north south standards harmonization and international trade recent years have seen a surge in economic integration agreements eias and the development of non tariff measures ntms as a consequence a growing number of eias include provisions on ntms however little attention has been given in the literature to the effects of ntm liberalization in the context of eias in this paper we focus on provisions for technical regulations and analyze whether the north south harmonization of technical barriers affects international trade using a gravity equation it tests whether as a result of the deep integration associated with standards provisions included in the eia the southern partners trade expands with the north but at the expense of their trade with non bloc southern partners empirical results provide strong support for this conjecture moreover harmonization on the basis of regional standards negatively impacts the exports of developing countries to the north

federal timber restrictions interregional spillovers and the impact on us softwood markets abstract an econometric model of the us softwood lumber and timber markets is estimated and used to simulate the price trade and welfare effects of reductions in federal timber sales in the western us commencing in the late 1980s results indicate that the timber sale reductions increased lumber prices by roughly 15 percent in the mid 1990s lumber consumers were the unambiguous losers from the policy while lumber and timber producers were net welfare gainers as the quantity induced losses to western lumber producers were more than offset by price increases and quantity gains to southern us and canadian lumber producers and timber producers in all regions

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

forming priors for dsge models and how it affects the assessment of nominal rigidities abstract we discuss prior elicitation for the parameters of dynamic stochastic general equilibrium dsge models and provide a method for constructing prior distributions for a subset of these parameters from beliefs about steady state relationships and second moments of the endogenous variables the empirical application documents how the specification of the prior distribution affects our assessment of the relative importance of price and wage rigidities in a new keynesian dsge model

forest management conservation and global timber markets this article develops a global timber market model which captures how timber supply reacts to future predicted increases in the demand for timber higher future demand is expected to increase prices increase investments in regeneration increase establishment of plantations and expand output dynamic market responses imply a greater reliance on plantations in productive regions allowing large areas of natural forest in low valued regions to remain largely intact sensitivity analysis suggests that price harvest and management are most sensitive to the rate of demand increase the interest rate the cost of plantations and access costs of natural forests two forest conservation strategies are examined which predict the system wide implications of forest conservation in europe and north america the policies indicate that whereas set asides can induce net conservation harvests increase elsewhere particularly in natural forests

comparing new keynesian models of the business cycle a bayesian approach abstract the baseline new keynesian model cannot replicate the observed persistence in inflation output and real wages for sensible parameter values as a result several extensions have been suggested to improve its fit to the data we use a bayesian approach to estimate and compare the baseline sticky price model of calvo s 1983 staggered prices in a utility maximizing framework journal of monetary economics 12 383 398 and three extensions our empirical results are as follows first we find that adding price indexation improves the fit of calvo s 1983 staggered prices in a utility maximizing framework journal of monetary economics 12 383 398 model second models with both staggered price and wage setting dominate models with only price rigidities third introducing wage indexation does not significantly improve the fit fourth all model estimates suggest a high degree of price stickiness fifth the estimates of labor supply elasticity are higher in models with both staggered price and wage contracts finally the estimated inflation parameters of the taylor rule are stable across models

man bites dog business cycles the newsworthiness of an event is partly determined by how unusual it is and this paper investigates the business cycle implications of this fact signals that are more likely to be observed after unusual events may increase both uncertainty and disagreement among agents in a simple business cycle model such signals can explain why we observe i occasional large changes in macro economic aggregate variables without a correspondingly large change in underlying fundamentals ii persistent periods of high macroeconomic volatility and iii a positive correlation between absolute changes in macro variables and the cross sectional dispersion of survey expectations

news noise and fluctuations an empirical exploration a common view of the business cycle gives a central role to anticipations consumers and firms continuously receive information about the future which is sometimes news and sometimes just noise based on this information consumers and firms choose spending and because of nominal rigidities spending affects output in the short run if ex post the information turns out to be news the economy adjusts gradually to a new level of activity if it turns out to be just noise the economy returns to its initial state therefore the dynamics of news and noise generate both short run and long run changes in aggregate activity this view appears to capture many of the aspects often ascribed to fluctuations the role of animal spirits in affecting demand spirits coming here from a rational reaction to information about the future the role of demand in affecting output in the short run together with the notion that in the long run output follows a natural path determined by fundamentals in this paper we examine whether this view is consistent with the data we reach three main conclusions the first two methodological the third substantive structural vars typically cannot recover news and noise shocks the reason is straightforward if agents face a signal extraction problem and are unable to separate news from noise then the econometrician faced with either the same data as the agents or a subset of these data cannot do it either while structural estimation methods cannot recover the actual time series for news and noise shocks either they can recover underlying structural parameters and thus the relative role and dynamic effects of news and noise shocks estimation of both a simple model and then of a more elaborate dsge model suggest that agents indeed solve such a signal extraction problem and that noise shocks play an important role in determining short run dynamics recent efforts to estimate business cycle models in which expectations about the future play an important role include christiano et al 2010 and schmitt grohe and uribe 2012 those papers follow the approach of jaimovich and rebelo 2009 and model news as perfectly anticipated productivity changes that will occur at

expectations learning and business cycle fluctuations this paper explores an alternative theory based on learning dynamics in the con text of an otherwise standard stochastic growth model we consider an environment in which households and firms have an incomplete model of the macroeconomy knowing only their own objectives constraints and beliefs agents are optimizing have a completely specified belief system but do not know the equilibrium map ping between primitive disturbances the aggregate state of the economy and mar ket clearing prices by extrapolating from historical patterns in observed data they approximate this mapping to forecast variables that are exogenous to their decision problems such as the rental rate of capital and the real wage this belief structure has the property that beliefs affect the true data generating process of the economy which in turn affects belief formation the economy is therefore self referential shifts in beliefs about future returns to labor and capital affect current market clear ing prices which in turn can reinforce beliefs in this environment current prices can become less informative about future economic conditions generating fluctuations in real activity this kind of mechanism driving business cycle fluctuations is found in early writ ings on macroeconomic dynamics for example alfred c pigou 1927 on page 122 writes

rational beliefs or distorted beliefs the equity premium puzzle and micro survey data 1 introductionsince shiller 1982 and mehra and prescott 1985 questioned why the gap between the rates of returns from stocks and bonds is so large the equity premium puzzle has attracted the attention of many economists the numerous explanations for the puzzle that have been put forth can be categorized into three approaches the first approach is to explain the puzzle under full rationality by introducing more complex utility functions epstein and zin 1989 and weil 1989 use a utility function that breaks the tight relation between the risk aversion coefficient and the elasticity of intertemporal substitution constantinides 1990 introduces the utility function with habit formation to the literature and campbell and cochrane 1999 succeed in explaining the equity premium puzzle and stock return predictability by making use of a particular variant of habit formation the second approach is to see the puzzle as being a result of distorted beliefs while maintaining the traditional power utility function rietz 1988 shows that the puzzle can be explained if consumers believe that a disastrous situation has a higher probability of arising than the historical data imply recently cecchetti lam and mark 2000 also succeeded in matching the first and second moments of the equity premium and the predictability of stock returns by assuming that the representative consumer with the traditional power utility function has distorted beliefs of a particular kind that lead him her to expect that both expansions and contractions end more quickly than the data suggest the third approach is to see the puzzle as being a result of market frictions such as borrowing constraints and short sale constraints heaton and lucas 1996 show the potential of this approach and luttmer 1999 estimates the magnitude of such frictions using the first order conditions from utility maximization however because of the success of campbell and cochrane 1999 and cecchetti lam and mark 2000 in explaining various aspects of the asset pricing phenomena including the equity premium puzzle this paper mainly focuses on an investigation of the first two approaches with the use of survey forecasts 1 in spite of the success of both approaches the puzzle has not yet been resolved because both approaches use completely different mechanisms to explain the puzzle we still do not know which one provides a better description of the cause of the puzzle in other words because the stylized facts in the financial market can be explained by both models it is hard for economists to judge which is the correct mechanism by looking at financial and consumption data 2 hence the main purpose of this paper is to derive different implications of consumers expectations from both models and to examine which implication is supported more through an investigation of the survey forecasts because campbell and cochrane s model retains rational expectations whereas cecchetti lam and mark s model is based on distorted beliefs the two models implications for survey forecasts will differ whereas campbell and cochrane 1999 would predict that survey forecasts are rational cecchetti lam and mark 2000 would claim that forecasts are excessively pessimistic over expansions and excessively optimistic over contractions using the livingston survey forecasts for the standard and poor s 500 index which is managed by the federal reserve bank of philadelphia this paper conducts a test of these implications to check whether the expected excess returns from the survey forecasts are rational a panel data model allowing a four dimensional structure for forecast errors individual bias business cycle effect aggregate shocks and idiosyncratic errors is analyzed 3the test results seem to support the model of cecchetti lam and mark 2000 the expected equity premium implied by the survey forecasts is on average lower than the actual realized equity premium during the sample period

seminonparametric estimation of conditionally constrained heterogeneous processes asset pricing applications the overidentifying restrictions of the intertemporal capital asset pricing model are usually rejected when tested using data on consumption growth and asset returns particu larly when additively separable constant relative risk utility is attributed to the representa tive agent this article investigates the extent to which specification error can explain these rejections the empirical strategy is limited information maximum likelihood in conjunc tion with seminonparametric expanding parameter space representations for both the law of motion and utility we find that consumption growth and asset returns display conditional heterogeneity but this fact does not account for rejection of the overidentifying restrictions as might be anticipated from the work of hansen singleton and others using generalized method of moments methods we also find that expansion of the parameter space in the direction of nonseparable utility causes the overidentifying restrictions to be accepted our estimation strategy provides information on the manner in which the restrictions distort the law of motion in particular imposition of additively separable constant relative risk aversion utility causes the conditional variance of consumption growth to be overpredicted the conditional covariance of asset returns with consumption growth to be overpredicted and an equity premium imposition of nonseparable seminon parametric utility causes distortion in these same directions though the distortions are much smaller which is consistent with the outcomes of the tests of the restrictions

the expectations driven us current account during the 1990s and 2000s survey expectations of long run output growth for the u s relative to the rest of the world were highly correlated with the u s current account and thus with global imbalances we show that this finding is to a large extent predicted by a two region stochastic growth model simulated using expected trend growth based on surveys in line with the intertemporal approach to the current account a major part of the buildup and subsequent reversal of the u s current account de cit appears to be consistent with an optimal response of households and firms to changing growth prospects this article is protected by copyright all rights reserved

growth expectations undue optimism and short run fluctuations this paper proposes a two step procedure in order to identify belief shocks shocks to expectations about the current state of the economy first we use the survey of professional forecasters to me

reputational and nonreputational policies under partial information abstract this paper analyses the effect of partial information on optimal policy design for stochastic macroeconomic models incorporating forward looking expectations the main theoretical result is that reputational and nonreputational policies are certainty equivalent as has previously been conjectured and it is also shown that the welfare loss does not necessarily increase with decreasing information of particular additional interest in the analysis of reputational policy design is the issue of sustainability and it is shown using an example that weak sustainability may be information dependent

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

product quality and sustainability the effect of international environmental agreements on bilateral trade this paper addresses the impact of sustainability in production on international trade in particular it examines the effect of the international tropical timber agreement itta on tropical timber trade the empirical analysis is based on a gravity equation in a difference in difference setting which is estimated by a panel heckman s selection model this accounts for the potentially systematic selection of trading partners into timber trade activity we then conduct a comprehensive comparative static analysis solving the structural gravity model with and without the itta this allows us to determine the trade impact of an itta induced increase in sustainability for participating as well as for third countries we find that countries participating in the itta exhibit a significant and substantial increase in trade intensity ranging from 4 to 6 furthermore we observe that this effect is more pronounced for smaller member countries non itta countries are confronted with reduced tropical timber flows

indicator variables for optimal policy under asymmetric information the optimal weights on indicators in models with partial information about the state of the economy and forward looking variables are derived and interpreted both for equilibria under discretion and under commitment the private sector is assumed to have more information about the state of the economy than the policymaker certainty equivalence holds for the optimal reaction function in state space form t he coefficients are independent of the degree of uncertainty about the state of the economy however in the case of commitment certainty equivalence does not hold for the reaction function in integrative form the policy instrument cannot be written as a distributed lag of past estimates of past states of the economy instead optimal policy will generally depend on new estimates of past states of the economy and in ways that depend on the information structure furthermore the usual separation principle does not hold since the estimation of the state of the economy is not independent of optimization and is in general quite complex we present a general characterization of optimal filtering and control in settings of this kind and discuss an application of our methods to the problem of the optimal use of real time macroeconomic data in the conduct of monetary policy

consumer misperceptions uncertain fundamentals and the business cycle abstract this paper estimates the importance of shocks to consumer misperceptions noise shocks for u s business cycle fluctuations i embed imperfect information as in lorenzoni 2009 into a smets and wouters 2007 type dsge model agents only observe aggregate productivity and a signal about the permanent component contaminated with noise based on this information agents form beliefs about the temporary and the permanent component of productivity shocks to the signal noise shocks trigger aggregate fluctuations unrelated to changes in productivity bayesian estimation shows that noise shocks explain up to 14 percent of output and up to 25 percent of consumption fluctuations nominal rigidities and the specification of the monetary policy rule are crucial for the importance of noise shocks these features help to resolve conflicting results in the previous literature

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

habit formation as a resolution to the equity premium puzzle what is in the data what is not the consumption based asset pricing model of lucas 14 defines a theoretical relationship between streams of consumption and equilibrium asset prices since data of both aggregate consumption and asset prices are available the theory can be tested empirical tests of the lucas model using standard time separable utility functions indicate mismatches between the theory and the data for example in the gmm generalized method of moments estimation of hansen and singleton 9 overidentifying constraints implied by the model were rejected mehra and prescott 16 demonstrated the difficulty of explaining a particular statistic the theoretical expected equity premium the yield differential between stocks and risk free bonds is much higher than the observed one if a standard utility function is used they called the mismatch the equity premium puzzle to improve the performance of the model several authors have relaxed the time separability of preferences in a stimulating paper constantinides 1 argued that the equity premium puzzle can be resolved through the assumption of habit formation the idea is that consumption in the past reduces utility in the present because it establishes habits his model can match the observed mean and the variance of both the equity premium and the consumption growth rate the match of the low moments is consistent with the bound tests of heaton 11 gallant hansen and tauchen 7 and hansen and jagannathan 10 on the other hand gmm estimations using monthly aggregate consumption of nondurable goods and leisure by eichenbaum hansen and singleton 3 and that using consumption of nondurable goods and durable goods by dunn and singleton 2 and eichenbaum and hansen 4 showed that if current utility depends on current and past consumption then current utility increases in past consumption i e consumption has local durability the opposite of that implied by habit formation a particularly strong result was obtained by gallant and tauchen 6 they estimated a general form of utility functions with a general law of motion of data and found that the source of the time non separability is local durability since it is known that local durability

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

collateral damage trade disruption and the economic impact of war abstract conventional wisdom in economic history suggests that conflict between countries can be enormously disruptive of economic activity especially international trade we study the effects of war on bilateral trade with available data extending back to 1870 using the gravity model we estimate the contemporaneous and lagged effects of wars on the trade of belligerent nations and neutrals controlling for other determinants of trade as well as the possible effects of reverse causality we find large and persistent impacts of wars on trade national income and global economic welfare we also conduct a general equilibrium comparative statics exercise that indicates costs associated with lost trade might be at least as large as the conventionally measured direct costs of war such as lost human capital as illustrated by case studies of world wars i and ii

the changing incidence of geography the incidence of bilateral trade costs is calculated here using neglected properties of the structural gravity model disaggregated by commodity and region and re aggregated into forms useful for economic geography for canada s provinces 1992 2003 sellers incidence is on average some five times higher than buyers incidence sellers incidence falls over time due to specialization despite constant gravity coefficients this previously unrecognized globalizing force drives big reductions in constructed home bias the disproportionate predicted share of local trade and large but varying gains in real gdp 7 lf11 f14 r12 the large gravity literature has revealed much information about bilateral trade costs anderson and eric van wincoop 2004 but the literature has not addressed incidence the proportions of trade costs paid by sellers and buyers the omission is important because incidence is what matters for most issues of regional specialization welfare and policy for example even with uniform trade costs sectors with larger sellers incidence will tend to have smaller supply all else equal as for welfare and policy uniform trade cost reductions confer benefits with buyers and sellers incidence varying across trade partners recently discovered properties of structural gravity are used here to calculate sectoral incidence measures of trade costs for canada s provinces 1992 2003 we uncover a secular fall in sellers incidence that induces a fall in home bias and a rise in real gdp this reflects a previously unrecognized force of globalization specialization acting to reduce the trade cost bill we add to the gravity literature new methods and new empirical lessons about canada s trade costs 1 inward and outward multilateral resistance anderson and van wincoop 2003 2004

a theory of demand shocks this paper presents a model of business cycles driven by shocks to consumer expectations regarding aggregate productivity agents are hit by heterogeneous productivity shocks they observe their own productivity and a noisy public signal regarding aggregate productivity the public signal gives rise to noise shocks which have the features of aggregate demand shocks they increase output employment and inflation in the short run and have no effects in the long run numerical examples suggest that the model can generate sizable equilibrium dsge models of the business cycle include a large number of shocks to technol ogy monetary policy preferences etc but typically do not include expectational shocks as independent drivers of short run fluctuations 1 this paper explores the idea of expectation driven cycles looking at a model where technology determines equilibrium output in the long run and consumers receive noisy signals about technology in the short run the presence of noisy signals produces expectational errors this paper studies the role of these expectational errors in gener ating volatility at business cycle frequencies the model is based on two ingredients first consumers take time to recognize permanent changes in aggregate fundamentals although they may have good information on the current state of the individual firm or sector where they operate they have only limited information regarding the long run determinants of aggregate activity second consumers have access to public information that is relevant to estimate long run productivity this includes news about technological innovations publicly released macroeconomic and sectoral statistics financial market prices and public statements by policy makers however these signals provide only a noisy forecast of the long run effects of technological innovations this opens the door to noise shocks which induce consumers to temporarily overestimate or underestimate the productive capacity of the economy

information animal spirits and the meaning of innovations in consumer confidence we show that unexplained innovations in several variables representing survey responses to forwardlooking questions on the michigan survey of consumers have powerful prognostic implications for the future paths of macroeconomic variables we attempt to distinguish the hypothesis that these impulse responses indicate a causal channel from autonomous movements in sentiment to economic outcomes the animal spirits view from the alternative interpretation that the surprise confidence movements summarize information about future economic prospects the information view in natural rate models animal spirits shocks are associated with overshooting of among other variables consumption that attenuates when agents come to grips with their overreaction while information shocks about the long future are followed by gradual movements in macroeconomic variables that are not subsequently reversed in a baseline vector autoregression involving consumption income and confidence the data come down sharply in favor of the information view the impulse responses of consumption and gdp show no tendency to attenuate even after a number of years further confidence innovations have strong implications for labor productivity many quarters into the future in somewhat larger vars with an information block that includes inflation and or stock prices the impulse responses to confidence innovations continue to have the permanent shape that defines information shocks but they are smaller in magnitude we demonstrate that this is due to the fact that both inflation and stock price innovations have prognostic implications for future productivity that are very similar to the implications of innovations in confidence addition of unemployment to the system induces a transitory component that changes the shape of the impulse responses and somewhat weakens the previously airtight case against animal spirits but it does not provide constructive evidence of such effects

local identification in dsge models abstract the issue of identification arises whenever structural models are estimated lack of identification means that the empirical implications of some model parameters are either undetectable or indistinguishable from the implications of other parameters therefore identifiability must be verified prior to estimation this paper provides a simple method for conducting local identification analysis in linearized dsge models estimated in both full and limited information settings in addition to establishing which parameters are locally identified and which are not researchers can determine whether the identification failures are due to data limitations such as lack of observations for some variables or whether they are intrinsic to the structure of the model the methodology is illustrated using a medium scale dsge model

optimal sticky prices under rational inattention this paper presents a model in which price setting firms decide what to pay attention to subject to a constraint on information flow when idiosyncratic conditions are more variable or more important than aggregate conditions firms pay more attention to idiosyncratic conditions than to aggregate conditions when we calibrate the model to match the large average absolute size of price changes observed in micro data prices react fast and by large amounts to idiosyncratic shocks but only slowly and by small amounts to nominal shocks nominal shocks have strong and persistent real effects we use the model to investigate how the optimal allocation of attention and the dynamics of prices depend on the firms environment jel e 3 e5 d8

implications of rational inattention abstract a constraint that actions can depend on observations only through a communication channel with finite shannon capacity is shown to be able to play a role very similar to that of a signal extraction problem or an adjustment cost in standard control problems the resulting theory looks enough like familiar dynamic rational expectations theories to suggest that it might be useful and practical while the implications for policy are different enough to be interesting

measuring transnational leakage of forest conservation abstract forest conservation in one country can influence the degree of conservation or deforestation in other countries because of international linkages of the forest products industry and markets and a lack of global coordination thus leakage and offsetting losses of environmental quality may be present this paper develops an analytical framework for measuring this leakage and estimates its magnitude via general equilibrium modeling we find that the magnitude of leakage depends upon the price elasticities of supply of and demand for forestry products across the countries and degree of cooperation in forest conservation we estimate that a significant portion 42 95 of the reduced forestry production implemented in a country region can be transferred to elsewhere offsetting environmental gains leakage generally diminishes as more countries cooperate but cooperation among only a few countries does not always dramatically reduce leakage thus forest conservation efforts and associated environmental quantity gains in a country or group of countries can be seriously undermined in terms of global net conservation gain in the absence of effective global cooperation our results also point to the importance of taking leakage into account in evaluating local or regional forest carbon sequestration projects