simulating stock returns under switching regimes a new test of market efficiency a model of profits switches between four regimes with fixed probabilities the rationally expected profits stream implies the stock market value this efficient market model is not rejected by uk post war time series behaviour of either profits or the ftse index

the stabilizing role of government size abstract this paper presents an analysis of how alternative models of the business cycle can replicate the stylized fact that large governments are associated with less volatile economies our analysis shows that adding nominal rigidities and costs of capital adjustment to an otherwise standard rbc model can generate a negative correlation between government size and the volatility of output however in the model we find that the stabilizing effect is only due to a composition effect and it is not present when we look at the volatility of private output given that empirically we also observe a negative correlation between government size and the volatility of consumption we modify the model by introducing rule of thumb consumers in this modified version of our initial model we observe that consumption volatility is also reduced when government size increases in similar way to the observed pattern in oecd economies over the last 45 years

growth effects of public expenditure on the state and local level evidence from a sample of rich governments there is a vast empirical literature investigating the relationship between government size and economic growth but the empirical evidence of growth effects of public expenditure using cross country regressions is still inconclusive according to a number of authors this is not surprising since the negative relationship only applies for rich countries with a large public sector restricting their analysis on rich countries only they can show the predicted negative impact naturally a selection of a sub sample of rich countries is always somewhat arbitrary another possibility is to concentrate on governments within a rich country however only few studies investigate the effect of state and local spending on economic growth this study concentrates on the relationship between public expenditure and economic growth within a rich country using the full sample of state and local governments from switzerland over the 1981 2001 period the general finding is a fairly robust negative relationship between gov

agricultural price instability a survey of competing explanations and remedies there are two explanations for agricultural price dynamics one follows cobweb logic and models fluctuations driven by expectation errors but emphasises that these expectations create complex dynamics and possibly chaos the other stems from the rational expectations tradition of dynamics driven by real shocks the empirical evidence tends to support the latter but is not conclusive the rational expectations model generates an optimal dynamic path from which no improvement can be expected from public intervention however if we take account of all the potential market failures in agricultural markets and especially in developing countries this conclusion might require some qualifications although an appropriate policy design for stability has still to be achieved this paper surveys the positive and normative literature on agricultural prices highlighting empirical evidence and identifying remaining unresolved issues

output dynamics in real business cycles models the time series literature reports two stylized facts about output dynamics in the united states gnp growth is positively autocorrelated and gnp appears to have an important trend reverting component this paper investigates whether current real business cycle rbc models are consistent with these stylized facts many rbc models have weak internal propagation mechanisms and must rely on external sources of dynamics to replicate both facts models that incorporate labor adjustment costs are partially successful they endogenously generate positive autocorrelation in output growth but they need implausibly large transitory shocks to match the trend reverting component in output

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

sectoral shocks and aggregate fluctuations abstract this paper presents a multisector dynamic general equilibrium model of business cycles with a distinctive feature aggregate fluctuations are driven by independent sectoral shocks the model hypothesizes that trade among sectors provides a strong synchronization mechanism for these shocks due to the limited but locally intense interaction that is characteristic of such input trade flows limited interaction characterized by a sparse intermediate input use matrix reduces substitution possibilities among intermediate inputs which strengthens comovement in sectoral value added and leads to a postponement of the law of large numbers in the variance of aggregate value added the chief virtue of this model is that reliance on implausible aggregate shocks is not necessary to capture the qualitative features of macroeconomic fluctuations building on horvath 1998 review of economic dynamics 1 781 808 which establishes the theoretical foundation for the relevance of limited interaction in the context of a stylized multisector model this paper specifies a more general multisector model calibrated to the us 2 digit standard industrial code economy simulations prove the model is able to match empirical reality as closely as standard one sector business cycle models without relying on aggregate shocks

the long run relationship between openness and government size evidence from bounds test the bounds test is applied to determine the existence of a level relationship between government size openness terms of trade volatility and external risk using time series data from australia canada england norway sweden and the usa bounds test results show that the existence of a long run relationship in the usa and canada but not in any of the other countries long run parameters are estimated using both autoregressive distributed lag and fm ols procedures results vary from country to country with some evidence that government size is significantly affected by openness and terms of trade volatility however contrary to argument and evidence developed using cross section data empirical evidence presented in this paper show that the size of the government has not changed to mitigate the effect of increased income risks associated with greater openness

job destruction and propagation of shocks this paper considers propagation of aggregate shocks in a dynamic general equilibrium model with labor market matching and endogenous job destruction cyclical fluctuations in the job destruction rate magnify the output effects of shocks as well as making them much more persistent interactions between capital adjustment and the job destruction rate play an important role in generating persistence propagation effects are shown to be quantitatively substantial when the model is calibrated using job flow data incorporating costly capital adjustment leads to significantly greater propagation

sectoral solow residuals this paper presents capital utilization corrected measures of technology shocks for aggregate and disaggregated two digit standard industrial classification code industries we correct for variations in capital utilization by employing industrial electrical use as a measure of capital services in contrast the standard measures of technology shocks used in the real business cycle literature are based on economy wide data and assume that capital services are proportional to the stock of measured capital to assess the impact of these differences we contrast selected properties of the competing technology shock measures we argue that the properties of technology shocks for the manufacturing sector are quite different than those used in the rbc literature we also find that correcting for capital utilization has important implications for the properties of the solow residual

inflation inflation uncertainty and relative price dispersion evidence from bivariate garch m models abstract one potential real effect of inflation is its influence on the dispersion of relative prices in the economy menu cost models generally imply that higher trend inflation will increase price dispersion in contrast signal extraction models predict that increased inflation uncertainty will raise relative price dispersion existing empirical studies do not distinguish between these separate hypotheses we constuct a bivariate garch m model of inflation and relative price dispersion to test these differing explanations in a single model and find that inflation uncertainty dominates trend inflation as a predictor of relative price dispersion

sectoral comovement monetary policy shocks and input output structure the comovement of output across the sector producing nondurables i e nondurable goods and services and the sector producing durables is well established in the monetary business cycle literature however standard sticky price models that incorporate sectoral heterogeneity in price stickiness i e sticky nondurables prices and flexible durables prices cannot generate this feature we argue that an input output i o structure provides a solution to this problem here we develop a two sector model with an i o structure which is calibrated to the u s economy in the model each sector s output affects those of the others by acting as an intermediate input this connection between the sectors provides a channel through which sectoral comovement is induced

the role of energy in real business cycle models abstract this paper modifies hansen s 1985 analysis of a real business cycle mode with indivisible labor by explicitly including energy as a productive input and modelling the relative price of energy as an exogenous random process one goal is to determine the extent to which the introduction of energy price shocks reduces the reliance of the real business cycle model on unobserved technology shocks the other goal following christiano and eichenbaum 1991 is to compare the correlation between real wages and hours predicted by the energy inclusive model to that predicted by hansen s model

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

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

current real business cycle theories and aggregate labor market fluctuations hours worked and the return to working are weakly correlated traditionally the ability to account for this fact has been a litmus test for macroeconomic models existing real business cycle models fail this test dramatically we modify prototypical real business cycle models by allowing government consumption shocks to influence labor market dynamics this modification can in principle bring the models into closer conformity with the data our empirical results indicate that it does

government size government debt and globalization this article empirically investigates the effect of globalization on government size and debt using panel heterogeneous cointegration techniques to a panel of developing and developed countries i

the role of the real exchange rate and capacity utilisation in convergence to the nairu the concept of the nairu or natural rate is central to macroeconomics but our empirical knowledge about it remains hazy in this paper we examine three aspects of the nairu in the united kingdom all of which have been comparatively neglected in the literature the first involves the speed at which the nairu is approached where demand shocks persist because of contracts or adjustment costs a second related issue involves the dynamic interrelationship between unemployment and utilisation in the goods market and the implications of both variables for inflationary pressure the third aspect we explore is the two way interaction between the nairu and the real exchange rate one of the most influential studies of the u k nairu is layard and nickell i986 this used a four equation model based on imperfectly competitive goods and labour markets the model we use here nidem i i 4 has the same theoretical foundations but is considerably more complex in particular the current account the exchange rate and demand are modelled in a more structural manner and expectations are assumed to be rational in section i we show how the wage and price equations in this model combine to give a relationship between unemployment capacity utilisation the real exchange rate and changes in inflation we then examine how movements in the nairu are associated with changes in the current account which in turn generate real exchange rate changes that feedback on to the nairu section ii looks at the issues involving dynamic convergence to the nairu using simulations of the model section iii outlines the main conclusions

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

imperfect competition and the effects of energy price increases on economic activity the authors show that modifying the standard neoclassical growth model by assuming that competition is imperfect makes it easier to explain the size of the declines in output and real wages that follow increases in the price of oil plausibly parameterized models of this type are able to mimic the response of output and real wages in the united states the responses are particularly consistent with a model of implicit collusion where markups depend positively on the ratio of the expected present value of future profits to the current level of output copyright 1996 by ohio state university press

the fischer black hypothesis some time series evidence we estimate an arch m model to analyze the relationship between the conditional standard deviation of real gross national product gnp and its growth rate for the period 1871 1993 we find that variability significantly increases output growth rates in addition impulse response functions show that the effect of variability on growth rates is dynamic these results provide evidence in favor of black s 1987 business cycle hypothesis

the macroeconomic effects of fiscal policy linking an econometric model with theory in this paper the authors outline a method termed theoretical reconstruction which allows the system properties of any econometric macromodel to be related to a simpler theoretical model first elements of the econometric model which involve significant additional theoretical complexity compared to the theory model are removed this process continues until the properties of the deconstructed econometric model match those of the reference theory second the econometric model is gradually reconstructed noting at each point how each element of additional complexity influences the model properties the technique is illustrated using fiscal policy changes and the u k econometric model compact coauthors are julia darby jonathan ireland and ottavio ricchi

equilibrium models displaying endogenous fluctuations and chaos abstract this paper surveys current developments in dynamic general equilibrium theory concerned with conditions under which endogenous fluctuations are possible existing contributions are divided into two classes the larger one consists of models with a unique perfect foresight equilibrium while the second includes models where equilibrium is indeterminate and the set of equilibria involving endogenous fluctuations includes sunspots equilibria while the two classes of models involve oscillations of different natures and with different policy implications we show that both are consistent with optimizing behavior and competitive equilibrium

international evidence on the historical properties of business cycles we contrast properties of real quantities with those of price levels and stocks of money for ten countries over the last century although the magnitude of output fluctuations has varied across countries and periods relations among real quantities have been remarkably uniform properties of price levels however exhibit striking differences between periods inflation rates are more persistent after world war ii than before and price level fluctuations are typically procyclical before world war ii and countercyclical afterward fluctuations in money are less highly correlated with output in the postwar period but are no more persistent than in earlier periods jel e32 e31

indivisible labor lotteries and equilibrium abstract this paper considers an economy where labor is indivisible and agents are identical although the discontinuity in labor supply at the individual level disappears as a result of aggregation it is shown that indivisible labor has strong consequences for the aggregate bahavior of the economy it is also shown that optimal allocations involve lotteries over employment and consumption

indeterminacy aggregate demand and the real business cycle abstract we show that under indeterminacy aggregate demand shocks are able to explain not only aspects of actual fluctuations that standard rbc models predict fairly well but also aspects of actual fluctuations that standard rbc models cannot explain such as the hump shaped trend reverting impulse responses to transitory shocks found in us output cogley and nason am econom rev 85 1995 492 the large forecastable movements and comovements of output consumption and hours rotemberg and woodford am econom rev 86 1996 71 and the fact that consumption appears to lead output and investment over the business cycle indeterminacy arises in our model due to capacity utilization and mild increasing returns to scale

the effects of discretionary fiscal policy on macroeconomic aggregates a reappraisal fiscal stimuli to recover a cascade of academic and layman articles debate the effectiveness of fiscal policy in stimulating the economy backed up by different economic models and empirical support this essay surveys the theoretical predictions and recent empirical vector autoregression var evidence on the short run effects of discretionary fiscal policy on macroeconomic aggregates

the effect of wealth on individual and household labor supply evidence from swedish lotteries abstract we study the effect of wealth on labor supply using the randomized assignment of monetary prizes in a large sample of swedish lottery players winning a lottery prize modestly reduces earnings with the reduction being immediate persistent and quite similar by age education and sex a calibrated dynamic model implies lifetime marginal propensities to earn out of unearned income from 0 17 at age 20 to 0 04 at age 60 and labor supply elasticities in the lower range of previously reported estimates the earnings response is stronger for winners than their spouses which is inconsistent with unitary household labor supply models jel d14 j22 j31

capacity utilization under increasing returns to scale abstract this paper overcomes an important objection against the empirical relevance of the benhabib farmer model as a potential account of actual business cycle fluctuations this is attributable to an elasticity effect and a returns to scale effect of capacity utilization these effects are closely related to the empirical puzzles that capital appears to play an insignificant role in explaining cyclical movements in output and that the estimated labor elasticity appears to be larger than labor s share due to these effects multiple equilibria and persistent fluctuations can easily occur in a growth model for externalities mild enough so that the aggregate labor demand curve is downward sloping analyses show that the propagation mechanism generated by capacity utilization under mild increasing returns is capable of explaining the periodic patterns of u s business cycles documented by watson journal of economic literature classification numbers e32 e22 c52

technological learning and labor market dynamics the search and matching model of the labor market fails to match two important business cycle facts i a high volatility of unemployment relative to that of labor productivity and ii a mild correlation between these two variables we address these shortcomings by focusing on the implementation process of technological innovation that is the empirical nding that new technologies are subject to a learning process we consider a novel source of business cycles namely uctuations in the ease or speed of technological learning and show that a search and matching model featuring such shocks can account for both facts moreover our model provides a new interpretation of news shocks discussed in the recent business cycle literature

explaining saving investment correlations national saving and investment rates are highly positively correlated in virtually all countries this is puzzling as it apparently implies a low degree of international capital mobility this paper shows that the observed positive correlation between national saving and investment rates arises naturally within a quantitatively restricted equilibrium model with perfect mobility of financial and physical capital the model is consistent with the fact that saving investment correlations are larger for larger countries but are still substantial for small countries further the model is consistent with the finding that current account deficits tend to be associated with investment booms copyright 1993 by american economic association

technology shocks and monetary policy assessing the fed s performance abstract the purpose of the present paper is twofold first we characterize the fed s systematic response to technology shocks and its implications for u s output hours and inflation second we evaluate the extent to which those responses can be accounted for by a simple monetary policy rule including the optimal one in the context of a standard business cycle model with sticky prices our main results can be described as follows first we detect significant differences across periods in the response of the economy as well as the fed s to a technology shock second the fed s response to a technology shock in the volcker greenspan period is consistent with an optimal monetary policy rule third in the pre volcker period the fed s policy tended to overstabilize output at the cost of generating excessive inflation volatility our evidence reinforces recent results in the literature suggesting an improvement in the fed s performance

postwar british economic growth and the legacy of keynes the policies used by britain to finance world war ii represented a dramatic departure from the policies used to finance earlier wars and were very different from the policies used by the united states during the war following keynes s recommendations britain taxed capital income at a much higher rate than the united states during the war and for much of the postwar period we analyze quantitatively the policies designed by keneys using an endogenous growth model and the ncoclassical growth model we also evaluate the implications of tax smoothing policies we find that the welfare costs of keynes s policies were very high relative to a tax smoothing policy and argue that britain s poor macroeconomic performance in the early postwar period is a consequence of the high tax rates levied on capital income

international business cycles what are the facts abstract modern business cycle theory involves developing models that explain stylized facts for this strategy to be successful these facts should be well established in this paper we focus on the stylized facts of international business cycles we use the generalized method of moments and quarterly data from twenty industrialized countries to estimate and test hypotheses concerning pairwise cross country correlations of macroeconomic aggregates a remarkable common feature emerges these correlations are mostly positive not very high and of a similar order of magnitude the most important discrepancy with the theory is the low cross country correlation of consumption

measuring the chinese business cycle this article documents the business cycle characteristics of the chinese economy by adopting both nonparametric and parametric methodologies the two approaches are applied to relevant macroeconomics indicators gross domestic product gdp and industrial production ip indices aiming to investigate the growth cycle deviation cycle we provide a clear chronology of the chinese growth cycle one significant characteristic of the chinese growth cycle is the relatively direct influence of government policies however recently these policy effects have become less significant when compared to global economic influences our study provides an enhanced understanding of the properties of business cycle dating algorithms and as such contributes to future chinese business cycle research

aggregation and irrelevance in multi sector models abstract this paper studies the ability of input output relationships to generate fluctuations in aggregate output in several multi sector models including that of long and plosser 1983 in these models the manufacture of each sector s output depends on other sectors for materials these interconnections provide a mechanism for transmission of shocks across sectors and over time we ask how aggregates from these multi sector models behave relative to single sector models we provide conditions under which the second moment properties of aggregates in these models are the same as their single sector counterparts we further demonstrate that a broad class of input output structures generate aggregates with identical second moment properties and that the input output structures in this class provide a poor amplification mechanism for sector shocks

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

age structure and trade openness an empirical investigation this study focuses on the relationship between age structure and trade openness we hypothesise that a higher share of the working age population in the total population increases trade openness because the dependent population tends to spend more than the working age population on non tradable goods such as education and medical services we estimate the effects of age structure on trade openness using panel data for 85 countries from 1991 to 2010 the empirical results show that the share of the working age population has a positive effect on trade openness an increase in the share of the working age population is considered to be one factor that contributed to an increase in trade openness in the sample period

factor hoarding and the propagation of business cycles shocks this paper analyzes the role of variable capital utilization rates in propagating shocks over the business cycle to this end we formulate and estimate an equilibrium business cycle model in which cyclical capital utilization rates are viewed as a form of factor hoarding we find that variable capital utilization rates substantially magnify and propagate the impact of shocks to agents environments the strength of these propagation effects is evident in the dynamic response functions of various economy wide aggregates to shocks in agents environments in the statistics that we construct to summarize the strength of the propagation mechanisms in the model and in the volatility of exogenous technology shocks needed to explain the observed variability in aggregate u s output other authors have argued that standard real business cycle rbc models fail to account for certain features of the data because they do not embody quantitatively important propagation mechanisms these features include the observed positive serial correlation in the growth rate of output the shape of the spectrum of the growth rate of real output and the correlation between the forecastable component of real output and various other economic aggregates allowing for variable capital utilization rates substantially improves the ability of the model to account for these features of the data

the consequences of the us doj s antitrust activities a macroeconomic perspective do the antitrust law enforcement activities of the us department of justice act as exogenous technology shocks or as markup shocks limiting market power and promoting economic growth we analyze annual time series data from 1947 to 2003 on three measures of federal antitrust intervention the ratio of the antitrust division s budgetary expenditures to gdp as well as the numbers of civil and criminal antitrust cases instituted we find that changes in the levels of these policy variables act like negative technology shocks and that the negative effects are transitory antitrust policy generates no subsequent offsetting increases in productivity

monetary policy and dividend growth in germany long run structural modelling versus bounds testing approach this study examines the long run relationship between monetary policy and dividend growth in germany for this purpose cointegration is tested for between both variables in the period 1974 to 2003 however problems related to spurious regression arise from the mixed order of integration of the series used from mutual causation between the variables and from the lack of a long run relationship among the variables of the model these problems are addressed by applying the bounds testing approach to cointegration in addition to a more standard long run structural modelling approach in principle both procedures are capable of dealing with the controversial issue of the exogeneity of monetary policy vis a vis dividend growth however the structural modelling approach still leaves a certain degree of uncertainty about the integration properties of the interest rate and the dividend growth hence one feels legitimized to refer to the bounds testing procedure and to conclude that in the longer term short t

changing credit limits changing business cycles abstract in the last half century capital markets across the industrialized world have undergone massive deregulation involving large increases in the loan to value ltv ratios of households and firms we study the business cycle implications of this phenomenon in an estimated dynamic general equilibrium model with multiple credit constrained agents a progressive relaxation of credit constraints initially leads to both higher macroeconomic volatility and stronger comovement between debt and real activity this pattern reverses at ltv ratios not far from those currently observed in many advanced economies due to credit constraints becoming non binding more often the non monotonic relationship between credit market conditions and macroeconomic fluctuations carries important lessons for regulatory and macroprudential policymakers while reducing the average ltv ratio may unintentionally increase macroeconomic volatility a countercyclical ltv ratio proves to be successful in dampening business cycle fluctuations and most importantly avoiding dramatic output drops

trade openness and government size abstract we examine whether trade openness influences government size using panel data we find no evidence of a positive relationship rather causality tests show that larger government size leads to lower openness the opposite of what rodrik rodrik dani 1998 why do more open economies have bigger governments journal of political economy 106 997 1032 hypothesized

oil and the macroeconomy since the 1970s economists have long been intrigued by empirical evidence that suggests that oil price shocks may be closely related to macroeconomic performance this interest dates back to the 1970s the 1970s were a period of growing dependence on imported oil unprecedented disruptions in the global oil market and poor macroeconomic performance in the united states thus it was natural to suspect a causal relationship from oil prices to u s macroeconomic aggregates since then a large body of work has accumulated that purports to establish this link on theoretical grounds and to provide empirical evidence in its support we do not attempt a comprehensive survey of this literature but rather provide an idiosyncratic synthesis of what we view as the key issues in this debate and the insights gained over the last 30 years the timing seems right for such an account although the experience of the 1970s continues to play an important role in discussions of the link between oil and the macroeconomy there have been a number of new oil price shocks since the 1970s notably the 1986 collapse of oil prices and the 2000 boom in oil prices as well as the oil price increases associated with the 1990 1991 gulf war and the 2003 iraq war given this richer case history we are arguably in a better position than two decades ago to distinguish the idiosyncratic features of each oil crisis from the systematic effects increases in oil prices have been held responsible for recessions periods of excessive inflation reduced productivity and lower economic growth in this paper we review the arguments supporting such views first we highlight some of the conceptual difficulties in assigning a central role to oil price shocks in explaining

can a real business cycle model pass the watson test abstract watson 1993 measures of fit for calibrated models journal of political economy 101 6 1011 1041 proposes a procedure for evaluating the fit of a dynamic equilibrium business cycle model under watson s criterion the standard real business cycle rbc model fails dramatically in reconciling the dynamics of the model with the data this inability to account for the dynamics of us aggregate data remains a major challenge to rbc theory this paper demonstrates that reasonable modifications can bring rbc theory into closer conformity with the data the empirical results indicate that when habit formation on leisure choice and employment externality are incorporated into the analysis the striking spectral density differentials documented by watson virtually vanish at business cycle frequencies

the relation between price and marginal cost in u s industry an examination of data on output and labor input reveals that some u s industries have marginal cost well below price the conclusion rests on the finding that cyclical variations in labor input are small compared with variations in output in booms firms produce substantially more output and sell it for a price that exceeds the costs of the added inputs the paper documents the disparity between price and marginal cost where marginal cost is estimated from annual variations in cost it considers a variety of explanations of the findings that are consistent with competition but none is found to be completely plausible

theories of entrepreneurship innovation and the business cycle abstract this paper discusses several prominent economic theories which link entrepreneurs and their innovations to the creation and magnitude of business cycles i distinguish three broad classes of theories models of creative destruction models of innovation and implementation cycles and models of production under asymmetric information key insights of the theories are identified policy implications are drawn and suggestions for future research are proposed

openness country size and government abstract this paper shows that smaller countries have a larger share of public consumption in gdp and are also more open to trade these empirical observations are consistent with recent theoretical models explaining country formation and break up and may account for the observed positive empirical relationship between trade openness and government size

an exploration into pigou s theory of cycles abstract this paper explores a theory of business cycles in which recessions and booms arise due to difficulties encountered by agents in properly forecasting the economy s future needs in terms of capital the idea has a long history in the macroeconomic literature as reflected by the work of pigou industrial fluctuation macmillan london 1926 the contribution of this paper is twofold first we illustrate the type of general equilibrium structure that can give rise to such phenomena second we examine the extent to which such a model can explain the observed pattern of u s recessions frequency depth without relying on technological regress we argue that such a model offer a framework for understanding elements of both the recent u s recession and of the asia downturns of the late 1990s

labor hoarding and the business cycle this paper investigates the sensitivity of solow residual based measures of technology shocks to labor hoarding behavior using a structural model of labor hoarding and the identifying restriction that innovations to technology shocks are orthogonal to innovations in government consumption we estimate the fraction of the variability of the solow residual that is due to technology shocks our results support the view that a significant proportion of movements in the solow residual are artifacts of labor hoarding behavior specifically we estimate that the variance of innovations to technology is roughly 50 percent less than that implied by standard real business cycle models in addition our results suggest that existing real business cycle studies substantially overstate the extent to which technology shocks account for the variability of postwar aggregate u s output

has federal budget deficit policy changed in recent years this paper applies new tests for parameter instability in cointegrated regression models to the u s federal government s intertemporal budget constraint in order to detect whether there has been a regime change in spending and taxing policies some researchers have argued that fiscal policy under presidents reagan and bush moved the u s deficit onto an unsustainable path my results suggest that government deficit policy in the 1980s was not significantly different from policies during the three earlier decades however a diverging debt gnp ratio suggests that the government will run into problems marketing its debt if current policy continues

productivity shocks and real business cycles abstract productivity shocks play a central role in real business cycles as an exogenous impulse to macroeconomic activity however measured solow prescott residuals do not behave as an exogenous impulse rather econometric evidence provided in this paper indicates that 1 money interest rates and government spending granger cause these impulses and 2 a substantial component of the variance of these impulses between one quarter and one half is attributable to variations in aggregate demand these results are robust to a number of econometric issues including measurement errors specification of the production function and certain forms of omitted real variables

intermediate inputs and sectoral comovement in the business cycle abstract the post war us business cycle is characterized by positive comovement of employment and output across sectors it has been argued that multi sector growth models are inconsistent with this observation when changes in relative productivities are the main source of fluctuations we suggest that the input output structure of an economy in particular the pervasive use of intermediate inputs can induce positive comovement in sectoral employment and output following changes in relative productivities we calibrate a model of the us economy for the durable and nondurable goods producing sectors and show that sectoral employment and output move together if intermediate inputs are used in production the model is also consistent with the observation that the relative price of nondurable goods is procyclical

business cycles and labor market search the quantitative implications of labor market search for economic fluctuations are evaluated in the context of a real business cycle model incorporating labor market search into the model is found to improve its empirical performance along several dimensions in particular hours now fluctuate substantially more than wages and the contemporaneous correlation between hours and productivity falls in addition the model replicates the observation that output growth displays positive autocorrelation at short horizons overall the empirical results suggest that the labor market search environment embodies a quantitatively important propagation mechanism copyright 1996 by american economic association

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

openness government size and the terms of trade this paper investigates the relationship between trade openness and the size ofngovernments both theoretically and empirically we argue that openness can increase the size of governments through two channels 1 a terms of trade externality whereby trade lowers the domestic cost of taxation and 2 the demand for insurance whereby trade raises risk and public transfers we provide a unified framework for studying and testing these two mechanisms our main theoretical prediction is that the relative strength of the two explanations depends on a key parameter namely the elasticity of substitution between domestic and foreign goods moreover while the first mechanism is inefficient from the standpoint of world welfare the second is instead optimal in the empirical part of the paper we provide new evidence on the positive association between openness and government size and we explore its determinants consistently with the terms of trade externality channel we show that the correlation is contingent on a low elasticity of substitution between domestic and foreign goods our findings raise warnings that globalization may have led to inefficiently large governments

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

fiscal shocks and their consequences this paper investigates the response of hours worked and real wages to fiscal policy shocks in the post world war ii us we identify these shocks with exogenous changes in military purchases and argue that they lead to a persistent increase in government purchases and tax rates on capital and labor income and a persistent rise in aggregate hours worked as well as declines in real wages the shocks are also associated with short lived rises in aggregate investment and small movements in private consumption we describe and implement a methodology for assessing whether standard neoclassical models can account for the consequences of a fiscal policy shock simple versions of the neoclassical model can account for the qualitative effects of a fiscal shock once we allow for habit formation and investment adjustment costs the model can also account reasonably well for the quantitative effects of a fiscal shock

the impact of exchange rate volatility on international trade flows despite the best efforts of economists a basic paradox as to the impact of exchange rate volatility on trade flows remains unresolved at both the theoretical and empirical level this paper surveys the vast literature in the area in an attempt to identify major issues which have contributed to the development of the debate and examine whether any general direction for consensus may be found

firm dynamics and markup variations implications for sunspot equilibria and endogenous economic fluctuations this paper analyzes how the interaction between firms entry and exit decisions and variations in competition gives rise to self fulfilling expectation driven fluctuations in aggregate economic activity and in measured total factor productivity tfp the analysis is based on a dynamic general equilibrium model in which net business formation is endogenously procyclical and leads to endogenous countercyclical variations in markups this interaction leads to indeterminacy in which economic fluctuations occur as a result of self fulfilling shifts in the beliefs of rational forward looking agents when calibrated with empirically plausible parameter values and driven solely by self fulfilling shocks to expectations the model can quantitatively account for the main empirical regularities characterizing postwar u s business cycles and for 65 of the fluctuations in measured tfp

economic leadership and growth abstract economies governed by former economics students grow faster than economies governed by leaders with other education backgrounds a result which is most evident for presidents faster growth average growth occurs during an economic leader s first year entire tenure primarily through investment when focusing on close elections which quasi randomize economic leadership i find a large effect that is robust controlling for a leader s advanced education investors seem to hasten their activity in anticipation of their economic leader s eventual reduction of the top personal income tax rate overall the findings suggest that economic leaders improve short term growth through the anticipation of policy changes

how occupied france financed its own exploitation in world war ii can a vanquished country deliver significant resources to its occupier based on the failure of germany to pay its post world war i reparations conventional wisdom generally doubts the possibility yet german reparations represent the exception rather than the rule perhaps the most successful case was the transfer of resources that germany obtained from france during world war ii although they imposed huge payments the victors left the french to decide how to raise the funds after comparing the magnitude of france s payment to other episodes we employ a neoclassical growth model to assess both wartime and postwar policies the burden imposed on the french economy caused it to shrink at a rapid pace curtailing consumption and yielding large debt and money overhangs although vichy france intended to manage the postwar debt burden with higher tax rates the governments following liberation allowed inflation to slash the debt redistributing the adjustment cost higher taxes did not fund the debt but instead paid for expenditures associated with the rise of the welfare state

labor search and matching in macroeconomics abstract the labor search and matching model plays a growing role in macroeconomic analysis this paper provides a critical selective survey of the literature four fundamental questions are explored how are unemployment job vacancies and employment determined as equilibrium phenomena what determines worker flows and transition rates from one labor market state to another how are wages determined what role do labor market dynamics play in explaining business cycles and growth the survey describes the basic model reviews its theoretical extensions and discusses its empirical applications in macroeconomics the model has been developed against the background of difficulties with the use of the neo classical frictionless model of the labor market in macroeconomics its success includes the modelling of labor market outcomes as equilibrium phenomena the reasonable fit of the data and when inserted into business cycle models improved performance of more general macroeconomic models at the same time there is evidence against the nash solution used for wage setting and an active debate as to the ability of the model to account for some of the cyclical facts

state dependent pricing and the general equilibrium dynamics of money and output economists have long suggested that nominal product prices are changed infrequently because of fixed costs in such a setting optimal price adjustment should depend on the state of the economy yet while widely discussed statedependent pricing has proved difficult to incorporate into macroeconomic models this paper develops a new tractable theoretical state dependent pricing framework we use it to study how optimal pricing depends on the persistence of monetary shocks the elasticities of labor supply and goods demand and the interest sensitivity of money demand

macro models and macro policy in the 1980s macroeconometric models play a key role in the policy making process they provide a consistent and comprehensive account of the various eco nomic interactions quantified with reference to historical data a treasury economist testifies that we could not operate at all effectively in policy analysis without the model odling smee 1989 p 34 models are simplifications however focus ing attention on the problem at hand changing when that focus of attention changes and changing when forecast failures highlight inadequacies in existing specifications moreover they are built in accordance with an underlying view of the way the world worics and the available data cannot always provide a clear discrimination between competing views thus models are not only an essential part of the policy analyst s equipment but also a reflection of economic opinion and policy concerns in this spirit our paper analyses the changes in and the interactions between modelling and policy making in the 1980s

the macroeconomic effects of war finance in the united states world war ii and the korean war during world war ii government expenditures were financed primarily by issuing debt during the korean war expenditures were financed almost exclusively by higher taxes reflecting president truman s preference for balanced budgets this paper evaluates quantitatively the economic effects of the different policies used to finance these two wars counterfactual experiments are used to explore the implications of financing world war ii like the korean war and financing the korean war like world war ii the author finds that using a korean war policy during world war ii would have resulted in much lower output and welfare relative to the actual policy copyright 1997 by american economic association

real business cycle models past present and future in this paper i review the contribution of real business cycles models to our understanding of economic fluctuations and discuss open issues in business cycle research this abstract was borrowed from another version of this item

real business cycles in this paper we demonstrate how certain very ordinary economic principles lead maximizing individuals to choose consumption production plans that display many of the characteristics commonly associated with business cycles our explanation is entirely consistent with i rational expectations ii complete current information iii stable preferences iv no technological change v no long lived commodities vi no frictions or adjustment costs vii no government viii no money and ix no serial dependence in the stochastic elements of the environment we also provide a completely worked out example of the type of artificial economy we have in mind the time series properties of the example exhibit some major features of observed business cycles although this type of model may not be capable of explaining all of the regularities in actual business cycles we believe that it provides a useful well defined benchmark for assessing the relative importance of factors e g monetary disturbances

public expenditures and the unemployment rate in the american states panel evidence we reexamine the unemployment rate ur government expenditure nexus in a panel of 50 state and local governments slgs over the period 1977 2006 to provide new pre recession empirical evidence that helps put the expectations on the effects of the federal relief to slgs in a broader context we found that 1 per capita real public spending total and capital assistance and subsidies wages and salaries and social insurance categories was part of a cointegrating relationship with ur and real per capita state personal income 2 with the exception of social insurance other spending variables when statistically significant actually had a depressing effect on ur the magnitude of this effect however was generally small ur was most sensitive to increases in wages and salaries 3 long term causality analysis based on panel error correction coefficients provided consistent evidence of a causal effect from spending to ur but less consistent evidence of such effect in the opposite direction soci