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

an equilibrium model of the business cycle with household production and fiscal policy the authors estimate a dynamic general equilibrium model of the u s economy that includes an explicit household production sector and stochastic fiscal variables they use their estimates to investigate two issues first the authors analyze how well the model accounts for aggregate fluctuations they find that household production has a significant impact and reject a nested specification in which changes in the home production technology do not matter for market variables second the authors study the effects of some simple fiscal policy experiments and show that the model generates different predictions for the effects of tax changes than similar models without home production copyright 1997 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

detecting imbalances in house prices what goes up must come down i suggest a toolkit of four bubble detection methods that can be used to monitor developments in house prices these methods are applied to us finnish and norwegian data for the united states all measures unanimously suggest a bubble in the early to mid 2000s whereas current us house prices are found to be aligned with economic fundamentals one of the measures indicates imbalances in finland while there are no signs of a bubble in norway i find that large parts of the us house price bubble can be explained by the sharp increase in capital inflows and the extension of loans to the subprime mortgage market

too big to manage us megabanks competition by innovation and the microfoundations of financialization disagreements over the systemic implications the future of financialization can be traced in part to the absence of sustained attention to the role of banking firms in driving this secular shift forward that is the financialization literature lacks an adequate microfoundation accounting for the drivers of financialization processes solely at the macro level overlooks the problems of how these processes came about and whether they are sustainable this paper addresses this explanatory gap arguing that a key independent microeconomic driver of increasing financialization did exist the incessant efforts by money centre banks in the usa to break out of depression era restrictions on their size activities and markets these banks growth strategies in turbulent times led to an institutional meso shift the rise of a megabank centred shadow banking system that now shapes global financial architecture even while operating in ways that are unsustainable in short too big to manage megabanks are at the heart of the fragility and instability of the economy today

why does household investment lead business investment over the business cycle household investment leads nonresidential business fixed investment over the u s business cycle because real business cycle theory has not been able to account for this observation it represents a potent challenge to the view that transitory productivity disturbances are the main source of aggregate fluctuations this paper reconciles rbc theory with the investment dynamics by extending the traditional home production model to make household capital complementary to business capital and labor in market production empirical evidence suggesting that household capital is a complementary input in market production is also presented

regional uk house price co movement cyclical synchronization of home prices has important implications for monetary and other policies regional house price divergence even over a business cycle can inhibit labour mobility and pr

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

housing really is the business cycle what survives the lessons of 2008 09 the downturn of 2008 09 has confirmed that i housing is the single most critical part of the u s business cycle ii the proper conduct of monetary policy needs to be cognizant that choices made at one point in time affect the options later and iii the best time to intervene in the housing cycle is when the volume of building is above normal and growing more so what was different this time was the rapid and substantial decline in home prices

the great mortgaging housing finance crises and business cycles this paper unveils a new resource for macroeconomic research a long run dataset covering disaggregated bank credit for 17 advanced economies since 1870 the new data show that the share of mortgages on banks balance sheets doubled in the course of the twentieth century driven by a sharp rise of mortgage lending to households household debt to asset ratios have risen substantially in many countries financial stability risks have been increasingly linked to real estate lending booms which are typically followed by deeper recessions and slower recoveries housing finance has come to play a central role in the modern macroeconomy

booms and busts in the uk housing market the often volatile behaviour of uk house prices between 1957 and 1994 is analysed in an annual econometric model theory suggests that financial liberalisation of mortgage markets in the 1980s should have led to notable shifts in house price behaviour the evidence supports the predictions of theory suggesting shifts took place in wealth effects as in the consumption function and that real interest rates and income expectations became more important the presence of transactions costs suggests important nonlinearities in house price dynamics the paper also contains an explicit econometric treatment of expectations demography supply spillovers from the rented sector and of composition biases in the official house price index

combining economic forecasts a method for combining forecasts may or may not account for dependence and differing precision among forecasts in this article we test a variety of such methods in the context of combining forecasts of gnp from four major econometric models the methods include one in which forecasting errors are jointly normally distributed and several variants of this model as well as some simpler procedures and a bayesian approach with a prior distribution based on exchangeability of forecasters the results indicate that a simple average the normal model with an independence assumption and the bayesian model perform better than the other approaches that are studied here

household borrowing constraints and residential investment dynamics abstract it is well known that residential investment leads output in the us economy the main contribution of our paper is to highlight the role of household borrowing constraints in accounting for this fact we study the role of home equity loans used to boost consumption as a channel that affects residential investment we consider a multi agent model where some home owning households face borrowing constraints that reflect home equity loans or refinancing constraints we show that the severity of the households borrowing constraints in an economy can generate this stylized fact of us residential investment dynamics interestingly the model correctly predicts coincident residential investment dynamics in countries with less severe borrowing constraints this prediction is borne out when the model is calibrated to french data

one size fits all monetary policy and asymmetric household debt cycles in u s states i investigate the nonlinear effects of monetary policy through differences in household debt across u s states after constructing a novel indicator of inflation for the states i compute state specific monetary policy stances as deviations from an aggregate taylor rule i find that the effectiveness of monetary policy is curtailed during periods of large household debt imbalances moreover a common u s monetary policy does not fit all it may have asymmetric effects on the economic performance across states particularly at times of high dispersion in the household debt imbalances as it may have been the case around the great recession

dollar sterling exchange rate in the 1920s purchasing power parity and the norman conquest of 4 86 the issue of long run purchasing power parity for the us dollar uk sterling exchange rate during the 1920s float is re examined and it is concluded that a form of long run purchasing power parity did in fact hold for dollar sterling during this period the new results are also employed to gauge the degree of overvaluation of sterling relative to the imposed pre war parity of 4 86 on its return to gold in 1925 and for 12 months afterwards

house prices and credit constraints making sense of the us experience most us house price models break down in the mid 2000s due to the omission of exogenous changes in mortgage credit supply associated with the sub prime mortgage boom from house price to rent ratio and inverted housing demand models previous models lack data on credit constraints facing first time home buyers incorporating a measure of credit conditions the cyclically adjusted loan to value ratio for first time buyers into house price to rent ratio models yields stable long run relationships more precisely estimated effects reasonable speeds of adjustment and improved model fits

the cross over effect of irrational sentiments in housing commercial property and stock markets abstract this paper examines the dependence in irrational sentiments across housing commercial property and stock markets our empirical results document an important and lasting impact that commercial real estate sentiment and returns have on broader financial markets we also show that the cross over effects of market sentiments are not consistent with cross over effects in market returns sentiments and returns in housing and stock markets exhibit strong dependence on other markets whereas they evolve independently in commercial real estate while housing and stock market returns respond to irrational sentiment in commercial real estate markets the opposite is not true

effective tax rates in macroeconomics cross country estimates of tax rates on factor incomes and consumption abstract this paper proposes a method for computing tax rates using national accounts and revenue statistics using this method we construct time series of tax rates for large industrial countries the method identifies the revenue raised by different taxes at the general government level and defines aggregate measures of the corresponding tax bases this method yields estimates of effective tax rates on factor incomes and consumption consistent with the tax distortions faced by a representative agent in a general equilibrium framework these tax rates compare favorably with existing estimates of marginal tax rates and highlight important international differences in tax policy

averages of forecasts some empirical results an alternative to using a single forecasting method is to average the forecasts obtained from several methods in this paper we investigate empirically the impact of the number and choice of forecasting methods on the accuracy of simple averages it is concluded that the forecasting accuracy improves and that the variability of accuracy among different combinations decreases as the number of methods in the average increases thus combining forecasts seems to be a reasonable practical alternative when as is often the case a true model of the data generating process or a single best forecasting method cannot be or is not for whatever reasons identified

theory measurement and calibration of macroeconomic models abstract calibration has become a standard tool of macroeconomics this paper extends and refines the calibration methodology along several important dimensions first accounting for home production is important both in measuring calibration targets and in organizing the data in a model consistent fashion for this reason thinking about home production is important even if the model under consideration does not include home production second investment specific technological change is included because of its strong balanced growth parameter restrictions third the measurement strategy is laid out as transparently as possible so that others can easily replicate the underlying calculations the data and calculations used in this paper are available at http clevelandfed org research models rbc index cfm

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

effects of rotation group bias on estimation of unemployment previous analysis of rotation group bias in the current population survey has concluded that if the biases are additive the ratio and composite estimators of month to month change in unemployment are unbiased this article shows that if the biases contain a multiplicative aspect both estimators of change are then biased the article also presents some empirical results that cast doubt on the validity of a purely additive model

is the uk balance of payments sustainable the uk current account deficit john muellbauer and anthony murphy the uk has a large and persistent current account deficit policy makers argue that the deficit is easily financed temporary and therefore not a sign of structural weakness we examine the conditions in which it is appropriate for a country to overspend its current income with the intention of repaying loans out of future income these include an increase in international capital mobility larger net holdings of foreign assets and expectations of faster productivity growth all three apply to the uk so official reasoning is in part correct even so for several decades there has been a trend deterioration of uk trade performance most markedly in manufacturing and we detect no underlying improvement in the 1980s we highlight structural deficiencies in both demand and supply on the demand side we show the importance of rising house prices and easier consumer credit in fuelling the consumer boom to an unwarranted extent this we trace to unjustifiable subsidies to house ownership on the supply side we stress vastly inadequate investment in skill formation education and physical capital these structural deficiencies lead us to a less optimistic view than official policy we draw the policy lessons for the uk and consider whether continental europe will face similar problems as financial markets are liberalized

stochastic process switching and the return to gold 1925 the authors analyze and estimate the effect on the dollar sterling exchange rate in the early 1920s of anticipations of the return to the gold standard at prewar parity in the united kingdom these measures are consistent with a class of models of the exchange rate that includes a version of the monetary model and with any fundamentals that follow a random walk with drift contrary to some contemporary views the appreciation of sterling prior to april 1925 appears to have been due to fundamentals such as restrictive monetary policy rather than to the expectation of a change in regime copyright 1990 by royal economic society

valuation of mortgage interest deductibility under uncertainty an option pricing approach abstract we propose a dynamic option pricing model to quantify the tax shield value of us mortgage interest deduction mid under uncertainty we identify non linear forms both convex and concave regions in the pay off of mid and discuss the implications for the valuation of mid the model provides insights regarding the relationship between the effective mid and a set of underlying variables including income level house price mortgage size and state and local tax rates we also show how the tax shield value of mortgage loans changes with the volatility of underlying processes we apply the model to the case of the optimal choice of adjustable versus fixed rate mortgages and prove that under a mean preserving interest rate an adjustable mortgage always offers a bigger tax saving we use the framework to study how the tax reforms of 2017 have affected the mid benefits of different households and find that no household is expected to receive a larger mortgage deduction under the new law finally we find that by putting a cap on deductible state and local taxes the 2017 reform has significantly reduced the quantitative impact of income and house price volatility on the expected mid value

average of forecasts an improvement stein rules are used in forming combination forecasts such forecasts have smaller prediction risk under certain conditions than the preferred method of average of forecasts the new composite forecasts will be theoretically biased but are likely to have smaller mean squared error of forecasts as shown in the empirical exercises examined when the forecasts appear to be unbiased and have a common mean lindley type combination is most useful

why is consumption so smooth for thirty years it has been accepted that consumption is smooth because permanent income is smoother than measured income this paper considers the evidence for the contrary position that permanent income is in fact less smooth than measured income so that the smoothness of consumption cannot be straightforwardly explained by permanent income theory the paper argues that in postwar u s quarterly data consumption is smooth because it responds with a lag to changes in income

modelling and forecasting mortgage delinquency and foreclosure in the uk in the absence of micro data in the public domain new aggregate models for the uk s mortgage repossessions and arrears are estimated using quarterly data over 1983 2014 motivated by a conceptual double trigger frame framework for foreclosures and payment delinquencies an innovation to improve on the flawed but widespread use of loan to value measures is to estimate difficult to observe variations in loan quality and access to refinancing and shifts in lenders forbearance policy by common latent variables in a system of equations for arrears and repossessions we introduce for the first time in the literature a theory justified estimate of the proportion of mortgages in negative equity as a key driver of aggregate repossessions and arrears this is based on an average debt equity ratio corrected for regional deviations and uses a functional form for the distribution of the debt equity ratio checked on irish micro data from the bank of ireland and bank of england snapshots of negative equity we systematically address serious measurement bias in the months in arrears measures neglected in previous uk studies highly significant effects on aggregate rates of repossessions and arrears are found for the aggregate debt service ratio the proportion of mortgages in negative equity and the unemployment rate economic forecast scenarios to 2020 highlight risks faced by the uk and its mortgage lenders illustrating the usefulness of the approach for bank stress testing for macroeconomics our model traces an important part of the financial accelerator the feedback from the housing market to bad loans and hence banks ability to extend credit

conference on housing stability and the macroeconomy international perspectives this article provides an introduction to the jmcb special issue on housing bubbles the global financial crisis and the ensuing recessions in countries that experienced housing busts we focus on five themes that are important for policymakers and researchers alike the domestic and international factors driving housing booms and busts the relevance of the housing sector for the real economy how monetary policy should react to housing booms and busts how housing and mortgage finance reform could affect financial stability and the broad lessons learned for macroeconomics and macroprudential policy

housing wealth and consumption evidence from geographically linked microdata rising home values also raise the cost of living offsetting their impact on consumption however additional home equity collateral can loosen borrowing constraints increasing spending for households that value their current endowment of housing highly i use geographically linked microdata to exploit regional heterogeneity in housing markets and identify the causal effect of house price fluctuations on consumer spending a 1 increase in home values leads to a 0 047 increase in spending for homeowners but a negligible response for renters results reflect large responses among credit constrained households suggesting looser borrowing constraints are a primary driver of the mpc out of housing wealth

housing and the business cycle revisited abstract i present a multisectoral dsge model with housing real frictions and variable capital utilization that generates aggregate and sectoral co movements due to uncorrelated sector specific shocks major advances are the robust positive correlations of residential investment with house prices and business investment in addition business investment is lagging other economic activities the key improvements are adjustment costs to business investment i identify the parameters of the exogenous shock processes business adjustment costs and variable capital utilization with bayesian estimation the results confirm those obtained from earlier work in this field

the assessment consumer expenditure this article aims to illuminate two sets of consumption puzzles the first concerns the behavior of aggregate saving rates in the 1980s and early 1990s collapse and rebound in scandinavia and the u k and apparently a more secular decline in the u s the second set of puzzles concerns various apparent contradictions of the rational expectations permanent income hypothesis e g in time series the excess sensitivity of consumption changes to anticipated income changes and in cross sections the tendency of consumption and income age profiles to follow each other more than standard life cycle theory implies the article discusses in relatively non technical terms the implications both for euler equations and solved out consumption functions of introducing uncertainty credit constraint consumption leisure interactions habits and durability alternative to rational expectations the illiquidity of some assets and financial deregulation it also compares the merits of euler and solved out models of aggregate consumption

household debt and spending during the financial crisis evidence from danish micro data abstract we use data for nearly 500 000 danish households to study the relationship between household leverage prior to the financial crisis of 2007 2009 and the development in spending over the course of the crisis we find a strong negative correlation between pre crisis leverage and the change in spending during the crisis this reflects that highly levered households spent a larger share of their income than their less levered peers prior to the crisis resulting in larger increases in debt in these years once we condition on the size of the pre crisis change in debt a high level of debt is no longer associated with a larger spending decline our results suggest that the larger decline in spending among high leverage households is the result of a spending normalization pattern that is also found in other years rather than a causal effect of high debt levels suppressing household spending during the crisis

stock volatility and the great depression stock return volatility during the great depression has been labeled a volatility puzzle because the standard deviation of stock returns was 2 to 3 times higher than any other period in american history we investigate this puzzle using a new series of building permits and leverage our results suggest that volatility in building permit growth and financial leverage largely explain the high level of stock volatility during the great depression markets factored in the possibility of a forthcoming economic disaster received september 30 2017 editorial decision august 27 2018 by editor philip e strahan authors have furnished an internet appendix which is available on the oxford university press web site next to the link to the final published paper online

housing wealth effects evidence from an australian panel we explore the positive relationship between house prices and household spending by following a panel of australian households no evidence for traditional housing wealth effects is found with young homeowners exhibiting the largest wealth effects young renters also exhibit a positive consumption response to house prices although less so than young homeowners this suggests that increasing house prices raise spending via easing credit constraints and a common association between house prices and a third factor results from a cohort level panel are similar to those using household level data suggesting that pseudo panels may be used as a partial substitute for actual panels

house prices and job losses why are house prices 80 correlated with job losses over the uk business cycle my paper studies this striking fact together with the strong comovements between house prices and labour market variables in general first a regional panel is estimated to quantify the impact of house prices on the unemployment job finding and job separation rates whereby rejection rates of planning applications are used as instruments to find exogenous variation in house prices second an orthogonalised var is used to estimate the aggregate impact of house price shocks both methods confirm the large impact of house price shocks on labour market variables and credit supply to understand the mechanism a general equilibrium model with collateral constraints endogenous job separation and housing shocks is confronted with macroeconomic data via bayesian methods the results suggest that shocks to house prices i explain about 10 of output fluctuations and about 20 of fluctuations in corporate credit unemployment and job separation rates via the collateral channel over the forecast horizon and ii were a major cause in triggering the 1990 and 2008 recessions in the uk

imperfect capital markets and the monetarist black box liquidity constraints inflation and the asymmetric effects of interest rate policy in this paper we examine the effects of unanticipated changes in interest rates on consumers expenditure in a model in which capital markets are imperfect we show that where constraints exist on the amounts individuals can borrow individuals may rationally choose to borrow up to the limits of such constraints over part of their lifetimes such liquidity constrained individuals in general have a higher marginal propensity to consume out of changes in current income than is the case with liquidity unconstrained individuals changes in interest rates which have the effect of redistributing income between liquidity constrained monetary debtors and liquidity unconstrained creditors will thus have a net effect on aggregate consumption we further show that this effect operates asymmetrically in the sense that an increase in interest rates will have a larger net impact than a fall formally we examine the impact of a change in the interest rate which we assume exogenous on the behaviour of an individual consumer the analysis is thus independent of the source of the interest rate shock 2 but we believe an important application of the model concerns the transmission mechanism through which monetary policy operates in this paper we do not consider the relationship between the supply of money and interest rates but simnply follow standard economic theory in assuming that monetary policy operates through the impact of interest rates on expenditure it is the mechanism linking interest rate changes to expenditure that has proved hard to identify and it is in this respect that our analysis may be relevant in suggesting a process through which interest rates can affect expenditure which appears to have been neglected hitherto the model provides a possible channel of transmission of monetary policy different from those usually considered 3 in so doing the model may offer some insight into the transmission processes within the monetarist black box and indeed suggests that the efficacy of monetary policy may in part depend on the existence of capital market imperfections

home production meets time to build an innovation in this paper is to introduce a time to build technology for the production of market capital into a model with home production our main finding is that the two anomalies that have plagued all household production models the positive correlation between business and household investment and household investment s leading business investment over the business cycle are resolved when time to build is added

house prices and consumer spending recent empirical work shows large consumption responses to house price movements this is at odds with a prominent theoretical view which using the logic of the permanent income hypothesis argues that consumption responses should be small we show that in contrast to this view workhorse models of consumption with incomplete markets calibrated to rich cross sectional micro facts actually predict large consumption responses in line with the data to explain this result we show that consumption responses to permanent house price shocks can be approximated by a simple and robust rule of thumb formula the marginal propensity to consume out of temporary income times the value of housing in our model consumption responses depend on a number of factors such as the level and distribution of debt the size and history of house price shocks and the level of credit supply each of these effects is naturally explained with our simple formula

how mortgage finance reform could affect housing abstract although major changes in mortgage finance have occurred since the subprime bust several issues remain unresolved centering on the roles of fannie mae freddie mac and the fha we analy

the role of real estate uncertainty in predicting us home sales growth evidence from a quantiles based bayesian model averaging approach abstractthis paper investigates the role of real estate specific uncertainty in predicting the conditional distribution of us home sales growth over the monthly period of 1970 07 to 2017 12 based

housing wealth and consumption a micro panel study there is strong evidence that house prices and consumption are synchronised there is however disagreement over the causes of this link this study examines if there is a wealth effect of house prices on consumption using a household level panel data set with information about house ownership income wealth and demographics for a large sample of the danish population in the period 1987 96 we model the dependence of the growth rate of total household expenditure with unanticipated innovations to house prices controlling for factors related to competing explanations we find little evidence of a housing wealth effect

exchange rate discounting abstract economists often describe nominal exchange rates as forward looking so that they reflect discounted expected future fundamentals this study applies a method for identifying the discount rate involved without knowing or measuring fundamentals identification arises from assumptions on the stochastic process followed by fundamentals combined with non linearity arising from expected future regime changes two applications yield evidence against the present value model in the form of discount rates which are negative and statistically significant

systematic monetary policy and the macroeconomic effects of shifts in residential loan to value ratios what are the macroeconomic consequences of changing aggregate lending standards in residential mortgage markets as measured by loan to value ltv ratios using a structural vector autoregression var we find that gdp and business investment increase following an expansionary ltv shock residential investment by contrast falls after a small initial uptick a result that depends on the systematic reaction of monetary policy we show that historically the fed tended to respond to expansionary ltv shocks by raising the monetary policy instrument and as a result mortgage rates increased and residential investment declined house prices are affected in a similar manner

home is where the equity is mortgage refinancing and household consumption applying a permanent income model with exogenous liquidity constraints and mortgage behavior household refinancing when mortgage interest rates are historically high and rising a persistent empirical puzzle is explained using data from the panel study of income dynamics households experiencing an unemployment shock and having limited initial liquid assets to draw upon are shown to have been 25 more likely to refinance 1991 94 on average such liquidity constrained households converted over two thirds of every dollar of equity they removed into current consumption as mortgage rates plummeted 1991 94 producing an estimated expenditure stimulus of at least 28 billion

transition probabilities in a problem of stochastic process switching extant solutions for state contingent process switching use first passage time densities or differential equations we alternatively employ transition probabilities these conditional likelihood functions also have obvious appeal for econometric analyses as well as derivative pricing and decision making under absorption and extinction

time varying impact of uncertainty shocks on the us housing market abstract this paper investigates the impact of uncertainty shocks on the housing market of the united states using the time varying parameter factor augmented vector autoregression tvp favar we use a comprehensive quarterly time series dataset on real economic activity price and financial variables besides housing market variables covering the period 1963 q1 to 2014 q3 in addition to housing prices we also consider variables related to home sales permits and starts in general the results of the cumulative response of housing variables to a one standard deviation positive uncertainty shock at the one four eight and twelve quarter horizon tends to change over time both in terms of sign and magnitude with the uncertainty shock primarily negatively affecting the housing variables in particular prices permits and starts in longer runs i e two and three years ahead horizons