a reevaluation of the macroeconomic effects of positive trend inflation abstract to date most of the papers which have examined the effects of trend inflation on the properties of new keynesian model were based on relatively simple sticky prices dsge models and whose realism was sometimes questionable in this paper we re evaluate the macroeconomic effects of non zero trend inflation building on the model of ascari 2004 as one of the most cited papers in the literature on the effects of trend inflation we show that the omission of some important theoretical ingredients significantly distorts the results obtained to date we propose a refinement of this model by introducing two theoretical important ingredients namely investment adjustment costs and a roundabout production structure once we add these features to make the model more realistic as commonly for medium scale models we find that the standard new keynesian model without real frictions overestimates the short term macroeconomic effects of a positive trend inflation rate and underestimates those of the long term

the american business cycle continuity and change in recent decades the american economy has experienced the worst peace time inflation in its history and the highest unemployment rate since the great depression these circumstances have prompted renewed interest in the concept of business cycles which joseph schumpeter suggested are like the beat of the heart of the essence of the organism that displays them in the american business cycle some of the most prominent macroeconomics in the united states focuses on the questions to what extent are business cycles propelled by external shocks how have post 1946 cycles differed from earlier cycles and what are the major factors that contribute to business cycles they extend their investigation in some areas as far back as 1875 to afford a deeper understanding of both economic history and the most recent economic fluctuations seven papers address specific aspects of economic activity consumption investment inventory change fiscal policy monetary behavior open economy and the labor market five papers focus on aggregate economic activity in a number of cases the papers present findings that challenge widely accepted models and assumptions in addition to its substantive findings the american business cycle includes an appendix containing both the first published history of the nber business cycle dating chronology and many previously unpublished historical data series

why does the cyclical behavior of real wages change over time the cyclical behavior of real wages has evolved from mildly countercyclical during the interwar period to modestly procyclical in the postwar era this paper presents a general equilibrium business cycle model that helps explain the evolution in the model changes in the real wage cyclicality arise from interactions between nominal wage and price rigidities and an evolving input output structure

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

output dynamics in real business cycles models the time series literature reports two stylized facts about output dynamics in the united states gnp growth is positively autocorrelated and gnp appears to have an important trend reverting component this paper investigates whether current real business cycle rbc models are consistent with these stylized facts many rbc models have weak internal propagation mechanisms and must rely on external sources of dynamics to replicate both facts models that incorporate labor adjustment costs are partially successful they endogenously generate positive autocorrelation in output growth but they need implausibly large transitory shocks to match the trend reverting component in output

post hoc ergo propter once more an evaluation of does monetary policy matter in the spirit of james tobin christina and david romer s paper does monetary policy matter advocates the so called narrative approach to causal inference we demonstrate that this method will not sustain causal inference first it is impossible to distinguish monetary shocks from oil shocks as causes of recessions second a world in which the fed only announces intentions to act cannot be distinguished from one in which it in fact acts third the techniques of dynamic simulation used in the romers study are inappropriate and quantitatively misleading and finally their approach provides no basis for establishing causal asymmetry

input demand elasticities for heterogeneous labor firm level estimates and an investigation into the effects of aggregation labor economists have paid increasing attention to the estimation of demand elasticities for heterogeneous labor the majority of these studies investigate the effect on wage rates resulting from exogenous changes in factor quantities i e the measurement of elasticities of complementarity examples of these studies abound borjas for example investigates the impact of differences in labor market representation on the earnings of racial groups 8 in another paper borjas defines immigrants as a separate labor group and is able to determine the impact of immigration on the wages earned by natives 9 berger defines labor inputs along education and gender lines thereby allowing for the investigation of changes in the age education composition of the work force on wage rates 5 and grant and hamermesh study the effect of increasing female labor force participation on the wages earned by youth and adults 17 less attention has been paid to the study of the responsiveness of employment to exogenous changes in wage rates i e the measurement of elasticities of substitution less attention has been focused on this issue because the data requirements are more stringent since in order to presume that wage rates are exogenously determined the unit of observation must be small ideally establishmentor firm level data would be used the relative inaccessibility of these type of data has led researchers to use more aggregated figures such as smsa level or industry level data to address microissues as long as wage rates are determined exogenously the unit of observation chosen is appropriate there are real concerns however about the adequacy of more aggregated units to describe the behavior of firms 2 this study addresses the issue of whether micro level data are in fact needed to accurately measure elasticities of substitution among labor groups a firm level data set that includes input

monetary policy and real wage cyclicality this article points to the potential role of monetary policy in affecting the degree of real wage cyclicality we show that the degree and direction of real wage cyclicality is determined by the interaction of i the returns to scale in production ii the nature of aggregate shocks and iii monetary policy given that production technology is fairly constant in the short run we suggest that variations in the real wage output covariance depend largely on the combination of the latter two identifying well documented monetary policy phases in six major organization for economic co operation and development oecd countries and accounting for both aggregate demand and supply shocks we provide empirical evidence to support our main theoretical claim

real wages over the business cycle evidence from panel data one topic on which keynes did not disagree with classical economists was the cyclical behavior of real wages keynes 1936 as well as various classical writers predicted that real wages should move countercyclically quoting the general theory p 17 in general an increase in employment can only occur through the accompaniment of a decline in real wages thus i am not disputing this vital fact which the classical economists have rightly asserted as indefeasible this prediction is based on the premise of competition and a given short run capital stock increases in employment then correspond to more intensive use of capital and through diminishing product lower real wages for this reason evidence by dunlop 1938 and tarshis 1939 that real wages move procyclically was viewed as paradoxical both dunlop and tarshis based their findings on an observed positive correlation between real and money wages which given the procyclical movement of money wages implies a positive correlation between

hyperbolic discounting and the phillips curve using a standard dynamic general equilibrium model we show that the interaction of staggered nominal contracts with hyperbolic discounting leads to inflation having significant long run effects on real variables

investment matching and persistence in a modified cash in advance economy abstract we simulate and estimate a new keynesian search and matching model with sticky wages in which capital has to be financed with cash at least partially our objective is to assess the ability of this framework to account for the persistence of output and inflation observed in the data we find that our setup generates enough output and inflation persistence with standard stickiness parameters the key factor driving these results is the inclusion of investment in the cia constraint rather than any other nominal or real rigidity the model reproduces labor market dynamics after a positive increase in productivity hours fall nominal wages hardly react and real wages go up with some delay regarding money supply shocks we investigate the conditions under which our model specification generates the liquidity effect a fact which is absent in most sticky price models

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

oil and the macroeconomy since world war ii all but one of the u s recessions since world war ii have been preceded typically with a lag of around three fourths of a year by a dramatic increase in the price of crude petroleum this does not mean that oil shocks caused these recessions evidence is presented however that even over the period 1948 72 this correlation is statistically significant and nonspurious supporting the proposition that oil shocks were a contributing factor in at least some of the u s recessions prior to 1972 by extension energy price increases may account for much of post opec macroeconomic performance

the dynamic effects of aggregate demand and supply disturbances we interpret fluctuations in gnp and unemployment as due to two types of disturbances disturbances that have a permanent effect on output and disturbances that do not we interpret the first as supply disturbances the second as demand disturbances demand disturbances have a hump shaped mirror image effect on output and unemployment the effect of supply disturbances on output increases steadily over time peaking after two years and reaching a plateau after five years

learning to bid an experimental study of bid function adjustments in auctions and fair division games we examine learning behaviour in auction and fair division experiments with independent private values under two different price rules first and second price participants play all four games repeatedly and submit complete bid functions rather than single bids this allows us to study how institutional changes are anticipated and whether learning is influenced by the structural differences between games we find that learning does not drive bidding towards the benchmark solution bid functions are adjusted globally rather than locally directional learning theory offers a partial explanation for bid changes the data support a cognitive approach to learning

endogenous business cycle propagation and the persistence problem the role of labor market frictions contrasting sharply with a recent trend in dsge modeling we propose a business cycle model where frictions and shocks are chosen with parsimony the model emphasizes a few labor market frictions and shocks to monetary policy and technology the model estimated from u s quarterly postwar data accounts well for important differences in the serial correlation of the growth rates of aggregate quantities the size of aggregate fluctuations and key comovements including the correlation between hours and labor productivity despite its simplicity the model offers an answer to the persistence problem chari et al 2000 that does not rely on multiple frictions and adjustment lags or ad hoc backward looking components we conclude modern dsge models need not embed large batteries of frictions and shocks to account for the salient features of postwar business cycles

changes in business cycles evidence and explanations this paper shows that the volatility of annual real macroeconomic indicators for the united states and the average severity of recessions have declined only slightly between the pre world war i and post world war ii eras recessions have however become somewhat less frequent and more uniform it argues that the advent of macroeconomic policy after world war ii can account for both the observed continuity and change countercyclical monetary policy and automatic stabilizers have prolonged postwar expansions and prevented severe depressions at the same time policy induced booms and recessions have led to continued volatility of the postwar economy

the wage price spiral this paper rehabilitates the old wage price spiral it shows that after an increase in aggregate demand the process of adjustment of nominal prices and nominal wages results from attempts by workers to maintain or increase their real wage and by firms to maintain or increase their markups of prices over wages under continuous price and wage setting the process of adjustment would be instantaneous under staggering of price and wage decisions the adjustment takes time the more inflexible real wages and markups are to shifts in demand the higher is the degree of price level inertia and the longer lasting are the effects of aggregate demand on output

inflation targeting what inflation rate to target abstract in an economy with nominal rigidities in both an intermediate good sector and a finished good sector and thus with a natural distinction between cpi and ppi inflation rates a benevolent central bank faces a tradeoff between stabilizing the two measures of inflation a final output gap and unique to our model a real marginal cost gap in the intermediate sector so that optimal monetary policy is second best we discuss how to implement the optimal policy with minimal information requirement and evaluate the robustness of these simple rules when the central bank may not know the exact sources of shocks or nominal rigidities a main finding is that a simple hybrid rule under which the short term interest rate responds to cpi inflation and ppi inflation results in a welfare level close to the optimum whereas policy rules that ignore ppi inflation or ppi sector shocks can result in significant welfare losses

nominal wage stickiness and aggregate supply in the great depression building on earlier work by eichengreen and sachs we use data for 22 countries to study the role of wage stickiness in propagating the great depression recent research suggests that monetary shocks transmitted internationally by the gold standard were a major cause of the depression accordingly we use money supplies and other aggregate demand shifters as instruments to identify aggregate supply relationships we find that nominal wages adjusted quite slowly to falling prices and that the resulting increases in real wages depressed output these findings leave open the question of why wages were so inertial in the face of extreme labor market conditions

housing demand and housing policy in urban bangladesh this paper estimates demand for housing and its attributes in urban bangladesh using a survey of 4400 owner renter and squatter households the results revealed that housing demand is inelastic with respect to income and price and price elasticity is less than income elasticity in absolute terms estimates of demand for housing attributes showed that owner and renter households value structural quality sanitation and electricity as well as a living room and dining room kitchen squatter households value living space pit latrine water supply and electricity but place less emphasis on structural quality irrespective of these submarkets income improvement strategies are likely to be the most effective means of enhancing housing consumption the rental submarket might be improved by rent liberalisation while slum improvement strategies should focus on tenure security and incremental improvement however contrary to current practice the emphasis should be on the size of squatter dwellings rather than on their structural quality

the impact of affirmative action on labor demand a test of some implications of the le chatelier principle this paper presents an alternative approach to measuring the impact of affirmative action on firms affirmative action is modeled as a series of hiring quotas if the quotas are binding then a firm subject to affirmative action will operate with greater costs of production have less elastic demand for inputs and be less able to substitute between most inputs the results are consistent with the hypothesis that affirmative action regulations significantly constrain firms behavior own wage elasticities are less elastic and most inputs are less substitutable for constrained firms further affirmative action raises costs by 6 5 percent for firms subject to the program copyright 1992 by mit press

increasing returns and unsynchronized wage adjustment in sunspot models of the business cycle a challenge to models of equilibrium indeterminacy based on increasing returns is that required increasing returns for generating indeterminacy can be implausibly large and rise quickly with the relative risk aversion in labor we show that unsynchronized wage adjustment via a relative wage effect can both lower the required degree of increasing returns for indeterminacy to a plausible level and make it invariant to the relative risk aversion in labor consequently indeterminacy and sunspot driven fluctuations can emerge for plausible increasing returns regardless of the relative risk aversion in labor our model generates reasonable dynamics in terms of matching the business cycle and sunspot shocks become more important with labor market friction

monopolistic competition and the effects of aggregate demand how important is monopolistic competition to an understanding of the effects of aggregate demand on output we ask the question at three levels can monopolistic competition by itself explain why aggregate demand movements affect output can it together with other imperfections generate effects of aggregate demand in a way that perfect competition cannot if so can it give an accurate account of the response of the economy to aggregate demand movements the answers are no yes and yes

intermediate goods and business cycles implications for productivity and welfare this paper presents an aggregate demand driven model of business cycles that provides a new explanation for the procyclicality of productivity and simultaneously predicts large welfare losses from monetary nonneutrality the key features of the model are an input output production structure imperfect competition countercyclical markups and for some results state dependent price rigidity true technical efficiency is procyclical even though production takes place with constant returns without technology shocks or technological externalities the paper has observable implications that distinguish it empirically from related work these implications are generally supported by data from u s manufacturing industries copyright 1995 by american economic association

on the timing and efficiency of creative destruction we analyze the timing pace and efficiency of ongoing job reallocation that results from product and process innovation there are strong reasons why an efficient economy ought to concentrate both job creation and destruction during recessions when the opportunity cost of reallocation is lowest incomplete contracting between labor and capital can disrupt this synchronized pattern and decouple creation and destruction transactional difficulties also lead to technological sclerosis characterized by excessively slow renovation government incentives to production may alleviate high unemployment but exacerbate sclerosis in contrast creation incentives increase the pace of reallocation an optimal combination of both policies restores economic efficiency

the comovement between output and prices abstract in this paper i analyze the comovement of us prices and output in the postwar period i use a new set of statistics to characterize the comovement between variables the statistics capture important information about the dynamics in the system the estimation procedure does not require assumptions about the order of integration or the types of assumptions needed for var decompositions i find that the comovement between output and prices is positive in the short run and negative in the long run i show that a model in which demand shocks dominate in the short run and supply shocks dominate in the long run can explain these empirical results while sticky price models with only demand shocks cannot

what determines corruption international evidence from microdata this paper uses a microlevel data set from 49 countries to create a direct measure of corruption which portrays the extent of bribery as revealed by individuals who live in those countries in addition it investigates the determinants of being asked for a bribe at the individual level the results show that both personal and country characteristics determine the risk of exposure to bribery examples are gender income education marital status the city size the country s unemployment rate average education and the strength of the institutions in the country jel k4 d73 p16

monetary policy in a forward looking input output economy this paper examines the implications for monetary policy of sticky prices in both final and intermediate goods in a new keynesian model both optimal policy under commitment and discretionary policy under simple loss functions are studied household utility losses under alternative loss functions are compared additionally the robustness of policy performance to model and shock misperceptions and parameter uncertainty is examined targeting inflation in both consumer and intermediate goods performs better than targeting inflation in one sector targeting price levels of both final and intermediate goods performs significantly better moreover targeting price levels in both sectors yields superior robustness properties

staggered price setting staggered wage setting and business cycle persistence abstract staggered price setting and staggered wage setting are commonly viewed as similar mechanisms in generating persistent real effects of monetary shocks in this paper we distinguish the two mechanisms in a dynamic stochastic general equilibrium framework we show that although the dynamic price setting and wage setting equations are alike a key parameter governing persistence is linked to the underlying preferences and technologies in different ways with reasonable parameter values the staggered price mechanism by itself is incapable of while the staggered wage mechanism plays an important role in generating persistence

noisy information distance and law of one price dynamics across us cities abstract us micro price data at the city level suggests that both the volatility and the persistence of law of one price deviations are rising in the distance between us cities a standard two city equilibrium model with trade costs can predict the relationship between volatility and distance but not between persistence and distance we show that if there is imperfect information about the state of nominal aggregate demand with noisy signals that are asymmetric across cities then distance and persistence will be positively correlated our main results are shown to be robust to the introduction of sticky prices and multiple cities

monetary factors in the great depression this paper examines the role of monetary policy in the early stages of the great depression and considers the mechanism whereby this policy may have affected real activity i conclude that the depression was preceded by a dramatic shift towards a highly contractionary monetary policy the economic impact of this policy seems unlikely to have come through the conventional keynesian channels of a shortage of liquidity and high ex ante real interest rates but instead may have operated through unanticipated deflation and after 1930 through the disruption of financial intermediation as a consequence of the banking panics

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