the dynamic effects of government spending policies in a two sector endogenous growth model this paper investigates the impact of government spending policies in a two sector model of endogenous growth endogenous growth arises because all factors of production physical and human capital are reproducible both temporary and permanent government spending shocks are examined the model implies that a permanent lump sum financed increase in government spending raises the long run growth rate this occurs because the negative wealth effects of a spending increase will increase labor supply on the other hand an income tax or wage tax financed rise in government spending reduces the growth rate the output effects of a temporary increase in government spending may be greater or less than a permanent increase in spending copyright 1995 by ohio state university press

the effect of experience on security analyst underreaction abstract we examine if analysts more fully incorporate prior earnings and returns information in their current quarter forecasts as their experience following a firm increases we measure analyst firm specific forecasting experience as the number of prior quarters for which the analyst has issued an earnings forecast for the firm we find that analysts underreact to prior earnings information less as their experience increases suggesting one reason why analysts become more accurate with experience

testing the long run implications of the neoclassical growth model abstract the long run implications of the one factor neoclassical growth model are tested by investigating the cointegrating relations between the log of output consumption and investment and the real interest rate with the exceptions of austria and the united kingdom the evidence for the united states and to a lesser extent for canada japan and the federal republic of germany is favorable to the neoclassical growth model a simple extension to a multicountry setting proved however to be unsuccessful national outputs nor consumption series are driven by just one common stochastic trend

the less volatile u s economy a bayesian investigation of timing breadth and potential explanations using a bayesian model comparison strategy we search for a volatility reduction in u s real gross domestic product gdp growth within the postwar sample we find that aggregate real gdp growth has been less volatile since the early 1980s and that this volatility reduction is concentrated in the cyclical component of real gdp sales and production growth in many of the components of real gdp display similar reductions in volatility suggesting the aggregate volatility reduction does not have a narrow source we also document structural breaks in inflation dynamics that occurred over a similar time frame as the gdp volatility reduction

what do interest rates reveal about the functioning of real business cycle models abstract this paper begins by documenting the extent to which the predictions of standard real business cycle rbc models are incompatible with observed movements in real interest rates the main finding of the paper is that extending the baseline model to include habit persistence in consumption and adjustment costs to capital significantly improves the model s empirical performance in our evaluation of the model s performance we take special care of estimating and testing predictions of the model using both moments drawn directly from the data and moments calculated after identifying shocks to the stochastic trend

energy price shocks and medium term business cycles abstract energy price shocks pose sudden challenges to economies this paper examines how oil price shocks have influenced the u s economy over the last decades and especially focuses on the productivity slowdown in the years following an oil price shock we extend the existing literature by considering medium term business cycles which consist of high frequency components conventional business cycles up to 8 years and medium frequency components 8 50 years we find that the medium frequency consequences of energy price shocks are considerable and explain a significant part of the productivity slowdown

econometric analysis of structural systems with permanent and transitory shocks this paper considers the implications of the permanent transitory decomposition of shocks for identification of structural models in the general case where the model might contain more than one permanent structural shock it provides a simple and intuitive generalization of the influential work of blanchard and quah 1989 the dynamic effects of aggregate demand and supply disturbances the american economic review 79 655 673 and shows that structural equations with known permanent shocks cannot contain error correction terms thereby freeing up the latter to be used as instruments in estimating their parameters the approach is illustrated by a re examination of the identification schemes used by wickens and motto 2001 estimating shocks and impulse response functions journal of applied econometrics 16 371 387 shapiro and watson 1988 sources of business cycle fluctuations nber macroeconomics annual 3 111 148 king et al 1991 stochastic trends and economic fluctuations american economic review 81 819 840 gali 1992 how well does the islm model fit postwar us data quarterly journal of economics 107 709 735 1999 technology employment and the business cycle do technology shocks explain aggregate fluctuations american economic review 89 249 271 and fisher 2006 the dynamic effects of neutral and investment specific technology shocks journal of political economy 114 413 451

cointegration in a macroeconomic system abstract this paper represents an exploratory study that investigates the vector autoregressive properties of a time series system containing six main indicators of the austrian economy gross domestic product gdp private consumption investment gdp deflator interest rate wages interest focuses on cointegrating structures in the system i e on linear combinations of some trending variates that generate stationary series johansen s 1987 procedure identifies three relations of this kind it is also tried to give an economic interpretation to these relations more extensively a variety of sensitivity experiments are performed which make somehow original use of the technique of canonical correlations contrary to the sensitivity experiments a critical assessment of the identified structure by medium term forecasting until 1999 sheds considerable doubt on its correctness at most one or two cointegrating relations may help to increase forecasting precision relative to traditional vector autoregression which do not use the idea of cointegration at all on the other hand using all three identified relations seems to impose excess stationarity on the system which is not replicated by actual data behavior

terms of trade economic growth and trade patterns a small open economy case by incorporating human capital accumulation into a dynamic trade model we examine the relationship between the growth rate and the specialization pattern of a growing economy we found that as long as its autarky price differs from the world price a small open economy eventually specializes completely furthermore the impact of the terms of trade on the growth rate depends on the trade pattern specifically if a country specializes in a capital commodity the growth rate is unaffected by the terms of trade if it specializes in a consumption commodity its growth rate is significantly influenced by the terms of trade

money output and income velocity this paper attempts to assess empirically the contribution of three structural shocks monetary institutional financial and fiscal and technological to output and velocity fluctuations in the national bank era and the post 1973 period to identify these shocks we impose only long run restrictions derived from a monetary growth model we find that higher money growth increases decreases velocity in the first second period depending crucially on the resulting changes in the transactions frequency credit enhancing financial or expansionary fiscal shocks have a permanent positive effect on velocity and a himp shaped effect on output whereas technological shocks cause velocity to decrease in the short run and output to move to a permanently higher level

the estimation of surprise models and the surprise consumption function in the first part of the paper we outline a method for estimating a class of models in which news or surprises appear and expectations are formed rationally the method is an extension of the errors in variables method of mccallum and wickens as a by product some of pagan s results on the circumstances under which the commonly used two step method of estimating surprise models is efficient are shown to be a consequence of well known theorems on the efficiency of sub system estimation when a subset of equations are exactly identified in the second part of the paper the method is applied to hall s random walk model of consumption which is extended to allow for stochastic interest rates and for leisure and government spending to be substitutes for private spending the extended formulation is a great deal more successful at capturing the salient features of the data we also derive approximate restrictions across the parameters of the model due to the rational expectations hypothesis but find that they are marginally rejected by the data finally we evaluate the ability of the life cycle with rational expectations model to encompass alternative models

selective hedging information asymmetry and futures prices evidence from hedging practices suggests that firms will hedge only if they expect that unfavorable events will arise in markets with a significant degree of information asymmetry in which hedgers are oligopolists with superior knowledge concerning supply and demand such as oil and gas futures we contend that these companies will selectively hedge price movements causing sharp price adjustments upon resolution of information asymmetry using aggregate analysts surprise as a proxy for the degree of information asymmetry we show that positive aggregate surprises lead to a price decline for futures which indicates that these firms unload their futures when the outlook is favorable

a positive model of earnings forecasts top down versus bottom up this article analyzes the behavior of two groups of corporate earnings forecasters analysts who follow individual company fortunes and market strategists who predict earnings for various company aggregates using data for two market indices the s p 500 and the dow jones industrial average we document that bottom up forecasts are systematically more optimistic than top down forecasts made by strategists this difference is not driven by the difference in the forecast target this finding may be explained by the incentives that analysts face and or by cognitive bias

will the new keynesian macroeconomics resurrect the is lm model the is lm model has no greater prospect of being a viable analytical vehicle for macroeconomics in the 1990s than the ford pinto has of being a sporty reliable car for the 1990s because of its treatment of expectations the is lm model as traditionally constructed and currently used is a hazardous base on which to build positive theories of business fluctuations and to undertake policy analysis to simplify economic reality sufficiently to use the is lm model as an analytical tool economists must essentially ignore expectations we now know that this simplification eliminates key determinants of aggregate demand the last two decades of research have taught economists that the assumption of rational expectations is a powerful part of economic explanations of individual and market behavior ranging from consumption and investment dynamics to pricing of stocks and bonds the emphasis on expectations in the macro model is the end result of a process of building microeconomic underpinnings that was initiated in the 1950s and 1960s when the goal was to develop dynamic theoretical foundations for the is and lm schedules inevitably consideration of dynamic choice pushed the question of expectations to the forefront as a result most of the equations of the is lm model are now viewed as summarizing purposeful economic behavior in which choices over time play a central role however as we will see this finding means there is no way to maintain traditional uses of the is lm model

following the leader a study of individual analysts earnings forecasts abstract this paper develops and tests procedures for ranking the performance of security analysts based on the timeliness of their earnings forecasts the abnormal trading volume associated with these forecasts and forecast accuracy our framework provides an objective assessment of analyst quality that differs from the standard approach which uses survey evidence to rate analysts we find that lead analysts identified by our measure of forecast timeliness have a greater impact on stock prices than follower analysts further we find that performance rankings based on forecast timeliness are more informative than rankings based on abnormal trading volume and forecast accuracy we also present evidence that analyst s forecast revisions are correlated with recent stock price performance suggesting that security analysts use publicly available information to revise their earnings forecasts

multivariate detrending under common trend restrictions implications for business cycle research abstract this paper outlines a methodology to detrend multiple time series under common trend restrictions the same filters used to construct the estimated trend in univariate exercises are shown to be appropriate in multivariate studies with a single common trend however to estimate the common trend in the multivariate case the filter is applied to a linear combination of series rather than to each series individually an empirical example and simulation exercises illustrate the implications of common trend detrending for measurement of business cycle properties

the role of energy in real business cycle models abstract this paper modifies hansen s 1985 analysis of a real business cycle mode with indivisible labor by explicitly including energy as a productive input and modelling the relative price of energy as an exogenous random process one goal is to determine the extent to which the introduction of energy price shocks reduces the reliance of the real business cycle model on unobserved technology shocks the other goal following christiano and eichenbaum 1991 is to compare the correlation between real wages and hours predicted by the energy inclusive model to that predicted by hansen s model

analyzing the analysts career concerns and biased earnings forecasts this paper examines the career concerns of security analysts we relate long histories of their earnings forecasts to job separations we find that relatively accurate past forecasts lead to favorable career outcomes such as remaining at or moving up to a high status large prestigious brokerage house controlling for accuracy optimistic forecasts relative to the consensus increase the chances of favorable job separations job separations depend much less on accuracy for analysts who cover stocks that are underwritten by their brokerage houses such analysts are also much more likely to be rewarded for optimistic forecasts than other analysts furthermore job separations were much less sensitive to accuracy and somewhat more sensitive to optimism during the stock market mania of the late 1990s these findings suggest that the well documented analyst forecast optimism bias is likely due to incentives to promote stocks

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

how well do linear approximation methods work abstract in this paper we investigate the accuracy of approximating policy functions for three different approximation methods in the context of a neoclassical model with a production tax we find that a variant of the king plosser and rebelo procedure yields the best approximations overall but that in certain instances researchers may be better off using a discrete state space solution to the euler equations of the model

tax disturbances and real economic activity in the postwar united states abstract this paper investigates the macroeconomic effects of cyclical fluctuations in marginal tax rates it finds that systematically including tax variables in a standard real business cycle model substantially improves the model s ability to reproduce basic facts about postwar u s business cycle fluctuations in particular modeling fluctuations in personal and corporate income tax rates increases the model s predicted relative variability of hours and decreases its predicted correlation between hours and average productivity fluctuations in tax rates produce large substitution effects that alter the leisure labor supply decision

productivity growth consumer confidence and the business cycle abstract the objective of this paper is to provide in the context of a dynamic general equilibrium model an answer to the following five questions 1 to what extent does an economy subject to regular variations in labor productivity growth differ from one where labor productivity is constant 2 what is the impact on major macro indicators of a one time change in labor productivity growth 3 what are the business cycle implications of autonomous non falsifiable changes in growth expectations 4 what is the potential of such expectation changes for explaining the volatility of consumption to output ratio 5 can autonomous changes in growth expectations help us understand recent business cycle episodes

vector autoregressions and reduced form representations of dsge models abstract the performance of dynamic stochastic general equilibrium models is often tested against estimated vars this requires that the data generating process consistent with the dsge theoretical model has a finite order var representation this paper discusses the assumptions needed for a finite order var p representation of a dsge model to exist when a var p is only an approximation to the exact infinite order var the truncated var p may return largely incorrect estimates of the impulse response function the results do not hinge on small sample bias or on incorrect identification assumptions but the bias introduced by truncation can lead to bias in the identification of the structural shocks identification strategies that work in the exact var representation perform poorly in the truncated var

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

family labor supply and aggregate fluctuations abstract this paper considers an economy which is populated by a continuum of identical families consisting of two members the two members have different productivities and the family faces a fixed utility cost if both members supply labor simultaneously although both family members have the same preferences they display very different elasticities of labor supply a real business cycle model is calibrated and it is seen that this cross sectional heterogeneity results in interesting forms of aggregation bias

output effects of government purchases the theoretical analysis focuses on the distinction between temporary and permanent movements in government purchases under plausible conditions the temporary case involves an output response that is positive less than one to one with the change in government purchases and larger than that generated by an equal sized but permanent shift in purchase the equilibrium real rate of return rise in the temporary case but changes little in the permanent one defense purchases are divided empirically into permanent and temporary components by considering the role of temporary wars no temporary shifts in nondefense purchases were isolated empirical results verify an expansionary output effect for temporary purchases that exceeds that of permanent purchases the results for some other expectational hypotheses are found to be generally supportive of the theory

some consequences of temporal aggregation in empirical analysis i derive the generating mechanism of a temporally aggregated process when the disaggregated one belongs to the vector autoregressive integrated moving average class i then study the effects of temporal aggregation on a set of characteristics of usual interest such as exogeneity causality cointegration and common features an empirical example with canadian interest rates illustrates the main issues

the forecast accuracy of individual analysts evidence of systematic optimism and pessimism o brien 1990 examines the annual earnings forecast accuracy of individual analysts reporting to the institutional brokers estimate system ibes of lynch jones and ryan during july 1975 september 1982 using a regression model which adjusts for average firm and year effects o brien finds no evidence of differential forecast accuracy comparing individual analysts earnings forecasts to median consensus forecasts during 1983 86 we also find no statistically significant evidence of differential analyst forecast accuracy our result however does not mean that one analyst s forecasts are much like another s we find that analysts are persistently optimistic or pessimistic relative to consensus forecasts we examine this persistent behavior and its effect on measures of forecast accuracy over a sample

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

government spending and consumer attitudes toward risk time preference and intertemporal substitution an econometric analysis we construct a model that considers the direct effects if any of government spending on the attitudes of a typical consumer toward risk time preference and intertemporal substitution the null hypothesis is that a growing government sector does not affect the consumer s behavior and the alternative is that it causes him to become less risk averse more impatient to consume now rather than in the future and less responsive to changes in real interest rates if the alternative hypothesis is correct then government growth may lead to lower economic growth using greek annual aggregate data 1960 1990 we can reject the null hypothesis

habit formation and the present value model of the current account yet another suspect abstract in a recent paper gruber gruber j w 2004 a present value test of habits and the current account journal of monetary economics 51 1495 1507 claims that habit formation in consumption plays an important role in current account fluctuations in selected developed countries extending the present value model of the current account pvm with consumption habits in this paper however i show that the habit forming pvm is observationally equivalent to the pvm augmented with persistent transitory consumption which is induced by world real interest rate shocks based on a small open economy real business cycle soe rbc model endowed with consumption habits as well as persistent world real interest rate shocks this paper resolves the inherent identification problem of the habit forming pvm by bayesian methods to seek effects of habit formation on current account fluctuations in typical small open economies canada and the united kingdom results reveal no clear evidence that habit formation plays a crucial role in current account fluctuations

indivisible labor lotteries and equilibrium abstract this paper considers an economy where labor is indivisible and agents are identical although the discontinuity in labor supply at the individual level disappears as a result of aggregation it is shown that indivisible labor has strong consequences for the aggregate bahavior of the economy it is also shown that optimal allocations involve lotteries over employment and consumption

the relative and complementary performance of analyst and security price based measures of expected earnings abstract this paper evaluates the relative performance of ibes consensus financial analyst forecasts and forecasts based upon the anticipatory behaviour of security prices according to two criteria a the accuracy of earnings growth predictions and b the contemporaneous association between unexpected earnings and security returns during the forecast year results are presented for firms in differing size groups measured here by market capitalization the results indicate that neither forecast source is superior to the other in terms of either criterion there is however significant complementarity of financial analyst and price based forecasts

long dark shadows or innovative spirits the effects of smoothing business cycles on economic growth a survey of the literature abstract it is argued that fiscal policy can play a part in preventing a possible downward spiral or be instrumental in achieving a higher long term path of growth never before has this argument been advanced as frequently as in the current economic crisis however the economic literature an overview of which is given here does not provide an unambiguous answer either theoretically or empirically to the question of the relationship between the smoothing of cyclical fluctuations and long term growth in this context two main contrasting explanatory paradigms can be identified schumpeter s concept of creative destruction and the learning by doing hypothesis even if it were possible to identify the relationship more clearly on this basis it is important not to lose sight of the problems associated with the real time assessment of the current economic situation time lags and political economic incentives even in difficult times

robust control of forward looking models abstract this paper shows how to formulate and compute robust ramsey aka stackelberg plans for linear models with forward looking private agents the leader and the followers share a common approximating model and both have preferences for robust decision rules because both doubt the model since their preferences differ the leader s and followers decision rules are fragile to different misspecifications of the approximating model we define a stackelberg equilibrium with robust decision makers in which the leader and follower have different worst case models despite sharing a common approximating model to compute a stackelberg equilibrium we formulate a bellman equation that is associated with an artificial single agent robust control problem the artificial bellman equation contains a description of implementability constraints that include euler equations that describe the worst case analysis of the followers as an example the paper analyzes a model of a monopoly facing a competitive fringe

indivisible labor and the business cycle abstract a growth model with shocks to technology is studied labor is indivisible so all variability in hours worked is due to fluctuations in the number employed we find that unlike previous equilibrium models of the business cycle this economy displays large fluctuations in hours worked and relatively small fluctuations in productivity this finding is independent of individuals willingness to substitute leisure across time this and other findings are the result of studying and comparing summary statistics describing this economy an economy with divisible labor and post war u s time series

can long run restrictions identify technology shocks gali s innovative approach of imposing long run restrictions on a vector autoregression var to identify the effects of a technology shock has become widely utilized in this paper we investigate its reliability through monte carlo simulations using calibrated business cycle models overall gali s methodology appears to be fruitful the impulse responses derived from the artificial data generally have the same sign and qualitative pattern as the true responses and the approach can be informative in discriminating between alternative models however our results reveal some important quantitative shortcomings including considerable estimation uncertainty about the impact of technology shocks on macroeconomic variables more generally the conditions under which the methodology performs well appear considerably more restrictive than implied by the key identifying assumption this underscores the importance of using economic models to guide in the implementation of the approach in interpreting the results and in assessing its limitations jel c32 e32 o33

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

tax analysis in a real business cycle model on measuring harberger triangles and okun gaps abstract a tax distorted real business cycle model is parameterized calibrated and solved numerically in an attempt to measure the size of harberger triangles relative to okun gaps in particular the model constructed is used to study quantitatively the impact of various distortional government tax and subsidy schemes it is shown that the government can use tax policy to stabilize cyclical fluctuations and this is done for the economy being studied the benefits of implementing such a stabilization policy are calculated and compared with the size of the welfare gains realized from reducing various tax distortions

trend growth and learning about monetary policy rules abstract the paper examines the effect of trend productivity growth on the determinacy and learnability of equilibria under alternative monetary policy rules under zero trend inflation we show that the economic structure is isomorphic to that of bullard and mitra 2002 and show that under a policy rule that responds to current period inflation and output a higher trend growth rate relaxes the conditions for determinacy and learnability results are mixed for other policy rules under the expectations based rule trend growth tightens the conditions for determinacy but it relaxes the conditions for learnability under the lagged data based rule trend growth tightens the conditions for determinacy and learnability our analysis shows that lower higher trend growth has similar effects as higher lower trend inflation in the sense of making inflation more less forward looking thus our results complement previous studies on the role of high trend inflation as a cause of macroeconomic volatility in the u s in the 1970s as this period was also characterized by productivity growth slowdown

the economic crisis from a neoclassical perspective abstract this paper assesses the 2007 2009 recession using neoclassical business cycle theory i find that the 2007 2009 u s recession differs substantially from other postwar u s recessions and also from the 2008 recession in other countries in that lower labor input accounts for virtually all of the decline in income and output in the united states while lower productivity accounts for much of other u s recessions and the 2007 2009 recession in other countries i also find that existing classes of models including financial market imperfections models do not explain the u s recession this is because the 2007 2009 recession is almost exclusively related to what appear to be labor market distortions that drive a wedge between the marginal product of labor and the marginal rate of substitution between consumption and leisure a topic about which current classes of financial imperfection models are largely silent i discuss future avenues for developing this class of models and i consider alterna

does government growth reduce precautionary saving the paper extends the constant relative risk aversion model by endogenizing the arrow pratt coefficient of relative risk aversion the empirical application treats this coefficient as a linear function of the rate of growth of real government expenditure per worker and estimates a euler equation for consumption using greek annual aggregate data for the period 1960 1993 the results support the view that government growth may cause a typical consumer to become less risk averse and save less

impulse dynamics and propagation mechanisms in a real business cycle model abstract in a typical real business cycle model we find that output dynamics are determined primarily by impulse dynamics and that endogenous propagation mechanisms are weak consequently the model must rely on external sources of dynamics in order to replicate the univariate dynamics of u s per capita gnp

average marginal tax rates from social security and the individual income tax we extend previous estimates of the average marginal tax rate from the federal individual income tax to include social security our computations consider the tax rates on employers employees and the self employed the income that accrues to persons with earnings below the ceiling and the effective deductibility of employers social security contributions from workers taxable income the next effect of social security on the average marginal tax rate is below 02 until 1966 but then rises to 03 in 1968 04 in 1973 05 in 1974 06 in 1979 and 07 in 1982 this abstract was borrowed from another version of this item

straight time and overtime in equilibrium abstract we formulate an equilibrium model of straight time and overtime wages by imposing restrictions on agents consumption sets and using a commodity space that includes employment lotteries we extract some time series implications from a linear quadratic approximation to our model evaluated at particular parameter values we use our model informally to interpret some features of observed time series for wages and employment

the relative adjustment of wages and prices direct tests within a multiple equation system in order to assess the relative rigidity of the aggregate price level and the nominal wage rate most researchers have focused on the implied behaviour of the real wage rate in response to a purely demand disturbance the present work examines the explicit behaviour of the two variables and is therefore able to analyse the variables short run responses within the context of their defined long run behaviour while the paper reports evidence of long run stability in the real wage rate additional evidence is presented which supports both sticky price and sticky wage models the determining factor is the choice of lag

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

human capital formation and business cycle persistence abstract in this paper we examine the role of the formation of human capital in propagating shocks over the business cycle we show that a two sector equilibrium business cycle model with human capital is able to generate persistence in the growth of output and other aggregate variables comparable to that observed in the post war us data a key feature is the relatively low elasticity of substitution between skilled and unskilled labor in the production of human capital

recessions and recoveries in real business cycle models i introduction do general equilibrium business cycle models generate business cycles that look like the business cycles observed in a modern industrial economy the early real business cycle literature as exemplified by kydland and prescott 1982 hansen 1985 and the papers in the march may 1988 issue of the journal of monetary economics evaluated the ability of dynamic general equilibrium models to generate business cycles by comparing selected second moments of the data generated by the models with those generated by actual detrended data specifically this literature considers the deviations of various macroeconomic aggregates from trend as the cyclical movement that needs to be explained by a model of the business cycle a model is judged to be successful if the second moments generated by the model are close in some informal sense to the second moments found in the data in this paper rather than examine whether real business cycle models can mimic the autocorrelation and cross correlation properties of the data we ask whether a representative model of this class is able to generate cyclical behavior consistent with the traditional nber conception of business cycles the traditional nber definition of a business cycle defines the cycle in terms of periods of absolute increases and decreases in economic activity rather than fluctuations about some trend below we examine whether a real business cycle model can produce business cycles in this more traditional sense that are of appropriate duration and shape there are several reasons for considering this alternative method of evaluating real business cycle models there is a large and old literature including among many others mitchell 1927 burns and mitchell 1946 eckstein and sinai 1986 and zarnowitz 1992 that examines fluctuations in economic activity in terms of a nber type chronology of business cycle peaks and troughs furthermore it is business cycles in the traditional nber sense that policymakers the press and the general public are typically concerned with while periods of sub par growth do receive attention and are a source of concern to policymakers it is nonetheless the case that the qualitative nature of policy deliberations seems to change when the economy experiences absolute declines in economic activity finally by examining the nature of business cycles in light of a nber type chronology one may be able to uncover relationships that otherwise would be undetected if only auto or cross correlations of the data were used using the concept of business cycle time introduced by burns and mitchell 1946 we divide recessions and expansions in calendar time into separate business cycle phases based on this framework we show that for real gnp expansions tend to be concave and recessions linear that is growth tends to be faster earlier in the expansion and slower later in the expansion while the rate of decline is not significantly different over the course of the recession furthermore output tends to have rounded peaks and pointed troughs in addition to aggregate output we consider the shape of consumption of nondurables and services fixed investment hours and real wages while not every variable displays concave expansions round peaks and pointed troughs are present in most of these variables a simple real business cycle model considered in king plosser and rebelo 1988a a variant of the hansen 1985 and rogerson 1988 models is used to generate artificial economic histories the algorithm developed by bry and boschan 1971 to mimic the business cycle dating procedure of the nber is used to date business cycle peaks and troughs in the artificial data we then compare the nature of business cycles implied by these simple real business cycle models to that of actual business cycles we find that while these models are adequate at capturing the duration and the amplitude of actual business cycles they do not capture the entire shape of the business cycle

seasonal cycles business cycles and monetary policy abstract this paper presents a dynamic general equilibrium model that is consistent with both seasonal and business cycle facts in the u s economy the model features consumption durability and a transaction technology both crucial in accounting for seasonal patterns of nominal variables a calibrated version of the model is used to quantitatively evaluate welfare consequences of three alternative monetary policy rules 1 the fed s historical policy that smooths nominal interest rates at the seasonal frequency but not at the business cycle frequency 2 a constant money growth rule and 3 a constant interest rate rule we find that the historical policy is associated with higher welfare than both alternatives

intertemporal dependence impatience and dynamics abstract this paper develops simple geometric methods for analyzing consumer behavior under recursive but intertemporally dependent tastes since the preferences studied need not be time additive they allow the marginal utility of consumption on a given date to vary with consumption on other dates intertemporal dependence is induced by the presence of a variable individual rate of time preference the optimal consumption responses to transitory and anticipated changes in incomes and interest rates are easily derived and are similar in many respects to the responses implied by the standard constant time preference model intuitive explanations of the first order conditions describing optimal paths are provided

stochastic trends and economic fluctuations in a large open economy abstract this study examines the role of stochastic trends in real exchange rates and foreign output in explaining economic fluctuations in the united states while many of the results are consistent with recent closed economy studies the evidence shows that external shocks have significant short run effects on economic fluctuations even in a large country a real appreciation of the dollar leads to permanent decreases in net exports and temporary decreases in output permanent shocks to real exchange rates have surprisingly large effects on output over the course of the normal business cycle

comparing the point predictions and subjective probability distributions of professional forecasters we use data from the survey of professional forecasters spf to compare point predictions of gross domestic product gdp growth and inflation with the subjective probability distributions held by forecasters we find that most spf point predictions are quite close to the central tendencies of forecasters subjective distributions tend to be asymmetric with spf forecasters tending to report point predictions that give a more favorable view of the economy than do their subjective means medians modes

estimating and testing rational expectations models when the trend specification is uncertain abstract this paper explores various strategies for estimating and testing rational expectations models when the trend specification is uncertain one approach seeks to make estimators and tests robust to trend misspecification by reducing the influence of low frequency dynamics however contrary to intuition the effects of trend specification errors are not confined to low frequencies but are spread across the entire frequency domain thus operations that damp low frequency components do not remove trend specification errors and are not sufficient for constructing robust estimators and tests another approach seeks representations of approximating models that do not condition on a specification of the trend and it uses gmm to estimate parameters and test over identifying restrictions because these methods do not condition on assumptions about trends they are robust to errors in that part of the approximating model

do security analysts improve their performance with experience we investigate if sell side security analysts generate more accurate quarterly earnings forecasts and more profitable stock recommendations as their experience following a specific firm increases we measure firmspecific experience as the number of prior quarters for which the analyst has issued an earnings forecast for the firm if analysts improve their forecasting performance with repetition as suggested by the learning by doing lbd model an analyst s earnings forecasts will become more accurate with experience prior empirical work provides mixed evidence on whether analysts exhibit individual forecasting performance differences e g butler and

endogenous growth and the procyclical behaviour of productivity abstract in this paper a model with endogenous growth is used to explain the procyclical behaviour of productivity periods when the marginal return to goods production is high are associated with low levels of human capital formation and other investment like activities in particular the model successfully explains the surges in productivity exhibited in the uk during wartime and the apparently permanent effect of the level of defence spending on the growth of total factor productivity

predicting forecast errors through joint observation of earnings and revenue forecasts abstract we propose a simple method to infer the forecast error associated with quarterly estimates of earnings and revenue before the firm announces realized earnings and revenue the method uses estimates of the profit margin implied by an analyst s forecasts of both earnings and revenue to identify forecasts that are likely to be optimistic or pessimistic the ability to anticipate forecast error permits a trading strategy that exploits the average market reaction following positive and negative earnings and revenue surprises

on weak identification in structural varma models we simulate synthetic data from known data generating processes dgps that arise from economic theory and compare the performance of fitted var and varma models in estimating the true impulse responses to structural shocks we show that while the varma structures implied by these dgps are theoretically identified and lead to precise estimates of impulse responses given enough data their parameters are close to the non identified ridge in the parameter space and that makes precise estimation of the impulse responses in small samples typical of macroeconomic data improbable as a result varma models barely show any advantage over vars in characterizing the known dgps in small samples this is a refinement of the conjecture that near non stationarity near non invertibility or weak identification could be possible reasons for the failure of structural varma models in providing good estimates of theoretical impulse responses of particular dsge models

chronic bias in earnings forecasts whatever the source or explanation of bias in forecasts of company earnings if such bias persists it is potentially discoverable and exploitable by investors this research addresses 1 whether characterizing forecasts as if they were a homogeneous group with respect to bias is accurate or useful and 2 whether a long term record of forecast errors contains information useful in predicting subsequent errors we found that earnings forecasts are heterogeneous with respect to direction and degree of bias we also found evidence of extremes in optimism and pessimism and that extreme errors tend to persist in the same direction which suggests certain potentially profitable trading strategies

cyclical uncertainty precautionary saving and economic growth this paper studies the interaction between cyclical uncertainty precautionary saving and economic growth in a stochastic endogenous growth model the analysis provides insight into the potential connection between technological uncertainty of the sort popularized in real business cycle models and the determinants of economic growth in a stochastic version of a popular model of endogenously determined economic growth the magnitude of the link between cyclical uncertainty and growth is quantified and found to be small in terms of its effect on the growth rate but possibly large in terms of its effect on levels of macroeconomic variables moreover the welfare costs of reduced cyclical uncertainty can be substantial owing to the lower historical rate of capital accumulation induced by a decrease in precautionary saving the chief implications of the model are found to be roughly consistent with the postwar experience of several countries although the predictions of the model with regard to growth rates are too small to explain much of the variation in growth rates across time or across countries

information constrained insurance the revelation principle extended abstract private information induced incentive constraints can cause allocations to diverge from full information optimal allocations often in the direction of limited insurance but can bring unanticipated anomalies related plausible contract exclusion restrictions can be damaging in welfare terms more generally private information optimal allocations can be sensitive to the information structure suggesting that the latter be specified with an eye toward realism as well as tractability in an effort to make tractability less of a constraint the paper shows how two apparently difficult information structures a costly state verification environment and a multiperiod multilateral private information environment can be handled theoretically by revelation principle methods the paper also shows how solutions can be generated numerically

how the basic rbc model fails to explain us time series abstract by examining the reduced form equations implied by an rbc model this paper shows how it fails in explaining the dynamic characteristics of the us time series using time domain analysis in particular by studying the serial correlation of the residuals of the reduced form and by introducing lagged dependent variables important propagation mechanisms left out in the model can be clearly discerned and reformations to improve the model can be evaluated

inefficiency in analysts earnings forecasts systematic misreaction or systematic optimism a rational analysis of analyst behavior predicts that analysts immediately and without bias incorporate information into their forecasts several studies document analysts tendency to systematically underreact to information underreaction is inconsistent with rationality other studies indicate that analysts systematically overreact to new information or that they are systematically optimistic this study discriminates between these three hypotheses by examining the interaction between the nature of information and the type of reaction by analysts the evidence indicates that analysts underreact to negative information but overreact to positive information these results are consistent with systematic optimism in response to information the literature on financial analysts defines the phrase forecast inefficiency to mean forecasts that fail to accurately incorporate new information on a timely basis and or that are biased these forecasts have also been described as irrational or suboptimal prior studies report inefficiency in analysts forecasts finding that they are upwardly biased and inaccurately reflect available information some studies conclude from this that analysts underreact to information other studies conclude that analysts overreact if markets treat analysts forecasts as both rational and statistically optimal then inefficient forecasts could have important implications for the efficiency of pricing in securities markets in this paper we reexamine the apparent tendency of analysts to misinterpret earnings information the intent of this study is to discriminate between three hypotheses 1 that analysts systematically underreact to new earnings information 2 that analysts systematically overreact to new earnings information and 3 that analysts are systematically optimistic in their reactions for hypotheses 1 and 2 the direction of the misinterpretation i e underor overreaction is independent of the nature of the information received in contrast hypothesis 3 predicts that analysts are optimistic in interpreting

balanced budget rules and aggregate instability the role of consumption taxes it is known that in a real business cycle model with constant returns to scale and a balanced budget fiscal policy rule steady state indeterminacy may arise due to endogenous labour income tax rates this article shows that when the government finances its expenditures via an endogenous consumption tax instead a steady state is always saddle path stable consequently combining income taxes with consumption taxes makes the ranges of indeterminacy shrink thus reducing the possibility of aggregate instability from a policy perspective the results provide an additional argument in favour of consumption taxes in place of capital taxes

the workweek of capital and its cyclical implications abstract the neoclassical growth model studied in the kydland and prescott time to build paper is modified to permit the capital utilization rate to vary the effect of this modification is to increase the amplitude of the aggregate fluctuations predicted by theory as the equilibrium response to technological shocks if following solow the changes in output not accounted for by changes in the labor and tangible capital inputs are interpreted as being the technology shocks the statistical properties of the fluctuations in the postwar united states economy are close in magnitude and nature to those predicted by theory

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

indeterminacy and endogenous growth with social constant returns abstract by examining endogenous growth models with physical and human capital this paper demonstrates that indeterminacy of equilibrium may emerge even in the absence of increasing returns to scale the model we examine consists of two production sectors one produces final goods and the other produces new human capital both sectors use physical as well as human capital it is assumed that while the private technology of the representative firm in each sector exhibits decreasing returns to scale the social technologies of both sectors satisfy constant returns because of the presence of sector specific externalities we demonstrate that a small divergence between private and social factor intensity conditions generates indeterminacy of equilibrium rather easily even under constant returns intuitive implications of the source of indeterminacy and a generalization of the model are also presented journal of economic literature classification numbers d90 o40 o41

dynamic laffer curves abstract in an endogenous growth model with human capital accumulation we discuss the possibility of welfare improving changes on the fiscal policy stance in some actual economies first we characterize the extent to which the initial fall in revenues produced by a permanent tax cut can be compensated by an increase in the tax base due to a dynamic laffer curve effect showing that there is in fact a non trivial margin for substituting debt for taxes on labor and capital income second we show that the largest feasible reduction in labor income tax rates may easily produce a higher welfare gain than the largest feasible reduction in capital income tax rates two qualifications a feasible tax cuts exist only for a relatively high elasticity of intertemporal substitution of consumption and b the preference for the largest feasible tax cut on labor income rather than that on capital income reverses for a low appreciation for leisure relative to consumption in the preferences of the representative agent