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

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

technology shocks and labor market dynamics some evidence and theory a positive technology shock may lead to a rise or a fall in per capita hours depending on how hours enter the empirical var model we provide evidence that independent of how hours enter the var a positive technology shock leads to a weak response in nominal wage inflation a modest decline in price inflation and a modest rise in the real wage in the short run and a permanent rise in the long run we then examine the ability of several competing theories to account for this var evidence our preferred model features sticky prices sticky nominal wages and habit formation the same model also does well in accounting for the labor market evidence in the post volcker period

coalition and party formation in a legislative voting game we examine a legislative voting game where decisions are being made over both ideological and distributive dimensions and legislators preferences are separable over the two dimensions in equilibrium legislators prefer to make proposals for the two dimensions together rather than offering sequential proposals on the two dimensions separately the equilibria exhibit interaction between the ideological and distributive dimensions and in any equilibrium there is a positive probability that a proposal is made and approved which excludes the median legislator as defined over the ideological dimension in contrast with a game where no distributive decision is being made moreover in any stationary equilibrium there is more than one ideological decision that has a positive probability of being proposed and approved we show that legislators can gain from forming political parties and consider examples where predictions can be made about the composition of parties we discuss the impact of political parties on the outcome

rule of thumb consumers productivity and hours in this paper we study the transmission mechanism of productivity shocks in a model with rule of thumb consumers in the literature this nancial friction has been studied only with reference to scal shocks we show that the presence of rule of thumb consumers is also very helpful in accounting for recent empirical evidence on productivity shocks rule of thumb agents together with nominal and real rigidities play an important role in reproducing the negative response of hours and the delayed responses of output and

elections coalitions and legislative outcomes predictions of electoral behavior in a multiparty setting should be a function of the voters beliefs about how parties will perform following an election similarly party behavior in a legislature should be a function of electoral promises and rewards we develop a multistage game theoretic model of three party competition under proportional representation the final policy outcome of the game is generated by a noncooperative bargaining game between the parties in the elected legislature this game is essentially defined by the vote shares each party receives in the general election and the parties electoral policy positions at the electoral stage parties and voters are strategic in that they take account of the legislative implications of any electoral outcome we solve for equilibrium electoral positions by the parties and final policy outcomes

the demand bargaining set general characterization and application to majority games abstract the cooperative solution concept introduced here the demand bargaining set contains the core and is included in the zhou bargaining set eliminating the dominated coalition structures the demand vectors belonging to the demand bargaining set are self stable in the class of constant sum homogeneous weighted majority games the demand bargaining set is nonempty and predicts a unique demand vector namely a proportional distribution within minimal winning coalitions the noncooperative implementation of the demand bargaining set is obtained for all the games that satisfy the one stage property

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

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

a bargaining model of collective choice we present a general model of legislative bargaining in which the status quo is an arbitrary point in a multidimensional policy space in contrast to other bargaining models the status quo is not assumed to be bad and delay may be pareto efficient we prove existence of stationary equilibria the possibility of equilibrium delay depends on four factors risk aversion of the legislators the dimensionality of the policy space the voting rule and the possibility of transfers across districts if legislators are risk averse if there is more than one policy dimension and if voting is by majority rule for example then delay will almost never occur in one dimension delay is possible if and only if the status quo lies in the core of the voting rule and then it is the only possible outcome this core selection result yields a game theoretic foundation for the well known median voter theorem our comparative statics analysis yield two noteworthy insights i if the status quo is close to the core t hen equilibrium policy outcomes will also be close to the core a moderate status quo produces moderate policy outcomes and ii if legislators are patient then equilibrium proposals will be close to the core legislative patience leads to policy moderation

on the welfare and cyclical implications of moderate trend inflation abstract the welfare and cyclical implications of moderate trend inflation are addressed in an augmented medium scale dsge model increasing trend inflation from 2 to 4 percent generates a consumption equivalent welfare loss of about 4 percent welfare costs of this magnitude are driven by staggered wage contracts trend growth extended borrowing a roundabout production structure and the interaction between trend inflation and shocks to the marginal efficiency of investment mei a sticky price model abstracting from these features generates much smaller losses moderate trend inflation also has important business cycle implications interacting much more strongly with mei shocks than with productivity or monetary shocks

how well does sticky information explain the dynamics of inflation output and real wages abstract this paper finds that a model with sticky information is less successful than a standard model featuring nominal rigidities inflation indexation and habits in generating the dynamics triggered by technology shocks as estimated by a vector autoregression using u s macroeconomic data the real wage responses after a permanent increase in productivity clearly favor the standard model the sticky information model fails to replicate the observed inertial response in the real wage whereas the standard model relies on inflation indexation in wage setting to achieve a better fit the two models are however statistically equivalent after a shock in monetary policy

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

technology shocks and monetary policy assessing the fed s performance abstract the purpose of the present paper is twofold first we characterize the fed s systematic response to technology shocks and its implications for u s output hours and inflation second we evaluate the extent to which those responses can be accounted for by a simple monetary policy rule including the optimal one in the context of a standard business cycle model with sticky prices our main results can be described as follows first we detect significant differences across periods in the response of the economy as well as the fed s to a technology shock second the fed s response to a technology shock in the volcker greenspan period is consistent with an optimal monetary policy rule third in the pre volcker period the fed s policy tended to overstabilize output at the cost of generating excessive inflation volatility our evidence reinforces recent results in the literature suggesting an improvement in the fed s performance

demand commitment in legislative bargaining morelli 1999 provides a model of government formation in which the parties make payoff demands and the order of moves is chosen by the leading party morelli s main proposition states that the ex post distribution of payoffs inside the coalition that forms is proportional to the distribution of relative ex ante bargaining power we provide a counterexample in which the leading party is able to obtain the entire payoff furthermore there are coalitions for which proportional payoff division does not occur for any order of moves

nominal vs real wage rigidities in new keynesian models with hiring costs a bayesian evaluation abstract the inclusion of labor market frictions in the new keynesian dsge model overcomes the main drawbacks of the baseline framework in this paper we show that this extended model by assuming real wage rigidities does not replicate the correct wage dynamics and the negative conditional correlation between technology shocks and employment observed in the data known as the productivity employment puzzle we show also that these empirical limitations can be overcome by replacing real wage rigidities with nominal wage rigidities without sacrificing other appealing features of the model we adopt a bayesian perspective to estimate the dynamic properties of the model with real wage rigidities and compare them with those of the model with nominal wage rigidities we show that the evidence favors this latter construction

what really accounts for the fall in hours after a technology shock abstract the paper asks how state of the art dsge models that account for the conditional response of hours following a positive neutral technology shock compare in a marginal likelihood race to that end we construct and estimate several competing small scale dsge models that extend the standard real business cycle model in particular we identify from the literature six different hypotheses that generate the empirically observed decline in hours worked after a positive technology shock these models alternatively exhibit i sticky prices ii firm entry and exit with time to build iii habit in consumption and costly adjustment of investment iv persistence in the permanent technology shocks v labor market friction with procyclical hiring costs and vi leontief production function with labor saving technology shocks in terms of model posterior probabilities impulse responses and autocorrelations the model favored is the one that exhibits habit formation in consumption and investment adjustment costs a robustness test shows that the sticky price model becomes as competitive as the habit formation and costly adjustment of investment model when sticky wages are included

nominal and real wage rigidities in new keynesian models a critical survey the labour market is receiving increasing attention in the new keynesian literature in this paper i critically survey this literature in order to highlight the role played by wage rigidities in the explanation of fluctuations caused by technology shocks to this aim i present a dynamic stochastic general equilibrium model with sticky prices nominal wage rigidities and hiring costs the comparison between this model and that of blanchard and gali highlights the non trivial differences which exist in the way nominal wage and real wage rigidities drive the economy s dynamics my conclusion is that models incorporating nominal wage rigidities and some degree of price stickiness provide a better account of macroeconomic dynamics than models with real wage rigidities copyright 2009 blackwell publishing ltd

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

the new keynesian phillips curve and staggered price and wage determination in a model with firm specific labor we develop a dsge model with rm speci c labor where rm level wage bargaining and price setting are subject to calvo type staggering this is in general an intractable problem due to complicated intertemporal dependencies between price and wage decisions however the problem is signi cantly simpli ed if we in line with empirical evidence assume that prices can be changed whenever wages are we show that the price and wage setting relationships are substantially altered by the introduction of rm speci c labor speci cally the in ation response is substantially dampened whereas the wage in ation response is increased as compared to models with freely mobile labor these distinctive features of the model with rm speci c labor is supported by empirical evidence from a structural var

the likelihood function and a test for serial correlation in a disequilibrium market model abstract the likelihood function for an econometric disequilibrium market model of fair and jaffee with autocorrelated disturbances is derived a statistic is introduced for the test of serial correlation in such a model the statistic can be regarded as generalization of the durbin watson statistic

neutral technology shocks and the dynamics of labor input results from an agnostic identification this article studies the dynamic response of labor input to neutral technology shocks it uses benchmark dynamic stochastic general equilibrium models enriched with labor market search and matching frictions and investment specific technological progress that enables a new agnostic identification scheme based on sign restrictions on a structural vector autoregression svar the estimation supports an increase of labor input in response to neutral technology shocks this finding is robust across different perturbations of the svar model

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

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