the growth of business firms facts and theory we refer to the framework developed by ijiri and simon 1977 and to the notion of independent submarkets sutton 1998 to provide a simple candidate explanation for the shape of the firm growth distribution based on a model of proportional growth at the level of both the introduction of new products by firms and their size dynamics we exploit the features of a unique longitudinal data set which covers the entire distribution of products and firms in the worldwide pharmaceutical industry to test the model at different levels of aggregation as well as at different time lags econometric investigations show that the model s predictions are in good agreement with empirical evidence jel l11 l65

the international transmission of real business cycles the authors present a stochastic model of two barter economies with production linked by free trade in goods and securities which generates pareto efficient international transmissions of business cycle disturbances each country is inhabi ted by an infinitely lived representative firm and consumer worker and is subject to country specific production shocks the internation al capital market effects perfect pooling of country specific risk c onsumption and output volatility may be higher in trade than under au tarchy as agents can be induced to undertake additional risk in exchange for a higher expected utility copyright 1988 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

nonlinearities in economic dynamics two reasons that led to the dominance of the linear stochastic difference equations approach the first one was the fact that the nonlinear systems seemed incapable of reproducing the statistical aspects of actual economic time series at best such models were able to produce periodic motion1 and an examination of the spectra of economic time series showed the absence of the spikes that characterise periodic data the emphasis on the equilibrium approach to aggregate economic behaviour cf lucas i 986 would make things even more difficult the plethora of stability results for models of infinitely lived agents with perfect foresight turnpike theorems suggested that even the regular fluctuations that had been derived in the literature on endogenous business cycles were incompatible with a theory that had solid microeconomic foundations further this indicated that while nonlinearities could be present the explanations of the fluctuations had to rest solely on the presence of exogenous shocks that working through the equilibrating mechanism would create the observed randomness if such shocks were absent the system would tend to a stationary state the second reason was the empirical success of the models based on linear stochastic difference equations low order autoregressive processes captured some of the features of aggregate time series in turn these processes can in principle result from an economy with complete markets where production is subject to exogenous shocks though the task of confronting these equilibrium models with actual data has not yielded uncontroversial results see the discussion and references in section i there was no obvious gain in the

the real effects of financial integration abstract this paper shows how correlations in gdp fluctuations rise with financial integration finance serves to increase international correlations in both consumption and gdp fluctuations which explains the persistent gap between the two in the data a quantity puzzle the positive association between financial integration and gdp correlation constitutes a puzzle as theory suggests a negative relation if anything nevertheless it prevails in the data even after the effects of finance on trade and specialization are accounted for

optimal growth with many consumers abstract a method is described for constructing all pareto optimal allocations for a dynamic economy with many heterogeneous consumers under certainty in which both the technology and consumer preferences are recursive but preferences need not be additively separable over time optimal perfect foresight competitive equilibrium allocations are obtained through the study of a dynamic program for an economy with one consumption good sufficient conditions are given for the existence of a unique interior stationary distribution of consumption and wealth for a two person exchange economy sufficient conditions are given for the global asymptotic stability of the unique interior stationary point

the role of credit in the great moderation a multivariate garch approach abstract during the great moderation financial innovation in the us increased the size and scope of credit flows supporting the growth of wealth we hypothesize that spending out of wealth came to finance a wider range of gdp components such that it smoothed gdp both these trends combined would be consistent with a decrease in the volatility of output we suggest testable implications in terms of both growth of credit and output and volatility of growth in a multivariate garch framework we test this view for home mortgages and residential investment we observe unidirectional causality in variance from total output residential investment and non residential output to mortgage lending before but not during the great moderation these findings are consistent with a role for credit dynamics in explaining the great moderation

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

tastes and technology in a two country model of the business cycle explaining international trade on international financial markets allows people to insure country specific risk and smooth consumption intertemporally equilibrium models of business cycles with trade on global financial markets typically yield international consumption correlations near one and excessive volatility of investment the authors incorporate nontraded goods in the model and find that the implications for aggregate consumption investment and the trade balance are consistent with business cycle properties of industrialized countries however the model driven by technology shocks alone yields counterfactual implications for comovements between consumption and prices at the sectoral level taste shocks produce price quantity relationships more consistent with the data copyright 1995 by american economic association

fiscal policy and business cycle characteristics in a heterogeneous agent macro model abstract this paper explores the macroeconomic implications of changing fiscal policy in a heterogeneous interacting agent hia model the key contributions to the existing hia complex adaptive trivial system cats literature include the addition of a progressive income tax structure an expanded role for redistribution and a stylized reactive government sector in certain specifications deficit financed tax cuts are shown to effectively shorten recessions while deficit financed spending stimulus is able to lengthen recoveries alternative specifications provide ambiguous support for generalizing the effectiveness of these policy treatments robustness checks support the general findings that increased redistribution towards the unemployed results in higher unemployment rates greater inequality and shorter contractions

trade finance specialization and synchronization i investigate the determinants of business cycle synchronization across regions the linkages between trade in goods financial openness specialization and business cycle synchronization are evaluated in the context of a system of simultaneous equations the main results are as follows i specialization patterns have a sizable effect on business cycles most of this effect is independent of trade or financial policy but directly reflects differences in gdp per capita ii a variety of measures of financial integration suggest that economic regions with strong financial links are significantly more synchronized even though they also tend to be more specialized iii the estimated role of trade is closer to that implied by existing models once intra industry trade is held constant the results obtain in a variety of data sets measurement strategies and specifications they relate to a recent strand of international business cycle models with incomplete markets and transport costs and on the empir

macroeconomics after the crisis time to deal with the pretense of knowledge syndrome the recent financial crisis has damaged the reputation of macroeconomics largely for its inability to predict the impending financial and economic crisis to be honest this inability to predict does not concern me much it is almost tautological that severe crises are essentially unpredictable for otherwise they would not cause such a high degree of distress what does concern me about my discipline is that its current core by which i mainly mean the so called dynamic stochastic general equilibrium approach has become so mesmerized with its own internal logic that it has begun to confuse the precision it has achieved about its own world with the precision that it has about the real one this is dangerous for both methodological and policy reasons to be fair to our field an enormous amount of work at the intersection of macroeconomics and corporate finance has been chasing many of the issues that played a central role during the current crisis including liquidity evaporation collateral shortages bubbles crises panics fire sales risk shifting contagion and the like however much of this literature belongs to the periphery of macroeconomics rather than to its core i will discuss the distinction between the core and the periphery of macroeconomics as well as the futile nature of the integrationist movement that is the process of gradually bringing the insights of the periphery into the dynamic stochastic general equilibrium structure i argue that the complexity of macroeconomic interactions limits the knowledge we can ever attain and that we need to place this fact at the center of our analysis we should consider what this complexity does to the actions and reactions of the economic agent and seek analytical tools and macroeconomic policies that are robust to the enormous uncertainty to which we are confined

a time series analysis of representative agent models of consumption andleisure choice under uncertainty this paper investigates empirically a model of aggregate consumption and leisure decisions in which utility from goods and leisure is nontime separable the nonseparability of preferences accommodates intertemporal substitution or complementarity of leisure and thereby affects the comovements in aggregate compensation and hours worked these cross relations are examined empirically using postwar monthly u s data on quantities real wages and the real return on the one month treasury bill the estimated values of the parameters governing preferences differ significantly from the values assumed in several studies of real business models several possible explanations of these discrepancies are discussed

perspective from gaussian to paretian thinking causes and implications of power laws in organizations although normal distributions and related current quantitative methods are still relevant for some organizational research the growing ubiquity of power laws signifies that pareto rank frequency distributions fractals and underlying scale free theories are increasingly pervasive and valid characterizations of organizational dynamics when they apply researchers ignoring power law effects risk drawing false conclusions and promulgating useless advice to practitioners this is because what is important to most managers are the extremes they face not the averages we show that power laws are pervasive in the organizational world and present 15 scale free theories that apply to organizations next we discuss research implications embedded in pareto rank frequency distributions and draw statistical and methodological implications

commodity trade and international risk sharing how much do financial markets matter abstract this paper evaluates the social gains from international risk sharing in some simple general equilibrium models with output uncertainty a simulation model calibrated to selected moments of u s and japanese data estimates the incremental loss from a ban on international portfolio diversification to be on the order of 0 20 percent of output per year even the theoretical gains from asset trade may disappear under alternative sets of assumptions on preferences and technology the paper argues that the small magnitude of potential trade gains may help explain the apparently inconsistent findings of empirical studies on the degree of international capital mobility

borders and business cycles abstract we document that business cycles of u s census regions are substantially more synchronized than those of european countries data from regions within european countries confirm a european border effect within country correlations are substantially larger than cross country correlations these results continue to hold after controlling for exogenous factors such as distance and size we consider the role of four factors that have received attention in the debate about emu sectoral specialization the level of trade monetary policy and fiscal policy we find that the lower level of trade between european countries explains most of the observed border effect

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

self organized criticality and economic fluctuations economists have long been interested in explaining the observed instability of economic aggregates though several reasons for variation in the pace of production are easily given such as exogenous variation in tastes or in production possibilities it is hard to see why there should be large variations in those factors that are synchronized across the entire economy instead it seems more likely to suppose that variations in demand or in production costs in different parts of the economy should be largely independent and hence that a law of large numbers would imply that significant variations in aggregate activity relative to the typical size of aggregate activity are not likely to occur an alternative approach proposes that economies possess intrinsically unstable dynamics which even in the absence of external shocks would result in persistent deterministic fluctuations this type of model implies however that aggregate fluctuations should involve motion on a low dimensional attractor while analysis of economic time series has not revealed structure of this kind another alternative proposes that the economy possesses multiple equilibria and that it can therefore switch between equilibria for arbitrary reasons this possibility suffers however from the difficulty that one must explain how people succeed in coordinating their expectations about the times at which a shift should occur here we explore another type of explanation which relies on an entirely different mechanism our proposal is that the effects of many small independent shocks to different sectors of the economy need not cancel out in the aggregate due to the presence of significantly nonlinear strongly localized interactions between different parts of the economy the type of macroscopic instability that can result has been studied by condensed matter physicists under the name of self organized criticality per bak and kan chen 1991 physicists have noted in several contexts the possibility of a critical state in which independent microscopic fluctuations can propagate so as to give rise to instability on a macroscopic scale this is a state in which chain reactions initiated by local disturbances neither damp out over a short distance the subcritical case nor propagate explosively so that the system cannot remain in that state the supercritical case as in the controlled nuclear fission that allows a reactor to generate power without exploding often this has seemed to depend upon parameters being carefully tuned to exactly their critical values in the case of a reactor an elaborate control mechanism is required to keep it near criticality more recently it has been argued that some systems may spontaneously evolve toward a critical state and return to it even if perturbed by an external shock the prototypical example of such selforganized criticality is a sandpile when the slope of the pile is nowhere too steep dropping on additional grains of sand at randomly chosen sites has no macroscopic effects as at most small numbers of grains will shift position in each case however randomly dropping on additional sand will eventually result in the slope of the pile increasing to a critical slope at which point large avalanches can occur in response to the dropping of a single additional grain of sand a sandpile with a slope that is initially greater than the critical slope also evolves toward it in this case through an immediate department of economics university of chicago 1126 east 59th st chicago il 60637 we thank per bak buz brock boyan jovanovic and paul krugman for discussions and the santa fe institute and the nsf for research support 1scheinkman 1990 surveys empirical work on this

trade production sharing and the international transmission of business cycles countries that are more engaged in production sharing exhibit higher bilateral manufacturing output correlations we use data on trade flows between us multinationals and their affiliates as well as trade between the united states and mexican maquiladoras to measure production sharing trade and its link with the business cycle we then develop a quantitative model of international business cycles that generates a positive link between the extent of vertically integrated production sharing trade and internationally synchronized business cycles a key assumption in the model is a relatively low elasticity of substitution between home and foreign inputs in the production of the vertically integrated good

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

the free trade epidemic of the 1860s and other outbreaks of economic discrimination why was there an abrupt increase in economic openness in europe in the 1860s this increase may have been the result of a contagion process in which the cobden chevalier treaty between britain and france threatened to displace third party exports to fra nce with british exports as a result most european states signed similar treaties with france which had further ripple effects this article outlines a formal model of this process based on the assumption that an agreement between two states incre ases the desirability of similar treaties to third parties propositions regarding the rate and pattern of spread of treaties are derived from this model this article then discusses the insights these propositions may offer into the rise and fall of the most favored nation network of treaties between 1860 and 1929 at a theoretical level the model aims to link the microlevel processes underlying state preferences to system level phenomena at a substantive level this analysis offers insight into the current explosion of regionalism

a real model of the world business cycle abstract in this paper a stochastic two country log linear infinite horizon model is used to analyze the generation and transmission of economic fluctuations across countries it is argued that following a country specific supply disturbance production interdependence and unitary elasticities in consumption and production are sufficient to generate comovements in aggregate economic activity investment and trade that are persistent over time and positively correlated across countries however the empirical analysis carried out for the usa japan germany and uk for the 1960 82 period suggests that common shocks rather than trade links are responsible for this pattern of comovements

complexity and empirical economics this article explores the state of interplay between recent efforts to introduce complex systems methods into economics and the understanding of empirical phenomena the empirical side of economic complexity may be divided into three general branches historical studies the identification of power and scaling laws and analyses of social interactions i argue that while providing useful stylised facts none of these empirical approaches has produced compelling evidence that economic contexts exhibit the substantive microstructure or properties of complex systems this failure reflects inadequate attention to identification problems identification analysis should therefore be at the centre of future work on the empirics of complexity

stochastic cascades credit contagion and large portfolio losses abstract we analyze an interactive model of credit ratings where external shocks spread by a contagious chain reaction to the entire economy counterparty relationships along with discrete adjustments of credit ratings generate a transition mechanism that allows the financial distress of one firm to spill over to its business partners the spread of financial distress constitutes a source of intrinsic risk for large portfolios of credit sensitive securities that cannot be diversified away we provide a characterization of the fluctuations of credit ratings in large economies when adjustments follow a threshold rule and analyze the effects of downgrading cascades on credit portfolios

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

business fluctuations in a behavioral switching model gridlock effects and credit crunch phenomena in financial networks abstract in this paper we characterize the evolution over time of a credit network in the most general terms as a system of interacting banks and firms operating in a three sector economy with goods credit and interbank market credit connections change over time via an evolving fitness measure depending from lenders supply of liquidity and borrowers demand of credit moreover an endogenous learning mechanism allows agents to switch between a loyal or a shopping around strategy according to their degree of satisfaction the crucial question we investigate is how financial bubbles and credit crunch phenomena emerge from the implemented mechanism

business cycles indicators and forecasting acknowledgments introduction james h stock and mark w watson 1 twenty two years of the nber asa quarterly economic outlook surveys aspects and comparisons of forecasting performance victor zarnowitz and phillip braun comment allen sinai 2 a procedure for predicting recessions with leading indicators econometric issues and recent experience james h stock and mark w watson comment kenneth f wallis 3 estimating event probabilities from macroeconometric models using stochastic simulation ray c fair comment james d hamilton 4 a nine variable probabilistic macroeconomic forecasting model christopher a sims comment pierre perron 5 why does the paper bill spread predict real economic activity benjamin m friedman and kenneth n kuttner comment ben s bernanke 6 further evidence on business cycle duration dependence francis x diebold glenn d rudebusch and daniel e sichel comment bruce e hansen 7 dynamic index models for large cross sections danny quah and thomas j sargent comment john geweke 8 modelling non linearity over the business cycle clive w j granger timo terdsvirta and heather anderson comment andrew harvey contributors author index subject index

are output growth rate distributions fat tailed some evidence from oecd countries this work explores some distributional properties of aggregate output growth rate time series we show that in the majority of oecd countries output growth rate distributions are well approximated by symmetric exponential power densities with tails much fatter than those of a gaussian fat tails robustly emerge in output growth rates independently of i the way we measure aggregate output ii the family of densities employed in the estimation iii the length of time lags used to compute growth rates we also show that fat tails still characterize output growth rate distributions even after one washes away outliers autocorrelation and heteroscedasticity

beyond gaussian averages redirecting international business and management research toward extreme events and power laws practicing managers live in a world of extremes but international business and management research is based on gaussian statistics that rule out such extremes on occasion positive feedback processes among interactive data points cause extreme events characterized by power laws they seem ubiquitous we list 80 kinds of them half each among natural and social phenomena we use imposed tension and per bak s self organized criticality to argue that pareto based science and statistics based on interdependence positive feedback scalability nearly infinite variance and emphasizing extremes should parallel the traditional dominance of gaussian statistics based on independent data points finite variance and emphasizing averages we question quantitative journal publications depending on gaussian statistics the cost is inaccurate science and irrelevance to practitioners in conclusion no statistical findings should be accepted into business studies if they gain significance via some assumption device by which extreme events and nearly infinite variance are ignored accordingly we suggest redirecting international business studies and management research in general

international business cycles world region and country specific factors the paper investigates the common dynamic properties of business cycle fluctuations across countries regions and the world we employ a bayesian dynamic latent factor model to estimate common components in macroeconomic aggregates output consumption and investment in a 60 country sample covering seven regions of the world the results indicate that a common world factor is an important source of volatility for aggregates in most countries providing evidence for a world business cycle we find that region specific factors play only a minor role in explaining fluctuations in economic activity we also document similarities and differences across regions countries and aggregates jel f41 e32 c11 c32

a new approach to business fluctuations heterogeneous interacting agents scaling laws and financial fragility abstract in this paper we discuss a scaling approach to business fluctuations our starting point consists in recognizing that concepts and methods derived from physics have allowed economists to re discover a set of stylized facts which have to be satisfactorily accounted for in their models standard macroeconomics based on a reductionist approach centered on the representative agent is definitely badly equipped for this task on the contrary we show that a simple financial fragility agent based model based on complex interactions of heterogeneous agents is able to replicate a large number of scaling type stylized facts with a remarkable high degree of statistical precision

country size aggregate fluctuations and international risk sharing country size measured by either population or gross domestic product gdp is shown to be negatively related to the variances of aggregate output consumption and in vestment and positively related to the contemporaneous correlations of consumption and investment with output in a sample of fifty six countries these results however hold pri marily for the high income countries of the sample a subsample consisting of the twenty countries with the lowest per capita gdp exhibits a significant negative relationship only between investment volatility and country size these empirical regularities are shown to be consistent with the implications of international risk sharing among countries of asymmetric sizes in an international real business cycle model shocks in relatively large countries con stitute world wide risk to a greater extent than do similar shocks in smaller countries thus foreign shocks have a greater impact on small countries causing their aggregates to fluc tuate more and their consumption and investment to be less highly correlated with domestic output

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

production fragmentation and business cycle comovement abstract international trade increasingly involves trade in goods being produced in fragmentation arrangements across countries with each country specializing in different stages of a production sequence this paper examines empirically whether pairs of countries with more bilateral production fragmentation arrangements tend to have more correlated business cycles using cross country data from 30 countries we find that bilateral production fragmentation has a positive effect while the standard bilateral trade intensity indicator has a negative impact on business cycle comovement we also find that the positive effect of trade in complements captured by bilateral production fragmentation dominates the negative effect of trade in substitutes explained by bilateral trade intensity resulting in an overall positive impact of trade hence bilateral production fragmentation plays a key role underlying the positive response of business cycle comovement to increases in trade

stages of diversification this paper studies the evolution of sectoral concentration in relation to the level of per capita income we show that various measures of sectoral concentration follow a u shaped pattern across a wide variety of data sources countries first diversify in the sense that economic activity is spread more equally across sectors but there exists relatively late in the development process a point at which they start specializing again we discuss this finding in light of existing theories of trade and growth which generally predict a monotonic relationship between income and diversification

welfare gains from international risksharing abstract this paper uses consumption data to compute yet unexploited welfare gains that can be achieved through risksharing among twenty oecd countries there is both aggregate national consumption risk and nondiversifiable individual specific risk countries engage in an optimal risksharing arrangement to pool risk associated with the aggregate consumption endowment streams welfare gains are associated with reduced consumption variability and with the international pricing of the consumption streams of individual countries the paper considers the standard vnm time additive preferences as well as nonexpected utility and habit formation preferences large unexploited gains are found under all sets of preferences leading to an international risksharing puzzle

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

government spending and the international business cycle in this paper the author develops a stochastic general equilibrium model of the world economy it differs from previous multicountry models in the introduction of the government sector the author assumes that countries produce a nonspecialized traded good and that households derive utility from the consumption of private and public goods and services this simple modification has a potential explanation for the low cross country correlations in private consumption and output and the countercyclical trade balances that are observed empirically

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 dynamics of a small open economy in response to monetary fiscal and productivity shocks abstract this paper evaluates empirically the relative importance of monetary and fiscal versus technology shocks in an open economy characterized by perfect international capital mobility the variance covariance matrix of these shocks is estimated a stochastic model is used to perform numerical simulations the results show that persistent shocks to productivity can reproduce several empirical regularities including the puzzling high correlation between national saving and investment remarkably well and that monetary and fiscal shocks play a minor role

a theory of anticipated utility abstract a new theory of cardinal utility with an associated set of axioms is presented it is a generalization of the von neumann morgenstern expected utility theory which permits the analysis of phenomena associated with the distortion of subjective probability

methodological and empirical issues in real business cycle theory abstract in this paper we argue that the major impact of the rbc literature has been to propose a new methodology for macroeconomics this methodology is distinguished first by the importance it attributes to the empirical description of the phenomena to be explained and second by the use of this description in conjunction with quantitative theorizing i e the construction of computable general equilibrium models whose characteristic statistics match those of the data in accordance with this approach we first report on the current state of knowledge concerning business cycle regularities and conclude that additional empirical effort is called for in order to arrive at the appropriate basis for theorizing we then examine the performance of existing models and evaluate the case for integrating monetary factors and demand shocks into them lastly we review the recent efforts to explain the employment variability puzzle and argue that the search for a solution naturally leads to the incorporation of significant non walrasian features into the rbc framework

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

evidence on macroeconomic complementarities this paper provides empirical evidence on macroeconomic complementarities a restriction on the nature of interaction between individuals in a multiagent setting these models imply that activities across agents will be positively correlated that discrete decisions will be synchronized and that disturbances will be magnified and propagated the paper shows that these implications are consistent with aggregate observations as well as some microeconomic evidence further looking at certain historical episodes such as the national industrial recovery act as well as seasonal fluctuations provides additional support for models with macroeconomic complementarities copyright 1996 by mit press

input output linkages and sectoral volatility why are some sectors more volatile than others this paper uncovers evidence of an empirical regularity in the us economy upstream sectors that are far removed from final consumers have higher levels of output volatility the relationship between volatility and upstreamness is not driven by sector size sector concentration trade openness or the level of aggregation at which sectors are defined rather the paper shows a stronger link between upstreamness and nominal output volatility than with indexes of real output volatility aggregate exports at the national level also reflect the empirical regularity of higher volatility with upstreamness export volatility is higher in economies with trade portfolios dominated by upstream sectors on average reducing the upstreamness of exports by 1 also reduces aggregate export volatility by about 10 the pattern of higher volatility for upstream sectors is explained with a model of demand shock transmission between sectors

self organized criticality in a dynamic game we investigate conditions under which self organized criticality soc arises in a version of a dynamic entry game in the simplest version of the game there is a single location a pool and one agent is exogenously dropped into the pool every period payoffs to entrants are positive as long as the number of agents in the pool is below a critical level if an agent chooses to exit he cannot re enter resulting in a future payoff of zero agents in the pool decide simultaneously each period whether to stay in or not we characterize the symmetric mixed strategy equilibrium of the resulting dynamic game we then introduce local interactions between agents that occupy neighboring pools and demonstrate that under our payoff structure local interaction effects are necessary and sufficient for soc and for an associated power law to emerge thus we provide an explicit game theoretic model of the mechanism through which soc can arise in a social context with forward looking agents

scaling the volatility of gdp growth rates abstract the distribution of shocks to gdp growth rates is found to be exponential rather than normal their standard deviation scales with gdp where 0 15 0 03 these macroeconomic results place restrictions on the microeconomic structure of interactions between agents

cost of business cycles with indivisibilities and liquidity constraints it is almost universally agreed that individuals face incomplete insurance markets and cannot perfectly insure against the idiosyncratic risk in this paper simple general equilibrium models with incomplete insurance markets are examined in order to assess the impact of imperfect insurance on the magnitude of the welfare costs of business cycles two versions of incomplete insurance markets are considered and certain statistical properties of the equilibrium stochastic processes in these environments are compared with those of a perfect insurance economy

savings investment and international capital flows abstract the high correlation between national savings and domestic investment rateshas been interpreted as evidence that capital is not internationally mobile this paper surveys the theory and evidence on the relationship between savings and investment in a sample of 23 oecd countries a positive correlation between savings and investment rates is found in both the short and long runs however a wide variety of models generate such co movements in savings and investment in response to exogenous disturbances even under conditions of complete financial markets thus the savings investment correlation provides little evidence on the question of international capital mobility

international financial remoteness and macroeconomic volatility abstract this paper shows that proximity to major international financial centers seems to reduce business cycle volatility in particular we show that countries that are farther from major locations of international financial activity systematically experience more volatile growth rates in both output and consumption even after accounting for political institutions trade and other controls our results are relatively robust in the sense that more financially remote countries are more volatile though the results are not always statistically significant the comparative strength of this finding is in contrast to the more ambiguous evidence found in the literature

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

microeconomic origins of macroeconomic tail risks we document that even though the normal distribution provides a good approximation to gdp fluctuations it severely underpredicts macroeconomic tail risks that is the frequency of large economic downturns using a multi sector general equilibrium model we show that the interplay of idiosyncratic microeconomic shocks and sectoral heterogeneity results in systematic departures in the likelihood of large economic downturns relative to what is implied by the normal distribution notably we also show that such departures can happen while gdp is approximately normally distributed away from the tails highlighting the qualitatively different behavior of large economic downturns from small or moderate fluctuations we further demonstrate the special role that input output linkages play in generating tail comovements whereby large recessions involve not only significant gdp contractions but also large simultaneous declines across a wide range of sectors

how do the trans pacific economies affect the usa an industrial sector approach this paper studies how the trans pacific region affects the us economy in terms of business cycle transmission we use a large data set consisting of disaggregated sectoral industrial production indexes from selected countries in the region and employ a factor augmented vector autoregression favar approach to analyse the transmission of shocks in different industries we find that a positive output shock in the entire trans pacific region has positive effects on the majority of us manufacturing sectors we also find that sectoral shocks in five sectors of the trans pacific region have a large impact on the overall us economy three of the five sectors displayed strong same sector responses relative to the overall response suggesting that vertical production linkages might play a key role in the transmission of shocks our results highlight the importance of examining industrial sectors in studying the transmission of shocks in the trans pacific region

a look into the nature of complex systems and beyond stonehenge economics coping with complexity or ignoring it in applied economics real world economic systems are complex in general but can be approximated by the open systems approach economic systems are very likely to possess the basic and advanced emergent properties e g self organized criticality fractals attractors of general complex systems t he theory of self organized criticality is proposed as a major source of dynamic equilibria and complexity in economic systems this is exemplified in an analysis for self organized criticality of danish agricultural subsectors indicated by power law distributions of the monetary production value for the time period from 1963 to 1999 major conclusions from the empirical part are 1 the sectors under investigation are obviously self organizing and thus very likely to show a range of complex properties 2 the characteristics of the power law distributions that were measured might contain further information about the state or graduation of self organization in the sector varying empirical results for different agricultural sectors turned out to be consistent with the theory of self organized criticality 3 fully self organizing sectors might be economically the most efficient finally empirical implications of the results are discussed complexity theory should be considered as a valuable supplement to the existing analytical toolbox jel classification b52

realistic cross country consumption correlations in a two country equilibrium business cycle model abstract a well known feature of one good multi agent arrow debreu economies with edentical additively separable homothetic preferences is that the consumptions of all agents are perfectly correlated such economies are widely used in interpreting business cycles but seem to be inconsistent with observed cross country correlations of aggregate consumption this paper provides an example of a two country real business cycle model in which preferences are not separable between consumption and labor supply the model has a simple closed form solution closed form solution and allows for fluctuations in labor supply in equilibrium moreover it generates correlations between national consumption rates which are close to some of those observed in historical data jel f41

international real business cycles we ask whether a two country real business cycle model can account simultaneously for domestic and international aspects of business cycles with this question in mind we document a number of discrepancies between theory and data the most striking discrepancy concerns the correlations of consumption and output across countries in the data outputs are generally more highly correlated across countries than consumptions in the model we see the opposite

identifying the common component of international economic fluctuations a new approach in this paper we develop an aggregation procedure using time varying weights for constructing the common component of international economic fluctuations the methodology for deriving time varying weights is based on some stylised features of the data documented in the paper the model allows for a unified treatment of cyclical and seasonal fluctuations and also accommodates the dynamic propagation of shocks across countries we find evidence for a world business cycle as well as evidence for a distinct european common component we also find some evidence that macroeconomic fluctuations have become more closely linked across industrial economies in the period after 1973 the world economy has become more closely integrated in recent years due to increasing trade and financial flows across countries this has spurred interest in the question of how the ongoing phenomenon of globalisation has affected the transmission and propagation of business cycle fluctuations across national borders an important question in this context is whether a substantial fraction of economic fluctuations are country specific or if there exists a world business cycle which might be defined as fluctuations that are common across all countries more generally the comovement of macroeconomic aggregates across different countries has become a topic of increasing interest in both academic and policy circles these issues have implications in a number of dimensions an empirical analysis of the relative importance of country specific versus common international fluctuations is of relevance for determining the structure of certain classes of international business cycle models from a policy perspective strong comovement of output across countries at business cycle frequencies implies that external trade would be unlikely to play a significant role in dampening fluctuations domestic policies aimed at affecting the real exchange rate and thereby attempting to boost net exports in the short run would then tend to have limited impact the degree of synchronisation of business cycles across countries also has important implications for short run international policy coordination and for assessing the feasibility of monetary unions therefore identifying and analysing the common component of international economic fluctuations is relevant from a number of different perspectives

capital flows investment and exchange rates abstract this paper incorporates international capital flows into a two country monetary general equilibrium model of asset prices with investment and production we calculate theoretical covariances between investment the current account the exchange rate and the terms of trade these covariances depend upon the coefficient of relative risk aversion the magnitude and sign of a country s net international indebtedness other properties of tastes and technologies and the stochastic processes on disturbances to productivity and monetary growth rates international capital flows arise from changes in world wealth and its relative composition in foreign and domestic assets

cascading failures in production networks i show how the extensive margin of firm entry and exit can greatly amplify idiosyncratic shocks in an economy with a production network i show that canonical input output models which lack the extensive margin of firm entry and exit have some crucial limitations in these models the systemic importance of a firm does not respond to productivity shocks depends only on the firm s role as a supplier and is equal to or well approximated by the firm s size this means that for every canonical input output model there exists a non interconnected model that has the same aggregate response to productivity shocks i show that when we allow for entry and exit the systemic importance of a firm responds endogenously to productivity shocks depends on a firm s role not just as a supplier but also as a consumer and a firm s systemic influence is no longer well approximated by its size furthermore i show that nondivisibilities in systemically important industries can cause one failure to snowball into a large scale avalanche of failures in this sense shocks can be amplified as they travel through the network whereas in canonical input output models they cannot