disentangling the college wage premium estimating a model with endogenous education choices this article proposes and empirically implements a structural model of education choices and wage determination to quantitatively evaluate the contributions of productivity enhancement and ability signaling in the college wage premium the model is estimated under various distributional parameterizations using 1990 u s census 5 public use micro sample under these parameterizations i find that college education enhances attendees productivity by about 40 and productivity enhancement accounts for close to two thirds of the college wage premium

measuring uncertainty and its impact on the economy we propose a new framework for measuring uncertainty and its effects on the economy based on a large var model with errors whose stochastic volatility is driven by two common unobservable factors representing aggregate macroeconomic and financial uncertainty the uncertainty measures can also influence the levels of the variables so that contrary to most existing measures ours reflect changes in both the conditional mean and volatility of the variables and their impact on the economy can be assessed within the same framework moreover identification of the uncertainty shocks is simplified with respect to standard var based analysis in line with the favar approach and with heteroskedasticity based identification finally the model which is also applicable in other contexts is estimated with a new bayesian algorithm which is computationally efficient and allows for jointly modeling many variables while previous var models with stochastic volatility could only handle a handful of variables empirically we apply the method to estimate uncertainty and its effects using us data finding that there is indeed substantial commonality in uncertainty sizable effects of uncertainty on key macroeconomic and financial variables with responses in line with economic theory

business and welfare state development why did employers accept social reforms in recent years employer centered explanations of welfare state development have begun to challenge conventional labor centered and state centered explanations these new explanations suggest that sector specific business interests and cross class alliances propelled the adoption and expansion of social programs the business interests thesis this article presents a novel explanation of differences in business support for welfare state expansion based on a diachronic analysis of the german case and shadow case studies of sweden and the united states the article suggests that when looking at changes in employers positions across time rather than across sectors political constraints turn out to be the central factor explaining variation in employers support for social reforms the political accommodation thesis the article identifies two goals of business intervention in welfare state development pacification and containment in the case of pacification business interests propel social policy expansion in the case of containment they constrain it business chooses pacification when revolutionary forces challenge capitalism and political stabilization thus becomes a priority business chooses containment when reformist forces appear likely to succeed in expanding social protection and no revolutionary challenge exists the article shows that changes over time in the type of political challenges that business interests confront best explain the variation in business support for labor friendly social reforms

measuring the level and uncertainty of trend inflation abstract firmly anchored inflation expectations are widely viewed as playing a central role for the conduct of monetary policy this paper presents estimates of trend inflation based on information contained in monthly data on realized inflation survey expectations and the term structure of interest rates in order to assess whether inflation expectations are anchored a timevarying volatility of trend shocks is estimated as well while there is some commonality in inflation and survey based estimates of trend inflation yield based trend estimates embed a highly persistent component orthogonal to trend inflation trimmed mean inflation rates and survey forecasts are most indicative of trend inflation

house prices borrowing constraints and monetary policy in the business cycle i develop a general equilibrium model with sticky prices credit constraints nominal loans and asset prices changes in asset prices modify agents borrowing capacity through collateral value changes in nominal prices affect real repayments through debt deflation monetary policy shocks move asset and nominal prices in the same direction and are amplified and propagated over time the financial accelerator is not constant across shocks nominal debt stabilises supply shocks making the economy less volatile when the central bank controls the interest rate i discuss the role of equity debt indexation and household and firm leverage in the propagation mechanism finally i find that monetary policy should not target asset prices as a means of reducing output and inflation volatility

reinventing welfare regimes employers and the implementation of active social policy denmark and britain have adopted quite similar active social reforms in which employers play a major role in the programmatic delivery of services however the implementation of the programs has differed dramatically in the two countries danish firms despite having had virtually no prior involvement in administering social programs have participated in far greater numbers than british employers who by contrast have long provided private employment based social benefits drawing from interviews with 107 randomly selected british and danish corporations this article seeks to explain why danish employers have participated at higher rates than their british counterparts subtle programmatic differences that reflect each country s welfare regime have had profound feedback effects on firms willingness to participate in the programs these findings have implications for regimes capacities both to correct for traps and to revise social protections to meet the needs of the new economy

productivity growth transparency and monetary policy abstract this study examines whether central bank transparency about views of future productivity growth contributes to stabilizing macroeconomic fluctuations in a standard new keynesian model the central bank and private agents make their subjective estimates on the persistence of productivity growth in this situation if private agents believe that the central bank s projections include forecast errors on future productivity growth these beliefs can destabilize private agents own expectations because the central bank s forecast errors may lead to policy mistakes in the future consequently central bank transparency does not necessarily stabilize the variations of the output gap and inflation rate the central bank should respond strongly to the inflation rate if the impact of transparency is uncertain

revealing the preferences of the us federal reserve we use bayesian methods to estimate changes in us post war monetary policy in the smets and wouters model we perform the estimations by allowing for a break in monetary policy at the time of volcker s appointment as chairman this enables us to capture changes in the monetary policy regime introduced by volcker during the volcker greenspan period we find support for the assumption that monetary policy in the volcker greenspan period performed optimally under commitment our estimation strategy allows us to estimate the preferences of the us federal reserve in the volcker greenspan period where the main objective of policy appears to be inflation followed by interest rate stabilization output growth and interest rate smoothing we find that the great moderation of output growth is explained by a combination of two factors the decrease in the volatility of the structural shocks and the improved monetary policy conduct inflation stabilization however is mainly due to the change in monetary policy that took place at the beginning of volcker s mandate copyright 2010 john wiley sons ltd

learning and the great moderation we study a stylized theory of the volatility reduction in the u s after 1984 the great moderation which attributes part of the stabilization to less volatile shocks and another part to more difficult inference on the part of bayesian households attempting to learn the latent state of the economy we use a standard equilibrium business cycle model with technology following an unobserved regime switching process after 1984 according to kim and nelson 1999a the variance of u s macroeconomic aggregates declined because boom and recession regimes moved closer together keeping conditional variance unchanged in our model this makes the signal extraction problem more difficult for bayesian households and in response they moderate their behavior reinforcing the effect of the less volatile stochastic technology and contributing an extra measure of moderation to the economy we construct example economies in which this learning effect accounts for about 30 of a volatility reduction of the magnitude observed in the postwar u s data

money demand heterogeneity and the great moderation abstract a forward looking model of the demand for money based on heterogeneous and sluggish portfolio adjustment can simultaneously account for the low short run and high long run semi elasticities reported in the literature the parameter estimates from the model for the short run and long run interest semi elasticities are 1 04 and 13 16 respectively a simulated version of the model suggests that the great moderation can be partially attributed to financial innovations in the late 1970s when moving toward a more flexible portfolio the model can account for almost one third of the observed decline in the volatilities of output consumption and investment

were there regime switches in u s monetary policy working paper 2004 14 june 2004 abstract a multivariate model identifying monetary policy and allowing for simultaneity and regime switching in coefficients and variances is confronted with u s data since 1959 the best fit is with a model that allows time variation in structural disturbance variances only among models that also allow for changes in equation coefficients the best fit is for a model that allows coefficients to change only in the monetary policy rule that model allows switching among three main regimes and one rarely and briefly occurring regime the three main regimes correspond roughly to periods when most observers believe that monetary policy actually differed and the differences in policy behavior are substantively interesting though statistically ill determined the estimates imply monetary targeting was central in the early 80s but was also important sporadically in the 70s the changes in regime were essential neither to the rise in inflation in the 70s nor to its decline in the 80s jel classification e52 e47 c53 key words counterfactuals lucas critique policy rule monetary targeting simultaneity volatility model comparison i the debate over monetary policy change in an influential paper clarida gali and gertler 2000 cgg presented evidence that us monetary policy changed between the 1970 s and the 1980 s indeed that in the 70 s it was drastically worse they found that the policy rule apparently followed in the 70 s was one that when embedded in most stochastic general equilibrium models would imply non uniqueness of the equilibrium and hence vulnerability of the economy to sunspot fluctuations of arbitrarily large size their estimated policy rule for the later period on the other hand eliminated this indeterminacy these results are a possible explanation of the volatile and rising inflation of the 70 s and of its subsequent decline the cgg analysis has two important weaknesses one is that it fails to account for stochastic volatility us macroeconomic variables and particularly the federal funds rate have gone through periods of tranquility and of agitation with forecast error variances varying greatly from period to period ignoring such variation does not lead to inconsistent estimates of model parameters when the forecasting equations themselves are constant but it strongly biases toward a finding of changed parameters tests of the stability of the forecasting equations the other weakness is that the cgg analysis rests on powerful and implausible identifying assumptions they require that we accept that the response of the monetary authority to expected future inflation and output does not depend on the recent history of inflation money growth or output it is hard to understand why this should be so especially in the 70 s when monetarism was a prominent theme in policy debates congress was requiring reports from the fed of projected time paths of monetary aggregates and financial markets were reacting sensitively to weekly money supply numbers the requirement for existence and uniqueness of equilibrium in dynamic models is that the monetary policy rule show a more than unit response of interest rates to the sum of the logs of all nominal variables that appear on the right hand side of the reaction function if we force a particular measure of expected future inflation to proxy for all the nominal variables that actually appear independently in the reaction function we are bound to get distorted conclusions on the one hand because expected future inflation will be a noisy measure of the full set of nominal influences on policy we might get downward bias in our estimates from the usual errorsin variables effect on the other hand to the extent that expected future inflation like most expected future values shows less variation than current nominal variables we could find a mistaken scaling up of coefficients

structural changes in the us economy is there a role for monetary policy this paper investigates the contribution of monetary policy to the changes in output growth and inflation dynamics in the us we identify a policy shock and a policy rule in at ime varying coefficients var using robust sign restrictions the transmission of policy shocks has been relatively stable the variance of the policy shock has decreased over time but policy shocks account for a small fraction of the level and of the variations in inflation and output growth volatility and persistence we find little evidence of a significant increase in the long run response of the interest rate to inflation a more aggressive inflation policy in the 1970s would have produced large output growth costs

the thrift crisis mortgage credit intermediation and housing activity this paper evaluates the influence of periodic disruptions in the thrift industry on mortgage credit intermediation and housing activity results of the analysis indicate that disruptions in the thrift industry during the early 1980s imposed real costs on the economy by reducing the amount of mortgage credit intermediation estimation findings indicate a sizable mortgage interest rate premium stemming from the loss in thrift intermediation services during the early 1980s those higher mortgage rates served to dampen housing demand in turn exacerbating the cyclical decline in contrast empirical findings for the post recession period of the 1980s indicates a severing of the link between mortgage interest rates and thrift provision of mortgage credit copyright 1995 by ohio state university press

identifying the sources of instabilities in macroeconomic fluctuations abstract this paper investigates the sources of the substantial decrease in output growth volatility in the mid 1980s by identifying which of the structural parameters in a representative new keynesian and structural var models changed overturning conventional wisdom we show that the great moderation was due not only to changes in shock volatilities but also to changes in monetary policy parameters as well as in the private sector s parameters the great moderation was previously attributed to good luck because the alternative sources of instabilities appear to have offsetting effects on output volatility and therefore were impossible to detect using existing techniques

erratum to why has u s inflation become harder to forecast the article journal of money credit and banking supplement to vol 39 no 1 february 2007 contains errors in figures 2 4 and tables 4 5 associated with a coding error in our program for estimating the uc sv model we thank ling hu of platinum grove asset management for finding this error and bringing it to our attention the corrected uc sv rows for tables 4 and 5 are given below corrected versions of figures 2 4 and corrected replication files can be found at http www princeton edu mwatson

learning and time varying macroeconomic volatility abstract this paper presents a dsge model in which agents learning about the economy can endogenously generate time varying macroeconomic volatility economic agents use simple models to form expectations and need to learn the relevant parameters their gain coefficient is endogenous and is adjusted according to past forecast errors the model is estimated using likelihood based bayesian methods the endogenous gain is jointly estimated with the structural parameters of the system the estimation results show that private agents appear to have often switched to constant gain learning with a high constant gain during most of the 1970s and until the early 1980s while reverting to a decreasing gain later on as a result the model can generate a pattern of volatility which is increasing in the 1970s and falling in the second half of the sample with a decline that can roughly match the magnitude of the so called great moderation in the 1984 2007 period the paper also documents how a failure to incorporate learning into the estimation may lead econometricians to spuriously find time varying volatility in the exogenous shocks even when these have constant variance by construction

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

on the salience of ethnic conflict ray acknowledges support from the national science foundation under grants 0421852 and 0617827 esteban is a member of barcelona economics xrea and is grateful for support from the generalitat de catalunya and the cicyt sej 2006 00369 this research is part of the polarization and conflict research project cit2 ct 2004 506084 funded by the european commission dg research sixth framework program

macroeconomic volatility and external imbalances abstract does macroeconomic volatility uncertainty affects accumulation of net foreign assets in oecd economies over the period 1970 2012 changes in country specific aggregate volatility are after controlling for a wide array of factors significantly positively associated with net foreign asset position a standard open economy model with time varying macroeconomic uncertainty can quantitatively account for this relationship the key mechanism is precautionary motive more uncertainty induces residents to save more and higher savings are in part channeled into foreign assets data and theory suggest that volatility is an important determinant of the medium long run evolution of external imbalances in developed countries

declining volatility in the u s automobile industry dramatic changes in the volatility of output occurred in the u s auto industry in the early 1980s namely output volatility declined the covariance of inventory investment and sales grew more negative and adjustments to production schedules which in earlier decades stemmed primarily from plants hiring and laying off workers were more often accomplished with changes in average hours per worker after the mid 1980s using a linear quadratic inventory model with intensive and extensive labor adjustments we show how all of these changes could have stemmed from one underlying factor a decline in the persistence of motor vehicle sales jel g31 l25 l62 m11

term structure inflation and real activity this paper estimates an internally consistent structural model that imposes cross sectional restrictions on the dynamics of the term structure of interest rates inflation and output growth distinct from previous term structure settings this model introduces both time varying central tendencies and a stochastic conditional mean of output growth the estimation of the model which is based on u s data over a 1960 to 2005 sample period provides reliable estimates for the implicit term structures of real interest rates expected inflation rates and inflation risk premia as well as for expectations of macroeconomic variables the model has better out of sample forecasting properties than a number of alternative models and it contradicts the puzzling evidence that during the great moderation in inflation subsequent to the mid 1980s the forecasting ability of structural models deteriorated with respect to atheoretic statistical models

macroeconomic forecasting and structural change the aim of this paper is to assess whether explicitly modeling structural change increases the accuracy of macroeconomic forecasts we produce real time out of sample forecasts for inflation the unemployment rate and the interest rate using a time varying coefficients var with stochastic volatility tv var for the us the model generates accurate predictions for the three variables in particular for inflation the tv var outperforms in terms of mean square forecast error all the competing models fixed coefficients vars time varying ars and the na ove random walk model these results are also shown to hold over the period commonly referred to as the great moderation

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

institutional choices and labor market policy a british swedish comparison focusing on employment exchange systems the authors explain how early labor market institutions established by british and swedish governments affected the possibilities for subsequent policy they demonstrate how the way in which labor exchanges were implemented in britain and sweden limited and facilitated respectively active labor market policy after 1945 the absence of institutional legitimacy in the legacy of the british labor exchange system contrasts with the legitimacy achieved by the swedish system the authors identify the reasons for this comparative pattern and analyze its significance

the new keynesian phillips curve from sticky inflation to sticky prices the new keynesian phillips curve nkpc model of inflation dynamics based on forward looking expectations is of great theoretical significance in monetary policy analysis empirical studies however often find that backward looking inflation inertia dominates the dynamics of the short run aggregate supply curve this inconsistency is examined by investigating multiple structural changes in the nkpc for the u s between 1960 and 2005 employing both inflation expectations survey data and a rational expectations approximation we find that forward looking behavior plays a smaller role during the high and volatile inflation regime to 1981 than in the subsequent period of moderate inflation providing empirical support for sticky price models over the last two decades a break in the intercept of the nkpc is also identified around 2001 and this may be associated with u s monetary policy in that period

weak instrument robust tests in gmm and the new keynesian phillips curve we discuss weak instrument robust statistics in gmm for testing hypotheses on the full parameter vector or on subsets of the parameters we use these test procedures to reexamine the evidence on the new keynesian phillips curve model we find that u s postwar data are consistent with the view that inflation dynamics are predominantly forward looking but we cannot rule out the presence of considerable backward looking dynamics moreover the phillips curve has become flatter recently and this is an important factor contributing to its weak identification

technology shocks in the new keynesian model in the new keynesian model preference cost push and monetary shocks all compete with the real business cycle model s technology shock in driving aggregate fluctuations a version of this model estimated via maximum likelihood points to these other shocks as being more important for explaining the behavior of output inflation and interest rates in the postwar u s data these results weaken the links between the current generation of new keynesian models and the real business cycle models from which they were originally derived they also suggest that federal reserve officials have often faced difficult trade offs in conducting monetary policy

investment adjustment costs an empirical assessment we evaluate empirical evidence for costs that penalize changes in investment using us industry data in aggregate models such investment adjustment costs have been introduced to help account for a variety of business cycle and asset market phenomena so far no attempt has been made to estimate these costs directly at a disaggregated level we consider an industry model with investment adjustment costs and estimate its parameters using generalized methods of moments the ndings indicate small costs associated with changing the ow of investment at the industry level the weighted average of the industry elasticities with respect to the shadow price of capital which depends inversely on the adjustment cost parameter is more than seven times larger than the largest estimate based on aggregate data we examine potential sources which may account for the large industry aggregate dierence overall our results suggest

facts and challenges from the great recession for forecasting and macroeconomic modeling this paper provides a survey of business cycle facts updated to take account of recent data emphasis is given to the great recession which was unlike most other postwar recessions in the united states in being driven by deleveraging and financial market factors we document how recessions with financial market origins are different from those driven by supply or monetary policy shocks this helps explain why economic models and predictors that work well at some times do poorly at other times we discuss challenges for forecasters and empirical researchers in light of the updated business cycle facts

a century of inflation forecasts abstract we investigate inflation predictability in the united states across the monetary regimes of the twentieth century the forecasts based on money growth and output growth were significantly more accurate than the forecasts based on past inflation only during the regimes associated with neither a clear nominal anchor nor a credible commitment to fight inflation these include the years from the outbreak of world war ii in 1939 to the implementation of the bretton woods agreements in 1951 and from nixon s closure of the gold window in 1971 to the end of volcker s disinflation in 1983

business cycles synchronicity and income levels has globalisation brought us closer than ever research on business cycle linkages shows a tendency to model countries of relatively the same income levels jointly however the issue of whether these countries move along the same business cycles has not been formally investigated in the literature in this paper we take this approach and investigate whether each group of countries follows its own dynamics and is therefore subjected to the same business cycle and whether these cycles are independent of each other across income groups results indicate that high income per capita countries hics tend to be guided by stronger similarity in business cycles than countries in the middle mics and low income lics groups in search for an explanation of the business cycles synchronicity observed panel data analysis was explored the results from the robust fixed effects estimation show neither trade openness nor shocks to consumption underlie international business cycle synchronization but rather shocks to oil prices

capitalist systems deindustrialization and the politics of public education recent years have seen a number of studies on the determinants of educational spending almost all of the existing work emphasizes the importance of left wing governments as a motor of expansion because such expansion allegedly ensures both redistribution and the facilitation of a supply side economy the existing literature thereby corroborates the power resource theory against this common wisdom the article presents an argument building on the varieties of capitalism approach it is argued that education is a poor instrument for redistribution because access is universal and high income groups have a tendency to use education even more than low income groups instead we argue that deindustrialization is the main driver of educational spending because deindustrialization constitutes one of the most salient threats to workers in modern societies as deindustrialization rises workers risk ending up with redundant skills especially in countries where the average skills specificity is high that is coord

imperfect credibility and inflation persistence in this paper we formulate a dynamic general equilibrium model with staggered nominal contracts in which households and rms use optimal ltering to disentangle persistent and transitory shifts in the monetary policy rule the calibrated model accounts quite well for the dynamics of output and insation during the volcker disinsation and implies a sacri ce ratio very close to the estimated value our approach indicates that insation persistence and substantial costs of disinsation can be generated in an optimizing agent framework without relaxing the assumption of rational expectations or relying on arbitrary modi cations to the aggregate supply relation jel classi cation e31 e32 e52

monetary policy regime shifts and inflation persistence abstract using bayesian methods we estimate a markov switching new keynesian msnk model that allows shifts in the monetary policy reaction coefficients and shock volatilities with u s data we find that a more aggressive monetary policy regime was in place after the volcker disinflation and before 1970 than during the great inflation of the 1970s our estimates also indicate that a low volatility regime has been in place during most of the sample period after 1984 we connect the timing of the different regimes to a measure of inflation persistence

the structural dynamics of output growth and inflation some international evidence we examine the dynamics of output growth and inflation in the us euro area and uk using a structural time varying coefficient var there are important similarities in structural inflation dynamics across countries output growth dynamics differ swings in the magnitude of inflation and output growth volatilities and persistences are accounted for by a combination of three structural shocks changes over time in the structure of the economy are limited and permanent variations largely absent changes in the volatilities of structural shocks matter

optimal control of heteroscedastic macroeconomic models summary this paper analyses the implications of heteroscedasticity for optimal macroeconomic policy and welfare we find that changes in the variance structure driven by exogenous processes like generalized autoregressive conditional heteroscedasticity garch affect welfare but not the optimal feedback rule however changes in the variance structure driven by state dependent processes affect both we also derive certainty equivalent transformations of state dependent volatility models that allow standard quadratic dynamic programming algorithms to be employed to study optimal policy these results are illustrated numerically using a reduced form model of the us economy in which changes in volatility are driven by a garch process and the rate of inflation copyright 2015 john wiley sons ltd

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

on the fit of new keynesian models this article provides new tools for the evaluation of dynamic stochastic general equilibrium dsge models and applies them to a large scale new keynesian model we approximate the dsge model by a vector autoregression and then systematically relax the implied cross equation restrictions and document how the model fit changes we also compare the dsge model s impulse responses to structural shocks with those obtained after relaxing its restrictions we find that the degree of misspecification in this large scale dsge model is no longer so large as to prevent its use in day to day policy analysis yet is not small enough to be ignored

combining var and dsge forecast densities a popular macroeconomic forecasting strategy utilizes many models to hedge against instabilities of unknown timing see among others stock and watson 2004 clark and mccracken 2010 and jore et al 2010 existing studies of this forecasting strategy exclude dynamic stochastic general equilibrium dsge models despite the widespread use of these models by monetary policymakers in this paper we use the linear opinion pool to combine inflation forecast densities from many vector autoregressions vars and a policymaking dsge model the dsge receives a substantial weight in the pool at short horizons provided the var components exclude structural breaks in this case the inflation forecast densities exhibit calibration failure allowing for structural breaks in the vars reduces the weight on the dsge considerably but produces well calibrated forecast densities for inflation

interpreting the great moderation changes in the volatility of economic activity at the macro and micro levels most advanced economies have experienced a striking decline in the volatility of aggregate economic activity since the early 1980s volatility reductions are evident for output and employment at the aggregate level and across most industrial sectors and expenditure categories inflation and inflation volatility have also declined dramatically previous studies offer several potential explanations for this great moderation we review evidence on the great moderation in conjunction with evidence about volatility trends at the micro level we combine the two types of evidence to develop a tentative story for important components of the aggregate volatility decline and its consequences the key ingredients are declines in firm level volatility and aggregate volatility most dramatically in the durable goods sector surprisingly this has occurred without a decline in household consumption volatility and individual earnings uncertainty our explanation for the aggregate volatility decline stresses improved supply chain management particularly in the durable goods sector and less important a shift in production and employment from goods to services we provide evidence that better inventory control made a substantial contribution to declines in firm level and aggregate volatility consistent with this view if we look past the turbulent 1970s and early 1980s much of the moderation reflects a decline in high frequency short term fluctuations while these developments represent efficiency gains they do not imply nor is there evidence for a reduction in economic uncertainty faced by individuals and households

pareto improving minimum wage laws by increasing the expected wage in low skill jobs a minimum wage law can reduce the incentive for low skill workers to imitate high skill workers in the signalling process the gain from reduced investment in the signal can more than offset the loss from unemployment among low skill workers so that total output increases moreover with an appropriate poll tax on workers to compensate owners of capital the law can make all workers and owners of capital better off

testing for indeterminacy an application to u s monetary policy reply this paper considers a prototypical new keynesian model in which the equilibrium is undetermined if monetary policy is passive the likelihood based estimation of dynamic equilibrium models is extended to allow for indeterminacies and sunspot fluctuations we construct posterior weights for the determinacy and indeterminacy region of the parameter space and estimates for the propagation of fundamental and sunspot shocks according to the estimated model u s monetary policy post 1982 is consistent with determinacy whereas the pre volcker policy is not we find that before 1979 indeterminacy substantially altered the propagation of shocks

does the human capital educational sorting debate matter for development policy if education increases human capital subsidizing education can generate economic growth and combat poverty estimates of its return suggest that education is a good social investment in sorting models the return reflects in part the information about productivity revealed by the worker s education thus the social and private returns diverge it might appear that if we believe the sorting model we should be less swayed by evidence that estimated returns to education exceed the social discount rate and therefore less likely to support education based development policies this conclusion is shown to be incorrect this abstract was borrowed from another version of this item

investigating inflation persistence across monetary regimes under inflation targeting estimates of the indexation parameter in hybrid new keynesian phillips curves are either equal to zero or very low in the united kingdom canada sweden and new zealand analogous results hold for the euro area under the european monetary union and for switzerland under the new monetary regime under stable regimes with clearly defined nominal anchors inflation appears to be purely forward looking these results question the notion that the intrinsic inflation persistence found in post wwii u s data is structural in the sense of lucas carnegie rochester conference series on public policy 1 1976 19 46 and suggest that hardwiring inflation persistence in macroeconomic models is potentially misleading

business cycle stylized facts and inventory behaviour new evidence for the euro area abstract the purpose of this paper is for the first time to use business tendency survey data first to identify new facts that are useful for the interpretation of the decline in the volatility of real activity in the euro area and second to test the inventory management hypothesis as an explanation for the great moderation in europe we present stylized facts from the business tendency data on series for inventories current production current orders and expected production for the euro area emphasizing the decline in the volatility of the series further we investigate whether the decline in inventory volatility can be attributed to an endogenous change in the persistence of shocks to the accumulation dynamics of inventories or to an exogenous change in the shocks hitting the inventory optimisation process our results at euro level generally indicate that there is no evidence of a break in the inventory accumulation process on the contrary the impact of exogenous shocks on inventory volatility appears to be steadily declining over time beginning from the mid 1980s

the causes of welfare state expansion deindustrialization or globalization an influential line of argument holds that globalization causes economic uncertainty and spurs popular demands for compensatory welfare state spending this article argues that the relationship between globalization and welfare state expansion is spurious and that the engine of welfare state expansion since the 1960s has been deindustrialization based on cross sectional time series data for fifteen oecd countries the authors show that there is no relationship between globalization and the level of labor market risks in terms of employment and wages whereas the uncertainty and dislocations caused by deindustrialization have spurred electoral demands for welfare state compensation and risk sharing yet while differential rates of deindustri alization explain differences in the overall size of the welfare state its particular character in terms of the share of direct government provision and the equality of transfer payments is shaped by government partisanship the argument has implications for the study and the future of the welfare state that are very different from those suggested in the globalization literature

housing credit constraints and macro stability the secondary mortgage market and reduced cyclicality of residential investment author s peek joe wilcox james a abstract as secondary mortgage markets developed and grew over the past two decades fluctuations in residential investment and in mortgage balances were much smaller than they had been prior to the 1980s we hypothesize that by reducing the volatility of the total supply of funds to mortgage markets larger secondary mortgage markets smm dampened the responses of residential investment to income and to interest rates and thereby contributed importantly to the great moderation in volatility of the u s economy our empirical results provide some evidence that the smm did continually reduce the volatility of residential investment over the past two decades by tempering its sensitivities to income and to interest rates

explaining the great moderation it is not the shocks this paper shows that the explanation of the decline in the volatility of gdp growth since the mid eighties is not the decline in the volatility of exogenous shocks but rather a change in their propagation mechanism

linking conflict to inequality and polarization in this paper we study a behavioral model of conflict that provides a basis for choosing certain indices of dispersion as indicators for conflict we show that a suitable monotone transform of the equilibrium level of conflict can be proxied by a linear function of the gini coefficient the herfindahl hirschman fractionalization index and a specific measure of polarization due to esteban and ray jel classification d74 d31

ethnicity and conflict an empirical study this paper examines the impact of ethnic divisions on conict the empirical specication is informed by a theoretical model of conict esteban and ray 2011 in which equilibrium conict is related to just three distributional indices of diversity ethnic polarization ethnic fractionalization and a greenberg gini index constructed across ethnic groups our empirical ndings verify that these distributional measures are signicant correlates of conict the underlying theory permits us to use these results to make inferences about the relative importance of public goods in conict as well as the extent of within group cohesion in conictual activity these eects are further strengthened as we introduce country specic measures of group cohesion and the relative importance of public goods and combine them with the distributional measures exactly as specied by the theory

the time varying volatility of macroeconomic fluctuations we investigate the sources of the important shifts in the volatility of us mac roeconomic variables in the postwar period to this end we propose the esti mation of dsge models allowing for time variation in the volatility of the structural innovations we apply our estimation strategy to a large scale model of the business cycle and find that shocks specific to the equilibrium condition of investment account for most of the sharp decline in volatility of the last two decades jel c51 e32

the heterogeneous great moderation in this paper i show that a more accurate analysis of the great moderation leads to interesting and novel findings about macroeconomic volatility dynamics in the last decades the main empirical result of the paper is that the great moderation has diversely affected macroeconomic volatility at different horizons short run business cycle and medium run i refer to this phenomenon as the heterogeneous great moderation across frequencies i formally test these findings by defining a frequency domain structural break test that detects the presence of a break in the variance of real macroeconomic variables at different frequencies i derive its asymptotic and small sample properties and i apply it to u s macroeconomic variables to provide statistical evidence that the great moderation is mainly confined to short run fluctuations i finally use a dsge model to investigate which elements of the model can generate the heterogeneous great moderation i find that whereas just a decline of the magnitude of the shocks and a change in the monetary policy cannot replicate the stylized facts accounting for the increased persistence of the exogenous disturbances is the key feature for generating the heterogeneous great moderation

the structural dynamics of u s output and inflation what explains the changes we examine the dynamics of u s output and inflation using a structural time varying coefficients vector autoregression there are changes in the volatility of both variables and in the persistence of inflation but variations are statistically insignificant technology shocks explain changes in output volatility real demand disturbances variations in the persistence and volatility of inflation we detect important time variations in the transmission of technology shocks to output and demand shocks to inflation and significant changes in the variance of technology and of monetary policy shocks

has monetary policy become more effective we investigate the implications of changes in the structure of the u s economy for monetary policy effectiveness estimating a vector autoregression over the pre and post 1980 periods we provide evidence of a reduced effect of monetary policy shocks in the latter period we estimate a structural model that replicates well the economy s response in both periods and perform counterfactual experiments to determine the source of the change in the monetary transmission mechanism and in the economy s volatility we find that by responding more strongly to inflation expectations monetary policy has stabilized the economy more effectively in the post 1980 period

monetary policy shocks and foreign investment income evidence from a large bayesian var abstract this paper assesses the transmission of monetary policy in a large bayesian vector autoregression based on the approach proposed by banbura et al 2010 the paper analyzes the impact of monetary policy shocks in the united states and canada not only on a range of domestic aggregates trade flows and exchange rates but also foreign investment income the analysis provides three main results first a surprise monetary policy contraction has a statistically important impact on both gross and net foreign investment income flows in both countries against the background of growing foreign wealth and investment income this result provides preliminary evidence that foreign balance sheet channels might play an increasingly significant role for monetary transmission second the impact of monetary policy on foreign investment income flows differs considerably across asset categories and over time suggesting that the investment instruments and the currency denomination of a country s foreign assets and liabilities are potentially relevant for the way in which monetary policy affects the domestic economy finally the results support existing evidence on the effectiveness of large vector autoregressions and the bayesian shrinkage approach in eliminating price and exchange rate puzzles

the decline in u s output volatility explanations for the decline in u s output volatility since the mid 1980s include better policy good luck and technological change our multiple break estimates suggest that reductions in volatility since the mid 1980s extend not only to manufacturing inventories but also to sales this finding along with a concentration of the reduction in the volatility of inventories in materials and supplies and the lack of a significant break in the inventory sales covariance imply that new inventory technology cannot account for most of the decline in output volatility

human capital vs signalling explanations of wages increases wages by directly increasing the worker s productivity this learning explanation is usually associated with human capital theory however it seems unlikely that learning explains all the wage differences associated with schooling and work history better educated workers are not a random sample of workers they have lower propensities to quit or to be absent are less likely to smoke drink or use illicit drugs and are generally healthier it is unlikely that employers make full use of differences in propensities to quit or to be absent or sick when hiring workers these characteristics are often not directly observed and the americans with disabilities act precludes firms from using either poor health or the likelihood of future sickness as a hiring criterion unless it is directly related to job performance however if low levels of education are associated with these unfavorable employee characteristics and employers are allowed to take education into account when hiring workers we would expect employers to favor better educated workers as a means of reducing their costs of sickness and job turnover in turn students will take these hiring criteria into account when deciding how long to stay in school students will choose a length of schooling to signal their ability to employers and employers will demand a minimum level of schooling

the social construction of an imperative why welfare reform happened in denmark and the netherlands but not in germany this article seeks to explain why denmark and the netherlands made dramatic progress reforming their welfare systems in the 1990s and why germany had a relatively slow start some possible explanations found to be incomplete are institutional differences in welfare programs the uniqueness of circumstances for example german unification and the balance of political power in governing institutions an important part of the puzzle is an increasing perception of the need to reform that was more widespread in denmark and the netherlands the social construction of an imperative to reform in these countries generated a political consensus that was elusive in germany but that may be developing under gerhard schroder s government

the dynamic effects of neutral and investment specific technology shocks the neoclassical growth model is used to identify the short run effects of neutral technology shocks which affect the production of all goods homogeneously and investment specific shocks which affect only investment goods the real equipment price crucial for identifying the investment shocks experiences an abrupt increase in its average rate of decline in 1982 so the analysis is based on a split sample on the basis of the preferred specification the two technology shocks account for 73 percent of hours and 44 percent of output s business cycle variation before 1982 and 38 percent and 80 percent afterward the shocks also account for more than 40 percent of hours and 58 percent of output s forecast errors over a three to eight year horizon in both samples the majority of these effects are driven by the investment shocks

equality employment and budgetary restraint the trilemma of the service economy this article presents an analysis of the postindustrial economy from a political economy perspective it identifies a set of specific distributional trade offs associated with the new role played by the services sector as the chief source of employment growth in advanced democracies over the last three decades it is argued that three core policy objectives budgetary restraint wage equality and expansion of employment constitute a political trilemma that allows only two of the goals to be successfully pursued at the same time using a combination of statistical and case oriented analysis the authors demonstrate the political and economic salience of the trilemma the distributional tensions inherent in each strategy to cope with it and the political institutional constraints under which these strategies are chosen

why has u s inflation become harder to forecast we examine whether the u s rate of price inflation has become harder to forecast and to the extent that it has what changes in the inflation process have made it so the main finding is that the univariate inflation process is well described by an unobserved component trend cycle model with stochastic volatility or equivalently an integrated moving average process with time varying parameters this model explains a variety of recent univariate inflation forecasting puzzles and begins to explain some multivariate inflation forecasting puzzles as well

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

real time density forecasts from bayesian vector autoregressions with stochastic volatility central banks and other forecasters are increasingly interested in various aspects of density forecasts however recent sharp changes in macroeconomic volatility including the great moderation and the more recent sharp rise in volatility associated with increased variation in energy prices and the deep global recession pose significant challenges to density forecasting accordingly this paper examines with real time data density forecasts of u s gdp growth unemployment inflation and the federal funds rate from bayesian vector autoregression bvar models with stochastic volatility the results indicate that adding stochastic volatility to bvars materially improves the real time accuracy of density forecasts this article has supplementary material online

the quantitative importance of news shocks in estimated dsge models we estimate a dynamic stochastic general equilibrium dsge model with several frictions and both unanticipated and news shocks using quarterly u s data from 1954 to 2004 and bayesian methods we find that unanticipated shocks dominate news shocks in accounting for the unconditional variance of output consumption and investment growth interest rate and the relative price of investment the unanticipated shock to the marginal efficiency of investment is the dominant shock accounting for over 45 of the variance in output growth news shocks account for less than 15 of the variance in output growth within the set of news shocks nontechnology sources of news dominate technology news with wage markup news shocks accounting for about 60 of the variance share of both hours and inflation we find that in the estimated dsge model i the presence of endogenous countercyclical price and wage markups due to nominal frictions substantially diminishes the importance of news shocks relative to a model without these frictions and ii while there is little change in the estimated contributions of technology news when we restrict wealth effects on labor supply the contributions of nontechnology news shocks are relatively more sensitive

federal reserve information during the great moderation using data from the period 1970 1991 romer and romer 2000 showed that that federal reserve forecasts of inflation and output were superior to those provided by commercial forecasters in this paper we show that this superior forecasting performance deteriorated after 1991 over the decade 1992 2001 the superior forecast accuracy of the fed held only over a very short time horizon and was limited to its forecasts of inflation in addition the performance of both the fed and the commercial forecasters in predicting inflation and output relative to that of naive benchmark models dropped remarkably during this period jel e58 e31

inflation persistence the nairu and the great recession the rate of inflation fell far less over the period 2007 2013 than in the period 1979 1985 despite similar large increases in the unemployment rate this paper asks why possible explanations include a change in the persistence of inflation changes in nairu and other shocks a change in the persistence of inflation with inflation more anchored in the period 2007 2013 than in the period 1979 1985 is found to be important the level and change in the nairu cannot be precisely estimated but the data suggest an increase of nearly 1 percentage point since 2007

great moderation and great recession from plain sailing to stormy seas many have argued that the great recession of 2008 marks the end of the great moderation of the eighties and nineties this paper shows this is not the case through painstaking empirical analysis of the data output volatility remains subdued despite the tumult created by the great recession this nding has important implications for policymaking since a lower volatility of output the hallmark of the great moderation is associated with lower recoveries jel classication c22 e32

measuring price level uncertainty and instability in the united states 1850 2012 abstract we measure price level uncertainty and instability in the united states over the period 1850 to 2012 major outbreaks of price level uncertainty and instability occur both before and after world war ii alternating with three price level moderations one near the turn of the twentieth century another under bretton woods and a third in the 1990s there is no evidence that the price level was systematically more stable or less uncertain before or after world war ii moderations sometimes involved links to gold but the experience of the 1990s proves that a well managed fiat regime can achieve the same outcome

long run risks in the term structure of interest rates estimation summary this paper estimates a model in which persistent fluctuations in expected consumption growth expected inflation and their time varying volatility determine asset price variation the model features epstein zin recursive preferences which determine the market price of macro risk factors analysis of the us nominal term structure data from 1953 to 2006 shows that agents dislike high uncertainty and demand compensation for volatility risks also the time variation of the term premium is driven by the compensation for inflation volatility risk which is distinct from consumption volatility risk the central role of inflation volatility risk in explaining the time varying term premium is consistent with other empirical evidence including survey data in contrast the existing long run risks literature emphasizes consumption volatility risk and ignores inflation specific time varying volatility the estimation results of this paper suggest that inflation specific volatility risk is essential for fitting the time series of the us nominal term structure data copyright 2012 john wiley sons ltd

deposit interest rate ceilings as credit supply shifters bank level evidence on the effects of regulation q abstract how did deposit interest rate ceilings an important feature of the u s regulatory regime until the mid 1980s affect individual banks lending and the transmission of monetary policy to credit i estimate the effect of deposit rate ceilings inscribed in regulation q on commercial banks credit growth using a historical bank level data set starting in 1959 banks credit growth contracted sharply when legally fixed deposit rate ceilings were binding interaction terms with monetary policy suggest that the policy impact on bank level credit growth was non linear and significantly larger when rate ceilings were in place bank size and capitalization mitigate these effects at the bank level short term interest rates exceeding the legally fixed deposit rate ceilings identify policy induced credit supply shifts that disappeared with deposit rate deregulation and thus weakened the bank lending channel substantially since the early 1980s

inventories and the business cycle an equilibrium analysis of s s policies we develop an equilibrium business cycle model where nonconvex delivery costs lead firms to follow s s inventory policies calibrated to postwar us data the model reproduces two thirds of the cyclical variability of inventory investment moreover it delivers strongly procyclical inventory investment greater volatility in production than sales and a countercyclical inventory to sales ratio our model challenges several prominent claims involving inventories including the widely held belief that they amplify aggregate fluctuations despite the comovement between inventory investment and final sales gdp volatility is essentially unaltered by inventory accumulation because procyclical inventory investment diverts resources from final production thereby dampening fluctuations in sales

social stratification and welfare regimes for the twenty first century revisiting the three worlds of welfare capitalism in the last decade the literature surrounding the political economy of welfare states in advanced industrial democracies has relied extensively on the welfare state typology developed by gosta esping andersen in his seminal book the three worlds of welfare capitalism since that time there has been much debate about whether and to what degree the features of welfare policies highlighted in this work have changed in the last twenty five years while scholars have used these data as a framework the substance of the framework itself the underlying indicators of benefit generosity and stratification has largely escaped criticism due to the absence of data that permit any yet such knowledge is essential to understand fully the welfare states of europe and other industrial countries in the twenty first century the authors have recently updated esping andersen s decommodification index this article examines the social stratification index reanalyzing and updating through the 1990s the indicators used by esping andersen as with earlier reexaminations of the index of decommodification this reanalysis produces considerably less empirical support for coherent welfare regimes moreover evidence of coherent regimes has become even less clear cut over the last quarter century

spillovers to low income countries importance of systemic emerging markets this article documents the expanding economic linkages between low income countries lics and a narrow group of emerging market em leaders that have become major players in international trade and financial flows var models show that these linkages have increased the share of growth volatility that can be attributed to foreign shocks in lics dynamic panel models further analyse the impact of lic trade orientation and production structure on the sensitivity to foreign shocks the empirical results demonstrate that the elasticity of growth to trading partners growth is high for lics in three out of the five regions asia latin america and the caribbean and europe and central asia however for commodity exporting lics in sub saharan africa and the middle east terms of trade shocks and demand from the em leaders are the main channels of transmission of foreign shocks

evolving u s monetary policy and the decline of inflation predictability based on a structural var with time varying parameters and stochastic volatility for the post wwii u s we document a negative correlation between the evolution of the long run coefficient on inflation in the structural monetary rule and the evolution of the persistence and predictability of inflation relative to a trend component using an estimated sticky price model we show that a more aggressive policy stance towards inflation causes a decline in inflation predictability jel e37 e52 e58

the u s business cycle 1867 2006 a dynamic factor approach we estimate a stock watson index of economic activity to assess u s business cycle volatility since 1867 we replicate the great moderation of the 1980s and 1990s and find exceptionally low volatility also in the golden age of the 1960s postwar moderation relative to pre 1914 occurs under constant but not time varying factor loadings suggesting structural change toward more volatile sectors for comparable series the u s postwar business cycle was as volatile overall as under the classical gold standard but much less so during the great moderation and the golden age

the lucas critique and the stability of empirical models this paper re considers the empirical relevance of the lucas critique using a dsge sticky price model in which a weak central bank response to inflation generates equilibrium indeterminacy the model is calibrated on the magnitude of the historical shift in the federal reserve s policy rule and is capable of generating the decline in the volatility of inflation and real activity observed in u s data using monte carlo simulations and a backward looking model of aggregate supply and demand we show that shifts in the policy rule induce breaks in both the reduced form coefficients and the reduced form error variances the statistics of popular parameter stability tests are shown to have low power if such heteroskedasticity is neglected in contrast when the instability of the reduced form error variances is accounted for the lucas critique is found to be empirically relevant for both artificial and actual data

the state and coordinated capitalism contributions of the public sector to social solidarity in postindustrial societies this article investigates the politics of change in coordinated market econo mies and explores why some countries well known for their highly cooperative arrangements manage to sustain coordination when adjusting to economic transformation while others fail the authors argue that the broad category of coordinated market economies subsumes different types of cooperative engagement macrocorporatist forms of coordination are characterized by national level institutions for fostering cooperation and feature a strong role for the state while forms of coordination associated with enterprise cooperation more typically occur at the level of sector or regional institutions and are often privately controlled although these diverse forms of coordination once appeared quite similar and functioned as structural equivalents they now have radically different capacities for self adjustment the role of the state is at the heart of the divergence among european coordinated countries a large public sector affects the political dynamics behind collective outcomes through its impact both on the state s construction of its own policy interests and on private actors goals although a large public sector has typically been written off as an inevitable drag on the economy it can provide state actors with a crucial political tool for shoring up coordination in a postindustrial economy the authors use the cases of denmark and germany to illustrate how uncontroversially coordinated market economies have evolved along two sharply divergent paths in the past two decades and to reflect on broader questions of stability and change in coordinated market economies the two countries diverge most acutely with respect to the balance of power between state and society indeed the danish state far from being a constraint on adjustment a central truism in neoliberal thought plays the role of facilitator in economic adjustment policy change and continued coordination