 permanent changes in government purchases induce larger effects than temporary changes 3 the financing decision is quantitatively more important than the resource cost of changes in government purchases and 4 public investment has dramatic effects on private output and investment these findings stem from important dynamic interactions of capital and labor absent in earlier equilibrium analyses of fiscal policy copyright 1993 by american economic association

do government policy multipliers decrease with inflation abstract we use cross country data to examine the effects of inflation on government spending and monetary policy multipliers in contrast to earlier work by ball mankiw and romer 1988 and defina 1991 we allow for differential impacts of both the monetary base and government spending and this difference turns out to be empirically quite important we find little evidence in favor of a new keynesian sticky price model

government debt government spending and private sector behavior a current period tax reduction financed by issuing government debt shifts the timing of tax collection from the current period to the future if the future taxes implied by government debt are not fully perceived and discounted by the private sector there will be a net wealth effect that increases private sector consumption thus reducing capital accumulation and growth if on the other hand the implied future taxes are perceived and discounted by the private sector the current period tax reduction will be used to increase private saving to pay for the future taxes and government debt will be absorbed without any real effects on the economy the effects of government spending financed by current period taxation also depend upon private sector perceptions 2 if the benefits of government spending are ignored private sector consumption will decrease in accordance with the reduction in permanent disposable income to the extent that government spending is on consumption type goods that are perceived as substitutes for privately provided consumption goods there will be a relatively greater reduction in private sector consumption to the extent that government spending is on investment type goods yielding future goods and services that are perceived as substitutes for future privately provided consumption goods there will be a relatively smaller reduction in private sector consumption the standard approach to modeling private sector consumption saving behavior involves a rather asymmetric set of assumptions as to how the private sector perceives the various elements of government fiscal policy 3 current period taxes are assumed to be fully perceived but current period government spending is implicitly assumed to be completely ignored by the private sector in considering permanent personal disposable income the private sector is assumed to be forward looking in its assessment of income and taxation the stock of government debt is nevertheless included as part of the stock of private wealth the implicit assumption associate professor of economics graduate school of business university of chicago 1101 east 58th street chicago il 60637 i thank eugene fama levis kochin michael mussa paul evans and an anonymous referee for helpful comments i am particularly grateful to daniel benjamin for contributing many hours of discussion and laura lahaye who was a research assistant and valuable adviser on earlier drafts the theoretical debate on the burden of the debt has been long standing gerald o driscoll 1977 documents ricardo s nineteenth century position robert barro 1974 reopened the debate by introducing the fundamental issue of intergenerational transfers also discussed in merton miller and charles upton 1974 the empirical side of the debate was initiated by levis kochin s 1974 attempt to test for the effects of deficits on consumption and by martin feldstein s 1974 attempt to test for the effects of social security wealth on consumption other empirical contributions include jess yawitz and laurence meyer 1976 myself 1978 and j earnest tanner 1978 1979 with respect to the effects of government deficits and debt and barro 1978 michael darby 1979 and dean leimer and selig lesnoy 1982 with respect to social security wealth see also interesting recent papers by john seater 1982 who generates detailed tests of the effects of deficits and debt on consumption charles plosser 1982 who explores the effects of government spending and debt shocks on interest rates and feldstein 1982 who attempts tests similar to some in this paper see fn 29 2martin bailey s 1962 1971 development of the effects of government spending on private consumption and aggregate economic activity is the seminal contribution paul david and john scadding 1974 extend bailey s ideas and provide some supporting empirical evidence more recently willem buiter 1977 and myself 1978 developed models based on bailey s earlier work barro 1981 has an interesting paper on related issues see also david aschauer 1982 3the standard approach incorporates fiscal policy through the concept of personal disposable income and by including the stock of government debt as part of personal wealth see for example the empirical specification of albert ando and franco modigliani 1963 which has been the basis of most empirical consumption studies since and feldstein 1974 for one of the more influential papers based on the ando modigliani specification

affine models of the joint dynamics of exchange rates and interest rates this paper extends the affine class of term structure models to describe the joint dynamics of exchange rates and interest rates in particular the issue of how to reconcile the low volatility of interest rates with the high volatility of exchange rates is addressed the in complete market approach of introducing exchange rate volatility that is orthogonal to both interest rates and the pricing kernels is shown to be infeasible in the affine setting models in which excess exchange rate volatility is orthogonal to interest rates but not orthogonal to the pricing kernels are proposed and validated via kalman filter estimation of maximal 5 factor models for 6 country pairs

small menu costs and large business cycles a macroeconomic model of monopoly i introduction the conflict between modern neoclassical and traditional keynesian theories of the business cycle centers upon the pricing mechanism in neoclassical models prices are fully flexible they represent the continuous optimization of economic agents and the continuous intersection of supply and demand in keynesian models prices are often assumed to be sticky they do not necessarily equilibrate all markets at all times one of the reasons for the resurgence of the equilibrium approach to macroeconomics has been the absence of a theoretical underpinning for this keynesian price stickiness this note shows that sticky prices can be both privately efficient and socially inefficient the business cycle results from the suboptimal adjustment of prices in response to a demand shock to the extent that policy can stabilize aggregate demand it can mitigate the social loss due to this suboptimal adjustment in some keynesian models prices are simply exogenously fixed 2 in others agents must set their prices in advance of the transaction date the act of altering a posted price is certainly costly these costs include such items as printing new catalogs and informing salesmen of the new price yet these menu costs are small and therefore generally perceived as providing only a weak foundation for these fixed price models however this inference is flawed small menu costs can cause large welfare losses the claim that price adjustment costs are small does not rebut the claim that they are central to understanding economic fluctuations

asymmetry in the effects of monetary and government spending shocks contrasting evidence and implications magda kandil 1 introduction recent research on business cycles has produced evidence that demonstrates the asymmetric effects of monetary shocks on economic variables 1 specifically the effect of expansionary monetary shocks on economic variables may be different from that of contractionary shocks the empirical evidence has stimulated efforts to provide an adequate theoretical explanation to the observed asymmetry sources of asymmetry have varied sharply in the theoretical literature primary explanations may be classified into supply side and demand side sources of asymmetry a strand of the theoretical literature has viewed asymmetry of economic fluctuations to be a supply side phenomenon demand shifts along a kinked supply curve are likely to produce varying effects on the economy as to the explanation of the kinked shape of the supply curve competing models offer explanations in one direction some have explained the asymmetric shape of the supply curve by conditions in the labor market this possibility arises in the context of models that advocate the contractual nominal wage rigidity explanation of business cycles the stipulation of wage contracts may allow for asymmetric wage indexation for example if wages are more responsive to expansionary demand shocks compared to contractionary shocks asymmetric wage indexation is consistent with a kinked supply curve in labor and output markets consequently expansionary demand shocks are likely to move the economy along a steeper supply curve 2 alternatively supply side asymmetry may be attributed to conditions in the p roduct market that differentiate price adjustment in the upward and downward directions faced with menu costs firms may be inclined for more frequent and larger adjustments of prices in the upward compared to the downward direction this possibility also is consistent with a steeper supply curve in the face of positive demand shocks compared to negative shocks 3 another line of the theoretical explanations of asymmetric economic fluctuations has emphasized possible asymmetry on the demand side of the economy conditions in the money and or goods markets may differentiate the response of aggregate demand to positive and negative shocks 4 this possibility differentiates the size of aggregate demand shifts in the face of expansionary and contractionary shocks in the absence of supply side asymmetry demand side asymmetry differentiates the severity of economic fluctuations in the face of positive and negative shocks the primary difference between demand side and supply side explanations concerns the output and inflationary effects in response to asymmetry supply side asymmetry produces a trade off between the asymmetric effects of demand shocks on output and their inflationary effects on wages and or prices the response of output growth is larger in the face of demand contraction compared to expansion concurrently the inflationary effect of demand shifts exceeds the deflationary effect on nominal wage and or price in contrast demand side asymmetry produces a positive correlation between the asymmetric effects of demand shocks on real output growth and nominal wage and price inflation that is larger output contraction relative to expansion correlates with smaller inflation relative to deflation of the nominal wage and price in the face of demand shocks the purpose of this investigation is to contrast asymmetry on the demand and supply sides in the face of two specific demand shocks monetary and government spending shocks demand and or supply conditions may differentiate the expansionary and contractionary effects of monetary and fiscal policies the article s analysis will highlight the specifics of this asymmetry the empirical evidence sheds some light on potential explanations of this asymmetry as follows conditions in the credit market and the behavior of ricardian consumers may differentiate the effects of expansionary and contractionary government spending shocks on aggregate demand

trigger points and budget cuts explaining the effects of fiscal austerity we propose and solve an optimizing model which explains counterintuitive effects of fiscal policy in terms of expectations if government spending follows an upward trending stochastic process which the public believes may fall sharply when it reaches specific trigger points then optimizing consumption behavior and simple budget constraint arithmetic imply a nonlinear relationship between private consumption and government spending this theoretical relation is consistent with the experience of several countries jel e62 e21 textbook aggregate demand models suggest simple relationships between the government budget and economic activity a cut in the government deficit for example depressing consumption and output though such models heavily influence the design of stabilization policies their micro foundations are unclear and their sharp predictions are not always consistent with reality in many countries large cuts in government spending carried out as part of stabilization programs have led to expansions rather than contractions in economic activity the absence of simple relationships be

the ricardian equivalence proposition evidence from foreign exchange markets abstract the major argument against running large government budget deficits is that they raise interest rates and crowd out real investment conclusive evidence of a relationship between large budget deficits and high interest rates has not been found two competing explanations are tested by examining the impact of government udget announcements on foreign exchange rates the ricardian equivalence proposition that deficits have no crowding out effects is compared to the conventional open economy hhypothesis that capital mobility transfers these effects to foreign exchange rates the results supports the open economy hypothesis over the ricardian equivalence proposition jel f41

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

government spending and the exchange rate this paper investigates the effects of govenment spending on real and nominal exchange rates within the context of an open economy equilibrium rational expectations model the model predicts that both real and nominal exchange rates appreciate in response to anticipated and unanticipated increases in government spending empirical evidence from germany for the period 1975 2 1989 4 provides some weak support for the predictions of the model

asymmetric effects of positive and negative money supply shocks this paper examines whether positive and negative money supply shocks have symmetric effects on output the results are consistent with the hypothesis that positive money supply shocks do not have an effect on output while negative money supply shocks do have an effect on output this finding is independent of whether or not expected money is assumed to affect output the results reported in this paper imply that the fed could increase the growth rate of real output by reducing the standard deviation of unexpected changes in the money supply

do budget deficits raise nominal interest rates evidence from six countries abstract it is widely believed that budget deficits raise nominal interest rates this paper shows that the belief has no empirical support for six countries ricardian equivalence may explain the lack of a positive association between budget deficits and nominal interest rates