can we explain inflation persistence in a way that is consistent with the microevidence on nominal rigidity this paper adopts the impulse response methodology to under stand inflation persistence it has often been argued that existing models of pricing fail to explain the persistence that we observe we adopt a common general framework which allows for an explicit modelling of the distribution of contract lengths and for different types of price setting we also evaluate how far the theories are consistent with recent evidence on price and wage rigidity we find that allowing for a distribution of durations can take us a long way to solving the puzzle of inflation persistence but not all the way yet

endogenous objectives and the evaluation of targeting rules for monetary policy recent research in monetary economics has followed the advice of mccallum 1988 robustness properties of a rule for monetary policy carnegie rochester conference series on public policy 29 173 203 and investigated the robustness properties of monetary policy rules by evaluating them in a variety of models evaluation across models is typically based on an exogenously specified loss function however the theory on which many recent monetary policy models are based implies that changes in the structure of the model also have consequences for the policy objectives the central bank should pursue objectives are endogenous not exogenous to the model in this paper i investigate the impact of endogenous objectives on the evaluation of targeting rules for monetary policy r 2005 elsevier b v all rights reserved

the quantitative analytics of the basic neomonetarist model this paper constructs a dynamic macroeconomic model with less than perfect price flexibility which has a classical side consistent with real business cycle theory augmented by investment adjustment costs increasing returns to scale and a new flexible formalization of imperfect competition something akin to the classical dichotomy is justified by a mode of approximation appropriate for a model in which one state variable adjusts quickly while another state variable adjusts slowly even with investment adjustment costs monetary expansions are found to raise the real interest rate the determinants of real rigidity and the macroeconomic rate of price adjustment are investigated copyright 1995 by ohio state university press

liquidity effects and the monetary transmission mechanism several recent papers provide strong empirical support for the view that an expansionary monetary policy disturbance generates a persistent decrease in interest rates and a persistent increase in output and employment existing quantitative general equilibrium models which allow for capital accumulation are inconsistent with this view there does exist a recently developed class of general equilibrium models which can rationalize the contemporaneous response of interest rates output and employment to a money supply shock however a key shortcoming of these models is that they cannot rationalize persistent liquidity effects this paper discusses the basic frictions and mechanisms underlying this new class of models and investigates one avenue for generating persistence we argue that once a simplified version of the model in christiano and eichenbaum 1991 is modified to allow for extremely small costs of adjusting sectoral flow of funds positive money shocks generate long lasting quantitatively significant liquidity effects as well as persistent increases in aggregate economic activity

theoretical analysis regarding a zero lower bound on nominal interest rates this paper explores several issues concerning a possible zero lower bound zlb including its theoretical rationale the magnitude of effects of low sustained inflation on real interest rates the validity of analyzing monetary policy in models with no monetary variables and the dynamic stabilizing properties of taylor rules in a zlb context the most important argument however is that if the short nominal rate is immobilized at zero there nevertheless exists a route for monetary stabilization policy to be effective via the foreign exchange market its quantitative importance is examined in a calibrated optimizing open economy model

the taylor principle fights back part ii abstract the existing literature holds that the taylor principle often leads to indeterminacy in new keynesian models that allow for capital accumulation and limited asset market participation this conclusion is special however to the case of continuous full employment when the assumption of perfect wage flexibility is relaxed very slightly so that the labor market clears quickly but not instantaneously determinacy is the norm the threat of indeterminacy is limited to a tiny irrelevant corner of the parameter space where the elasticity of labor supply is unusually high and real wage adjustment is unbelievably fast everywhere else the taylor principle guarantees a unique rational expectations equilibrium the dramatic difference in results reflects the sensitivity of the monetary transmission mechanism to the speed of adjustment in the labor market

housing dynamics over the business cycle housing construction measured by housing starts leads gdp in a number of countries measured as residential investment the lead is observed only in the united states and canada elsewhere residential investment is coincident variants of existing theory however predict housing construction lagging gdp in all countries in the sample nominal interest rates are low ahead of gdp peaks introducing long term nominal mortgages and an estimated process for nominal interest rates into a standard model aligns the theory with observations on starts as mortgages transmit nominal rates into real housing costs longer time to build makes residential investment cyclically coincident abstract from author

estimating temptation and commitment over the life cycle this paper estimates the importance of temptation gul and pesendorfer 2001 for consumption smoothing and asset accumulation in a structural life cycle model we use two complementary estimation strategies rst we estimate the euler equation of this model and second we match liquid and illiquid wealth accumulation using the method of simulated moments we nd that the utility cost of temptation is one quarter of the utility bene t of consumption further we show that allowing for temptation is crucial for correctly estimating the elasticity of intertemporal substitution estimates of the eis are substantially higher than without temptation finally our method of simulated moments estimation is able to match well the life cycle accumulation pro les for both liquid and illiquid wealth only if temptation is part of the preference speci cation our ndings on the importance of temptation are robust to the di erent estimation strategies revised july 2020

interpreting the macroeconomic time series facts the effects of monetary policy existing theory and evidence on the effects of monetary policy are reviewed substantial room for disagreement among economists remains new evidence based on multivariate time series studies of several countries is presented while certain patterns in the data consistent with effective monetary policy are strikingly similar across countries others particularly the tendency of interest rate increases to predict high inflation are harder to reconcile with effective monetary policy

the hump shaped behavior of inflation and a dynamic externality we propose a general equilibrium model that explains the empirical evidence of the hump shaped response of inflation to a monetary policy shock the model replaces backward looking indexation a la christiano et al 2005 nominal rigidities and the dynamic effect of a shock to monetary policy journal of political economy 113 1 1 45 with a dynamic externality into the production function of firms the model armed with sticky wages and variable capital utilization has two offsetting effects on real marginal cost over the business cycle first increasing factor prices raise real marginal cost in response to an expansionary monetary policy shock in the intermediate run second a dynamic externality reduces real marginal cost in the short run because it raises productivity in response to an increase in output following the shock overall the resulting short run decrease and intermediate run increase in marginal cost replicate the hump shaped behavior of inflation under purely forward looking price and wage phillips curves

nominal price rigidity money supply endogeneity and business cycles abstract this paper investigates the ability of nominal price rigidity to explain the co movement of inflation with the cyclical component of output observed in the post war u s data a dynamic general equilibrium model is constructed with the introduction of monopolistic competition and nominal price rigidity in a standard real business cycle model allowing for an endogenous money supply rule it is then demonstrated that sticky price models can explain the observed associations between movements in inflation and output much better than flexible price models this result depends little on whether money supply is assumed to be endogenous or not

a new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the business cycle abstract this paper introduces a general procedure for decomposition of non stationary time series into a permanent and transitory component allowing both components to be stochastic the permanent component is shown to be a random walk with drift and the transitory or cyclical component is a stationary process with mean zero the decomposition methodology which depends only on past data and therefore is computable in real time is applied to the problem of measuring and dating business cycles in the portwar u s economy we find that measured expansions and contractions are of roughly equivalent duration and that our dating of cyclical episodes tends to lead the traditional nber dating and to a lesser extent the growth cycle chronology of zarnowitz and boschan 1977

experimental evidence on the persistence of output and inflation this article presents experimental evidence from a monetary sticky price economy in which output and inflation depend on expected future inflation rational inflation expectations do not allow for persistent deviations of output and inflation following a monetary shock in the experimental sessions however output and inflation display considerable persistence and regular cyclical patterns

sticky price models of the business cycle can the contract multiplier solve the persistence problem we construct a quantitative equilibrium model with firms setting prices in a staggered fashion and use it to ask whether monetary shocks can generate business cycle fluctuations these fluctuations include persistent movements in output along with the other defining features of business cycles like volatile investment and smooth consumption we assume that prices are exogenously sticky for a short time persistent output fluctuations require endogenous price stickiness in the sense that firms choose not to change prices much when they can do so we find that for a wide range of parameter values the amount of endogenous stickiness is small thus we find that in a standard quantitative model staggered price setting alone does not generate business cycle fluctuations

detrending and business cycle facts a user s guide this note argues that it is hardly the case that the profession is fully aware that the application of di erent filters to the data leads to di erent outcomes and that we have enough evidence to claim that these di erences are unimportant to evaluate the fit models to the data 1998 elsevier science b v all rights reserved jel classification b41 e32

when is sticky information more information this paper uses sectoral data to study survey based balance indices designed to capture changes in the business cycle in real time the empirical framework recognizes that when answering survey questions regarding their firm s output respondents potentially rely on infrequently updated information the analysis then suggests that their answers reflect notable information lags on the order of 71 2 months on average moreover information stickiness implies that noisy output fluctuations will be attenuated in survey answers and consequently helps explain why balance indices successfully track business cycles conversely in an environment populated by fully informed identical firms as in the standard rbc framework for example balance indices instead become degenerate finally information regarding changes in aggregate output tends to be sectorally concentrated the paper therefore illustrates how this feature of the data may be relevant for the construction of balance indices

inflation and output dynamics with state dependent pricing decisions this paper studies a state dependent pricing model in which firms face a fixed cost of changing their pricing plans a pricing plan specifies an entire sequence of time varying future prices allowing firms to choose a pricing plan rather than a single price generates inflation inertia in the response of the economy to small changes in the growth rate of money allowing firms to choose when to change their pricing plan generates a non linear response of inflation and output to small and large changes in the money growth rate the non linear solution method also reveals that the model generates an asymmetric response of output and inflation to monetary expansions and contractions

the optimal monetary response to technology shocks i introduction during the past decade many economists adopted the view that shocks to the aggregate production function or technology shocks represent the dominant source of fluctuations in the united states economy as noted by shapiro 1987 a number of elements came together to shape this view most important a series of severe supply shocks hit the economy during the 1970s standard keynesian models with their emphasis on the demand side had great difficulty tracking the economy s response to these shocks the view solidified after kydland and prescott 1982 demonstrated that many features of the business cycle can be replicated in a model where technology shocks are the only source of fluctuations kydland and prescott s work launched the now extensive literature on real business cycles surveyed by mccallum 1989 the observation that supply side disturbances are important in generating business cycles however need not imply that monetary factors play no role in accounting for variations in economic activity greenwood and huffman 1987 and cooley and hansen 1989 add cash in advance constraints to otherwise standard real business cycle models as a simple way of including the nominal sector in these cash in advance models monetary shocks have little effect on the cyclical behavior of real variables these models preserve the emphasis on technology shocks in explaining the business cycle nevertheless the models show how sustained inflation can affect the real economy by acting as a distortionary tax on productive activity the models of greenwood and huffman and cooley and hansen imply that optimal monetary policy involves a steady contraction of the money supply that keeps the nominal interest rate at zero as called for by friedman 1969 this optimal policy makes no attempt to respond to technology shocks instead it simply removes the distortionary inflation tax more recently cho and cooley 1992 yun 1994a and dow 1995 have investigated the effects of introducing various forms of price rigidity into monetary versions of the real business cycle model technology shocks continue to play a major role in these studies but the presence of nominal rigidities allows monetary shocks to affect the business cycle as well in fact these studies show that the addition of price rigidity improves the model s ability to match the cyclical properties of the data this paper complements these studies by deriving the implications of nominal price rigidity for optimal monetary policy i begin by outlining a model that shares the basic features of those cited above including technology shocks a cash in advance constraint and nominal price rigidity in the model both technology and monetary shocks have important effects on aggregate output and employment unlike flexible price cash in advance models for instance the model developed here gives rise to a phillips curve relationship between money and output the model is used to answer the following question does the presence of nominal price rigidity rationalize a monetary policy that responds actively to technology shocks or does the optimality of friedman s constant money growth rule still apply the results show that optimal policy does in fact exploit the monetary authority s ability to influence the real economy when prices are sticky that is the optimal policy is activist on the other hand the results also show that the friedman rule while no longer optimal comes very close to the optimum in welfare terms in this sense the main policy implication of flexible price cash in advance models appears robust to the introduction of nominal price rigidity section ii presents the model section iii describes the key features of its equilibrium section iv derives the optimal activist policy and compares its performance to that of the friedman rule section v concludes ii the model the economic environment infinitely lived households firms and a monetary authority populate an economy where time periods are indexed by t 0 1 2

stochastic trends and economic fluctuations are business cycles mainly the result of permanent shocks to productivity this paper uses a long run restriction implied by a large class of real business cycle models identifying permanent productivity shocks as shocks to the common stochastic trend in output consumption and investment to provide new evidence on this question econometric tests indicate that this common stochastic trend cointegration implication is consistent with postwar u s data however in systems with nominal variables the estimates of this common stochastic trend indicate that permanent productivity shocks typically explain less than half of the business cycle variability in output consumption and investment copyright 1991 by american economic association

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

inventories sticky prices and the persistence of output and inflation post war business cycle fluctuations of output and inflation are remarkably persistent many recent sticky price models however grossly underpredict this persistence we assess whether adding inventories to a standard sticky price model raises the persistence of output and inflation for this addition we consider a shopping cost model in the model consumers find shopping activities costly and the cost of shopping depends on the stock of goods available in this context producers manage inventories to smooth production and to affect the cost of shopping we find that the shopping cost model generates a persistence for output and inflation that matches the persistence observed in the post 1985 us data

long run income and interest elasticities of money demand in the united states econometric techniques designed to accommodate nonstationary data are used to reexamine the stability of interest and income elasticities of money demand in the united states estimates based on postwar monthly data reveal a stable relationship between m1 velocity and various measures of interest rates that proxy the opportunity cost of holding money balances tests for the existence of cointegration and methods used to estimate the income and interest elasticities are based on procedures prescribed by soren johansen 1988 corresponding error correction estimates offer insight as to the dynamics of the process that maintains the equilibrium relation between velocity and interest rates copyright 1991 by mit press

liquidity loanable funds and real activity abstract this paper develops a general equilibrium model of two traditional explanations of the monetary black box linking money and real activity the liquidity effect and the loanable funds effect these effects are modeled with a monetary production economy in which central bank injections of cash are funnelled into the economy through the credit market since only borrowers have direct access to the newly injected cash monetary injections cause nominal interest rates to fall if firms are borrowers then monetary injections also increase current and future real activity

how much persistence should sticky price models generate to match us data abstract a number of recent papers find that sticky price models fail to explain the persistence of output and inflation we argue that this failure is partially attributable to low frequency fluctuations present in us data but absent from sticky price models

partisan bias in inflation expectations we examine partisan bias in inflation expectations our dataset includes inflation expectations of the new york fed s survey of consumer expectations over the period june 2013 to june 2018 the results show that inflation expectations were 0 46 points higher in republican dominated than in democratic dominated us states when barack obama was us president compared to inflation expectations in democratic dominated states inflation expectations in republican dominated states declined by 0 73 points when donald trump became president we employ the blinder oaxaca decomposition method to disentangle the extent to which political ideology and other individual characteristics predict inflation expectations around 25 of the total difference between inflation expectations in democratic dominated versus republican dominated states is based on how partisans respond to changes in the white house s occupant partisan bias the results also corroborate the belief that voters misperceptions of economic conditions decline when the president belongs to the party that voters support

the monetary transmission mechanism an empirical framework this paper provides an overview of the monetary transmission mechanism describing the impact of changes in monetary policy on real gdp changes in financial market prices including long term interest rates and exchange rates are the main vehicle for the transmission of policy the framework incorporates rational expectations and policy rules it is empirical and appears to fit the facts well

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

persistency in sticky price models abstract nominal rigidities imply that nominal shocks have an impact effect which may be propagated by standard mechanisms however the nominal adjustment process may in itself be a propagation mechanism causing persistent effects of nominal shocks this may be caused by inertia in nominal wage and price adjustment arising due to input output networks or multiperiod nominal contracting as captured in models with staggered price wage decisions it has recently been contested whether staggering can account for persistency of any quantitative importance this paper reviews the theory and empirical evidence on this issue and it is concluded that staggering may be a quantitative important propagation mechanism

inflation output and markup dynamics with forward looking wage and price setters abstract medium scale new keynesian models are sometimes criticized for their use of backward looking wage and price setting mechanisms and for assuming several types of disturbances including some that would be difficult to interpret economically we propose a dsge model with purely forward looking wage and price setters and parsimoniously chosen disturbances our model emphasizes an interplay between production firms networking and working capital firms can use working capital to finance all or a fraction of their outlays on production factors and use the output of other firms as an input in a what is often called a roundabout production structure our model generates a response of inflation which is mute on impact of a monetary policy shock but highly persistent and very hump shaped afterwards it also yields a large contract multiplier for output two times larger than the one implied by a model relying on indexation only we also show that the response of the price markup can be positive on impact of an expansionary monetary policy shock which differs from the standard countercyclical markup channel emphasized in conventional new keynesian models in contrast to models relying on indexation to past inflation our model produces non inertial responses of inflation to productivity and investment shocks a finding which is broadly consistent with the existing var evidence

reconsideration of the p bar model of gradual price adjustment abstract this paper compares the p bar model of price adjustment with the currently dominant calvo specification theoretically the p bar model is more attractive as it depends on adjustment costs for physical quantities rather than nominal prices while incorporating a one period information lag furthermore the resulting adjustment relation is more completely free of money illusion in terms of dynamic relationships and therefore satisfies the natural rate hypothesis of lucas 1972a econometric testing of the natural rate hypothesis in eckstein o ed the econometrics of price determination board of governors of the federal reserve system which is not satisfied by the calvo model in any of its variants along the way it shows that both the p bar and calvo models can be formulated in distinct versions in which current real wages are or are not allocative quantitatively for a given calibration of the demand parameters the implied time series properties of the inflation rate output gap and nominal interest rate are determined for various policy parameters and are compared with quarterly data for the us economy neither model dominates but overall the comparison seems somewhat more favorable to the p bar model and certainly does not provide support for the dominant position held by the calvo model in current monetary policy analysis

a dynamic analysis of the adoption of a new technology the case of optical scanners two p roportional hazard models are used to investigate the differingeffects of marke t structure variables on the conditional probabilityof a firm initially adoptin g the new technology of optical scanners as the innovation spreads through the f ood store industry during the early stage leading firms with large average sto re size which are not members of chains and which operate in less concentrated m arkets with higher incomes and wage rates tend to adopt scanners sooner later on differences in seller concentration market share and size become less impo rtant as other firms follow prior adoptions copyright 1987 by mit press

the demand and liquidity effects of monetary shocks abstract this paper examines the effect of a monetary shock in a stochastic growth model with a cash in advance constraint and a financial intermediary it explores the differences between the results of restrictions on nominal price adjustment the demand effect and restrictions on savings behavior the liquidity effect it is found that the model that produces the appropriate response to a temporary monetary shock includes both demand and liquidity effects

production growth and business cycles ii new directions abstract this paper outlines new directions for investigations of real business cycle models consideration of stochastic growth of exogenous and endogenous forms analysis of suboptimal outcomes arising due to externalities of distorting taxes and implications of labor market heterogeneity

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

indexing the income tax code monetary fiscal interaction and the great moderation abstract this paper considers the consequences of automatically indexing the us federal income tax code to inflation indexation implemented during the 1981 federal tax overhaul and active monetary policy constitute necessary conditions for a unique rational expectations equilibrium in standard new keynesian models with a generalized progressive labor income tax additionally fixing the monetary regime shows that indexation reduces overall volatility in the model as well as the contribution of supply side disturbances together these results support a fiscal extension to the good policy hypothesis of the great moderation and encourage further indexation of the united states tax code

overshooting and the exchange rate disconnect puzzle a reappraisal transitions to floating exchange rate regimes have led to sharp increases in exchange rate volatilities with no corresponding changes in the distribution of macroeconomic fundamentals in the spirit of dornbusch 1976 we assess whether nominal exchange rate overshooting is responsible for this phenomenon as long as uncovered interest rate parity holds nominal exchange rate overshooting is linked to a persistent fall in the spread between domestic and foreign nominal interest rates we thus develop a limited participation model in a small open economy setting with small adjustment costs on money holdings overshooting substantially contributes to the nominal exchange rate volatility

money prices interest rates and the business cycle the mechanisms governing the relationship of money prices and interest rates to the business cycle are the most studied and most disputed topics in macroeconomics in this paper we first document key empirical aspects of this relationship we then ask how well three benchmark rational expectations macroeconomic models a real business cycle model a sticky price model and a liquidity effect model account for these central facts while the models have diverse successses and failures none can account for the fact that real and nom inal interest rates are inverted leading indicators of real economic activity that is none of the models captures the post war u s business cycle fact that a high real or nominal interest rate in the current quarter predicts a low level of real economic activity two to four quarters in the future i introduction the positive correlation of monetary aggregates and real economic activity over the course of many business cycles is a key empirical fact about the u s economy indeed the dynamic dimension of this covariation is so strong and stable that a monetary variable has long been included in the commerce department s index of leading economic indica tors while this pattern of cyclical comovement is widely agreed upon its interpretation is not some macroeconomists view money as purely passive with a positive response to varying levels of economic activity producing the positive correlation others view changes in the quantity of money as an important perhaps dominant source of economic fluctua tions frequently the real effects of monetary changes are suggested to arise from frictions in commodity labor or financial markets in economic theories that describe the influence of these frictions the transmission mechanism from monetary changes to real activity is typically viewed as involving interest rates and the price level the primary goal of this paper is to evaluate three models that explain the link between money prices interest rates and the business cycle we do this in three steps first we docu ment the cyclical behavior of these variables in the united states over the postwar period second we construct three quantitative rational expectations models of macroeconomic activity i a real business cycle model with endogenous money ii a model of commodity market frictions with mon etary non neutralities arising from gradual adjustment of goods prices and iii a model of financial market frictions with monetary non neutralities arising from gradual adjust ments of portfolios finally we compare the models predic tion for the business cycle behavior of money prices and interest rates with the data in exploring the predictions of these models we take the stock of money to be one of several exogenous variables in the system all of our models are capable of generating a forecasting role for money relative to real economic activity similar to that found in the u s data in the real business model monetary changes can forecast real activity because productivity is related to many underlying sources of shocks and because these real shocks also affect the money stock in the models with sticky prices and liquidity effects short hand names for the models with frictions in the com modity and financial markets monetary changes have an additional direct positive effect on aggregate output the outline of the paper is as follows section ii describes the data and documents its business cycle characteristics section iii outlines the three macroeconomic models and develops the particular quantitative versions of the models used in our analysis our main empirical results are pre sented in section iv and section v summarizes our results and concludes

sticky price and limited participation models of money a comparison abstract we provide new evidence that models of the monetary transmission mechanism should be consistent with at least the following facts after a contractionary monetary policy shock the aggregate price level responds very little aggregate output falls interest rates initially rise real wages decline by a modest amount and profits fall we compare the ability of sticky price and limited participation models with frictionless labor markets to account for these facts the key failing of the sticky price model lies in its counterfactual implications for profits the limited participation model can account for all the above facts but only if one is willing to assume a high labor supply elasticity 2 percent and a high markup 40 percent the shortcomings of both models reflect the absence of labor market frictions such as wage contracts or factor hoarding which dampen movements in the marginal cost of production after a monetary policy shock 1997 elsevier science b v

sluggish inflation and optimizing models of the business cycle abstract many researchers have added sticky prices to quantitative business cycle models i simulate several of these models in order to evaluate their success at reproducing two features of us data the lagged reaction of inflation to monetary growth and the persistence of inflation

an optimizing is lm specification for monetary policy and business cycle analysis we ask whether relations of the is lm type can sensibly be used for the aggregate demand portion of a dynamic optimizing general equilibrium model intended for analysis of issues regarding monetary policy and cyclical fluctuations the main result is that only one change the addition of a term regarding expected future income is needed to make the is function match a fully optimizing model whereas no changes are needed for the lm function this modification leads to a dynamic forward looking model of aggregate demand that is tractable and usable with a wide variety of aggregate supply specifications theoretical applications concerning price level determinacy and gradual price adjustment are included

real business cycles a new keynesian perspective the debate over the source and propagation of economic fluctuations rages as fiercely today as it did 50 years ago in the aftermath of keynes s the general theory and in the midst of the great depression today as then there are two schools of thought the classical school emphasizes the optimization of private economic actors the adjustment of relative prices to equate supply and demand and the efficiency of unfettered markets the keynesian school believes that understanding economic fluctuations requires not just studying the intricacies of general equilibrium but also appreciating the possibility of market failure on a grand scale

money and interest in a cash in advance economy the authors analyze an aggregative general equilibrium model in which the use of money is motivated by a cash in advance constraint applied to purchases of a subset of consumption goods the system is subject to both real and monetary shocks which are economy wide and observed by all they develop methods for verifying the existence of characterizing and explicitly calculating equilibria copyright 1987 by the econometric society

in search of the liquidity effect in a modern monetary model abstract this paper examines the impact of a monetary policy shock in a dynamic stochastic general equilibrium model with sticky prices and financial market frictions first we examine the shortcomings of monetary models emphasizing these frictions individually the model then is specified to limit the response of prices and savings to a current period monetary disturbance our results show that this model can account for the following key responses to an expansionary monetary policy shock a fall in the nominal interest rate a rise in output consumption and investment and a gradual increase in the price level finally a detailed sensitivity analysis shows the model s results depend on the parameters assigned to critical structural features

are statistical reporting agencies getting it right data rationality and business cycle asymmetry this article provides new evidence on the rationality of early releases of industrial production ip and producer price index ppi data rather than following the usual practice of examining only first available and fully revised data we examine the entire revision history for each variable thus we are able to assess for example whether earlier releases of data are in any sense less rational than later releases and when data become rational our findings suggest that seasonally unadjusted ip and ppi become rational after approximately 3 4 months whereas seasonally adjusted versions of these series remain irrational for at least 6 12 months after initial release for all variables examined we find evidence that the remaining revision is predictable from its own past or from publicly available information in other economic and financial variables in addition we find a clear increase in the volatility of revisions during recessions suggesting that early data releases are less reliable in toughe

macro factors and the affine term structure of interest rates this paper formulates an affine term structure model of bond yields from a dynamic stochastic general equilibrium model with observable macro state variables as the term structure factors model implications for the joint macro term structure dynamics are consistent with the empirical patterns from the var estimation model calibration and simulation exercises also provide clear macroeconomic interpretations of the latent term structure factors as found in the finance literature most of the slope factor movement can be explained by exogenous monetary policy shocks and the level factor movement is closely related to the technology shocks

imperfectly competitive equilibria in international commodity markets the simple model of perfect competition in spatial markets has been widely applied in analyzing international agricultural trade yet many markets do not appear to be perfectly competitive this paper offers a new and efficient method for computing spatial equilibrium in oligopolistic or oligopsonistic markets the authors apply the technique to an analysis of several hypotheses of market conduct in the international wheat market that have been put forward by other authors they conclude that a cournot nash duopsony model does not perform well in explaining trade

incorporating policy variables in a model of the world soybean rapeseed market policy variables are typically treated as exogenous variables in agricultural commodity models in this paper evidence that policy variables can be successfully endogenized in a world trade model of the soybean rapeseed and products market is presented minimum price support equations are estimated for u s brazilian and japanese soybeans and ec and japanese rapeseed macroeconomic indicator variables are used to capture the impact of nontariff barriers in brazil and japan domestic world price link equations simulation experiments are conducted which indicate that the model with endogenous policy variables performs well in comparison with a model which treats policy exogenously

monetary policy and economic fluctuations in a sticky price model abstract this paper examines a simple monetary optimizing model with sticky prices two types of monetary policy rules are considered constant money growth rules and interest rate feedback taylor type rules in the case of constant money growth rules we show the existence of limit cycles through the hopf bifurcation theorem on the other hand in the case of the interest rate feedback rules we show that active monetary policy leads to the determinacy of equilibrium path while passive monetary policy induces economic fluctuations

sticky price and sticky information price setting models what is the difference using a partial equilibrium framework mankiw and reis 2002 show that a sticky information model can generate a lagged and gradual inflation response after a monetary policy shock whereas a sticky price model cannot our paper demonstrates that that finding is sensitive to their model s parameterization to determine a plausible parameterization we specify a general equilibrium model with sticky information in that model we find that inflation peaks only one period after a monetary disturbance a sensitivity analysis of our results reveals that the inflation peak is delayed by including real rigidities when the monetary policy instrument is money growth whereas inflation peaks immediately when the policy instrument is the nominal interest rate

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

brazilian soybean policy the international effects of intervention this paper examines the effects of the complex set of brazilian soybean sector policies on the world soybean and products market brazilian policy makers have intended to encourage domestic crushing of soybeans and exports of processed rather than raw soybeans removal of the brazilian policy set for the period 1960 78 is simulated with an econometric model of the world soybean market the results indicate that the intervention objectives were not achieved moreover the u s soybean industry has benefited from the policies

dynamic inconsistencies counterfactual implications of a class of rational expectations models a number of recent papers have developed dynamic macroeconomic models that incorporate rational expectations and optimizing foundations while the theoretical motivation behind these models is sound the dynamic implications of many of the specifications that assume rational expectations and optimizing behavior can be seriously at odds with the data for both inflation and real side variables exhibit gradual and hump shaped responses to real and monetary shocks for models that are intended for monetary policy analysis these dynamic shortcomings should be considered quite serious when monetary policy has only short run effects on real variables the inability to approximately capture the short run responses of inflation or real variables to policy shocks makes a model unsuitable for policy analysis this paper identifies a simple feature common to many dynamic specifications for prices and real variables that causes the problem the paper also discusses several potential solutions to the problem including alterations to the expectations assumption to the order of differencing implicit in the model and to the underlying behavioral assumptions this abstract was borrowed from another version of this item

federalism chinese style the political basis for economic success in china china s remarkable economic success rests on a foundation of political reform providing a considerable degree of credible commitment to markets this reform reflects a special type of institutionalized decentralization that the authors call federalism chinese style this form of decentralization has three consequences first it fosters competition not only in product markets but also among local governments for labor and foreign capital this competition in turn encourages local government experimentation and learning with new forms of enterprises regulation and economic relationships second it provides incentives for local governments to promote local economic prosperity finally it provides a significant amount of protection to local governments and their enterprises from political intrusion by the central government

transitory variation in investment and output abstract although the permanent income model is a cornerstone of macreoconomics the evidence for its assumption that output has a transitory component is mixed this paper documents transitory variation in gnp the story centers on the variation in investment relative to consumption consumption behaves like a random walk in the long term investment moves one for one with consumption in the near term however investment takes strong transitory swings away from the random walk it shares with consumption these surges in investment relative to consumption are not offset by government expenditures transitory variation in investment thus becomes transitory variation in gnp

the effects of real and monetary shocks in a business cycle model with some sticky prices an established characteristic of macroeconomic fluctuations is the strong positive correlation between variations in the money stock and variations in production income and employment at business cycle frequencies this finding has motivated an enormous literature that has studied the effects of monetary policy disturbances on the real economy and in particular the role of money in business cycles several classes of monetary business cycle models have been developed that feature different channels through which monetary policy can have real effects one model that has been used widely is the keynesian model in which monetary shocks can have important effects on allocations because there are nominal rigidities in prices and or wages the keynesian assumption of sticky nominal prices is often motivated by reference to studies that have analyzed the frequency of nominal price changes the broad conclusion that emerges from this literature is that there are a number of goods that have prices that appear to change infrequently for example carlton 1989 has reported slow changes in nominal transactions prices for producers goods even without long term relationships between buyers and sellers and has documented that delivery lags and other product characteristics frequently change before nominal prces change similarly blinder s survey 1991 of firms shows that prices for many goods change only about once per year while this evidence

management structure and technology diffusion in chinese state owned enterprises abstract this paper identifies factors that can explain the variation in the diffusion of continuous casting technology among chinese steel firms during the period 1985 1995 potential factors affecting firm level diffusion of continuous casting technology are tested econometrically using data from 75 chinese steel firms the results suggest that institutional factors such as management structure have had a significant influence on a firm s rate of diffusion in particular the results show that although centrally managed firms are typically the first to acquire a new technology complete integration of the technology into the production process occurs more rapidly in firms that are locally managed furthermore the results suggest that certain market factors are important in a locally managed firm s decision to convert but seem to have played a lesser role in centrally managed firms these results imply that although centrally managed firms have better access to new technologies due to their close ties to the central government locally managed firms may possess a greater incentive to improve production efficiency through the incorporation of new technology