asymmetric persistence in gdp a deeper look at depth abstract if an economic time series behaves asymmetrically then an interpretation of economic fluctuations based on linear time series models could be misleading beaudry and koop 1993 recently argued that for post war us gdp data there exists a statistically significant difference in persistence between negative and positive shocks we demonstrate that their test has two pitfalls first the t statistic for testing asymmetry in persistence does not have a conventional interpretation second a highly significant t value may come from sources different from asymmetry using international data we investigate for the presence of asymmetric persistence across the g 7 countries

the federal funds rate and the channels of monetary transmission the authors show that the interest rate on federal funds is extremely informative about future movements of real macroeconomic variables then they argue that the reason for this forecasting success is that the funds rate sensitively records shocks to the supply of bank reserves that is the funds rate is a good indicator of monetary policy actions finally using innovations to the funds rate as a measure of changes in policy the authors present evidence consistent with the view that monetary policy works at least in part through credit i e bank loans as well as through money i e bank deposits copyright 1992 by american economic association

attitudes toward risk and the risk return paradox prospect theory explanations this study attempted to explain bowman s risk return paradox in terms of recent research in behavioral decision theory and prospect theory the research emphasized the role of reference or target

project evaluation by potential tax reform abstract shadow prices are derived for small open economies with several production sectors experiencing constant returns to scale small projects affect the balance of trade domestic prices of non traded goods and factors and sector scales only domestic prices affect welfare and only if there is not domestic price equalization generally a project s net benefits depend upon the potential tax and tariff reform made possible or necessary through the balance of trade effect border prices are right for traded goods but domestic good shadow pricing requires knowing the direction of at least one reversible available tax reform and presuming optimality with respect to available reforms

foreign exchange equivalence and project appraisal procedures this paper investigates the implications of different adjustment mechanisms for shadow pricing traded and nontraded goods in a flexible price model a foreign exchange equivalent rule that can be readily adapted whatever the adjustment mechanism is derived it is shown that traded commodities are always valued at border prices and nontraded commodities can always be shadow priced in terms of changes in production and consumption of traded goods valued at border prices the role of the shadow exchange rate and the implications for measuring the balance of payments effect when no tax adjustment policy is assumed are also discussed copyright 1990 by royal economic society

the upside potential of hiring risky workers evidence from the baseball industry making use of performance data for baseball players this article provides empirical evidence in support of lazear s 1998 theoretical predictions that 1 risky workers will earn a premium for their upside potential 2 this risk premium will be higher the longer a worker s work life and 3 firms must enjoy some comparative advantage in the labor market to be willing to pay a premium to risky workers the validity of lazear s predictions carries implications for wage differentials between young and old workers and between men and women

shadow pricing with suboptimal policy rules abstract this paper aims to clarify different views on the validity of the little mirrlees border price rule for project evaluation in a context where the government chooses its controls suboptimally in a systematic fashion the rule is shown to be valid quite generally for small public sector projects when the government s response restores market clearing in nontradeables and foreign exchange it can be invalid in contexts of a non market clearing or b private sector projects that generate profits distributed to households in the latter case special treatment of profit effects is required along the lines described by little and mirrlees 1974

the inflation output variability tradeoff and monetary policy evidence from a garch model this paper empirically investigates the taylor curve volatility tradeoff in light of the stochastic behavior of the conditional variances of output and inflation stressing structural instability between periods before and after the 1979 1982 monetary policy regime change i implement a bivariate generalized autoregressive conditional heteroskedasticity model to capture the output inflation variability tradeoff and to explore the plausible impact of a change in the federal funds rate on the two conditional volatilities i further evaluate the impacts of anticipated and unanticipated policy actions measured by two alternative policy reaction functions one from a vector autoregression based reduced form equation and another based on the taylor rule in addition to showing a volatility tradeoff relationship the empirical model reveals different magnitudes of policy effects on output and inflation volatility across the two sample periods

solution of macromodels with hansen sargent robust policies some extensions abstract we summarize some methods useful in formulating and solving hansen sargent robust control problems and suggest extensions to discretion and simple rules matlab octave and gauss software is provided we illustrate these extensions with applications to the term structure of interest rates the time inconsistency of optimal monetary policy the effects of expectations on the variances of inflation and output and on whether central banks should make their forecasts public

monetary policy when interest rates are bounded at zero this paper assesses the importance of the zero lower bound on nominal interest rates for the interest rate channel of monetary policy we simulate several interest rate setting policy rules with ei

the inflation and output variability tradeoff evidence from a garch model abstract this paper empirically investigates the possibility of a tradeoff between the variability of inflation and output gap over the period 1960 1997 in light of a bivariate garch model there is strong evidence of temporal instability in the garch process and the variability tradeoff is more apparent for the post october 1979 subperiod the slope of the tradeoff nevertheless appears to be considerably flat

how important is precommitment for monetary policy we quantify the welfare differential between precommitment and discretionary monetary policy in three estimated models of the u s economy by calculating the permanent deviation of inflation from target that in welfare terms is equivalent to moving from discretion to precommitment using a range of reasonable central bank preference parameters this inflation equivalent ranges from 0 05 to 3 6 percentage points with a mid point of either 0 15 or 1 1 5 percentage points depending on the model in addition to the degree of forward looking behavior we show that the existence of transmission lags and or information lags is crucial for determining the welfare gain from precommitment

time inconsistency and the exchange rate channel of monetary policy this paper analyses time inconsistency problems related to the exchange rate channel of monetary policy within a simple open economy macroeconomic model where the exchange rate is the only forward looking variable we show that a difference emerges between optimal policy under discretion and under commitment moreover the nature of the time inconsistency problem resembles that resulting from standard new keynesian models when cost push shocks occur the exchange rate channel gives rise to excessive output stabilisation and insufficient inertia in monetary policy under a discretionary policy

estimating new keynesian phillips curves a full information maximum likelihood approach abstract the new keynesian phillips curve has recently become an important ingredient in monetary policy models however using limited information methods the empirical support for the new keynesian phillips curve appear to be mixed this paper argues by means of monte carlo simulations with a simple new keynesian sticky price model that single equations methods e g gmm are likely to produce imprecise and biased estimates then it is argued that estimating the model with full information maximum likelihood fiml is a useful way of obtaining better estimates finally a version of the model used in the monte carlo simulations is estimated on u s data with fiml and although the pure forward looking new keynesian phillips curve is rejected a version with both forward and backward looking components provides a reasonable approximation of u s inflation dynamics

inflation output variance trade offs and optimal monetary policy the author estimates the inflation output gap variance trade off faced by monetary policymakers in the united states for policymakers who care about deviations of inflation around target and output around potential the estimated trade off represents the optimal policy frontier given the structure of the economy policymakers can do no better than to attain weighted variances of inflation and output that lie on the frontier the author finds that the variance trade off becomes quite severe when the standard deviation of inflation or output drops much below 2 percent this suggests that approximately balanced responses to policy goals are consistent with reasonable preferences over inflation and output variability copyright 1997 by ohio state university press

relative shadow prices and the shadow exchange rate abstract the divergent conclusions that have been reached in the literature as to the role of the shadow exchange rate in project appraisal are reconciled in this paper it is shown that the shadow exchange rate is not needed to assess the relative shadow prices of either traded or nontraded goods

econometric policy evaluation and inverse control the traditional approach to monetary policy evaluation entails a first step in which structural parameters are estimated and a second in which the performance of alternative policy rules is studied this paper combines the two steps of the traditional approach into one by estimating a structural model subject to the restriction that the central bank chooses the policy rule that minimizes expected loss the structure is a forward looking new keynesian model in which equilibrium values of output and inflation depend on expectations of future values of those variables analysis of u s data between 1965 and 2001 support the hypotheses that the sample contains two policy regimes that the fed placed far greater weight on stabilizing inflation after 1980 and that improvements in policy were available in both regimes the unified approach also sharpens estimates of structural parameters

choosing the devil you don t know evidence for limited sensitivity to sample size based uncertainty when it offers an advantage many decision makers seek to optimize choices between uncertain options such as strategies employees or products when performance targets must be met attending to observed past performance is not enough to optimize choices option uncertainty must also be considered for example for stretch targets that exceed observed performance more uncertain options are often better bets a significant determinant of option uncertainty is sample size for a given option the smaller the sample of information we have about it the greater the uncertainty in two studies choices were made between pairs of uncertain options with the goal of exceeding a specified performance target information about the options differed in the size of the sample drawn from them sample size and the observed performance of those samples the proportion of successes or hits in the sample we found people to be sensitive to sample size based uncertainty only when differences in observed performance were negligible we conclude that

measuring asymmetry and persistence in conditional volatility in real output evidence from three east asian tigers using a multivariate garch approach we search for evidence of conditional volatility in the quarterly real gross domestic product gdp growth rates of three east asian tigers singapore hong kong and taiwan the widely accepted exponential generalized autoregressive conditional heteroscedasticity egarch type model is used to capture the existence of asymmetric volatility and the potential structural break points in the volatility we find evidence of asymmetry and persistence in the volatility of gdp growth rates it is noted that the structural breakpoints of volatility correspond reasonably well to the historical economic and political events in these economies policy implications from our findings are discussed

should monetary policy respond strongly to output gaps much recent monetary policy analysis has featured stochastic simulations with small structural macroeconomic models that include a spending vs saving is sector a price adjustment sector and an interest rate policy rule the first two are frequently specified so as to reflect optimizing behavior policy may or may not be specified as optimizing depending on the study s objectives some leading issues concern modifications to simple quantitative optimizing models that are needed to generate realistic degrees of persistence in inflation and output gap variables a major policy issue is whether it is desirable for monetary policy to respond strongly to the output gap the paper argues that the latter is unobservable and considers the implications of using a trend type measure while the true concept is of a type more in keeping with basic theory in such circumstances highly undesirable consequences are likely to ensue if policy responds strongly to the measured gap this abstract was borrowed from another version of this item

the new econometrics of structural change dating breaks in u s labor productivity we have seen the emergence of three major innovations in the econometrics of structural change in the past fifteen years 1 tests for a structural break of unknown timing 2 estimation of the timing of a structural break and 3 tests to distinguish unit roots from broken time trends these three innovations have dramatically altered the face of applied time series econometrics in this paper we review these three innovations and illustrate their application through an empirical assessment of u s labor productivity in the manufacturing durables sector

global output growth and volatility spillovers this article examines discernable patterns of real gross domestic product gdp growth co movements across 29 countries using consistent time series data 1912 2008 of these countries only 12 are found to form three statistically significant groupings i e g6 six organization for economic co operation and development oecd european countries g4 four anglo saxon countries and g2 two major asian countries one may then conclude that inter alia geographical proximity cultural ties and the level of socio economic and financial ties among countries determine the global systematic co movements of growth rates our results indicate that any recession in the us initially engulfs other anglo saxon countries as well as g6 and g2 countries before exerting its adverse knock on effects to the rest of the world a multivariate generalized autoregressive conditional heteroscedasticity mgarch model is also used to examine the transmission of gdp growth across these three groups and their corresponding vol

fiscal rules discretionary fiscal policy and macroeconomic stability an empirical assessment for oecd countries does aggressive use of discretionary fiscal policy induce macroeconomic instability in terms of higher output and inflation volatility three main conclusions arise from our cross section and panel analysis for a sample of 20 oecd countries first discretionary fiscal policy has a significant and sizeable effect on volatility of gdp per capita and all of its components second there is no direct effect on inflation volatility since output volatility is an important determinant of inflation volatility discretionary fiscal policy indirectly exacerbates inflation volatility these results turn out robust with respect to alternative fiscal policy measures and endogeneity concerns finally many of the fiscal rules introduced since 1990 appear to have reduced the use of discretionary fiscal policy

robust monetary policy with competing reference models abstract the existing literature on robust monetary policy rules has largely focused on the case in which the policymaker has a single reference model while the true economy lies within a specified neighborhood of the reference model in this paper we show that such rules may perform very poorly in the more general case in which non nested models represent competing perspectives about controversial issues such as expectations formation and inflation persistence using bayesian and minimax strategies we then consider whether any simple rule can provide robust performance across such divergent representations of the economy we find that a robust outcome is attainable only in cases where the objective function places substantial weight on stabilizing both output and inflation in contrast we are unable to find a robust policy rule when the sole policy objective is to stabilize inflation we analyze these results using a new diagnostic approach namely by quantifying the fault tolerance of each model economy with respect to deviations from optimal policy

inflation output and uncertainty in the era of inflation targeting a multi economy view on causal linkages abstract this study provides cross country robust evidence on interdependencies among inflation output growth and respective uncertainties for the current era of low inflation policies we attribute the extant empirical disagreement on these relations to the fact that long sampling periods and single economies are typically considered for analysis in this study varx mgarch m models are estimated for 34 developed and emerging economies and the time period of 1990 2010 we study average granger causal effects by aggregating parameter estimates over economies the cross sectional variation of estimates serves as a means to assess the robustness of empirical findings over the entire cross section we find that both inflation and inflation uncertainty significantly reduce output growth economies with low inflation rates are particularly at risk to incur output losses from increasing inflation we also find spillover effects among uncertainty variables where the causal impact if present seems to point from the uncertainty in output to inflation uncertainty

house prices borrowing constraints and monetary policy in the business cycle i develop a general equilibrium model with sticky prices credit constraints nominal loans and asset prices changes in asset prices modify agents borrowing capacity through collateral value changes in nominal prices affect real repayments through debt deflation monetary policy shocks move asset and nominal prices in the same direction and are amplified and propagated over time the financial accelerator is not constant across shocks nominal debt stabilises supply shocks making the economy less volatile when the central bank controls the interest rate i discuss the role of equity debt indexation and household and firm leverage in the propagation mechanism finally i find that monetary policy should not target asset prices as a means of reducing output and inflation volatility

a small estimated euro area model with rational expectations and nominal rigidities abstract we estimate a small model of the euro area to be used for evaluating alternative monetary policy strategies starting with the relationship between output and inflation we compare the fit of the nominal wage contracting model due to taylor j political econom 88 1980 1 and the relative real wage contracting model proposed by buiter and jewitt the manchester school 49 1981 211 reprinted in buiter ed macroeconomic theory and stabilization policy manchester university press manchester 1989 and estimated with u s data by fuhrer and moore quart j econom 110 1995 127 while fuhrer and moore reject nominal contracts in favor of relative contracts which induce more inflation persistence we find that both specifications fit euro area data reasonably well when considering france germany and italy separately however we find that nominal contracts fit german data better while the relative contracting model does well with respect to formerly high inflation countries such as france and italy we close the model by estimating an aggregate demand relationship and investigate the implications of nominal versus relative contracts for the inflation output variability tradeoff when monetary policy follows taylor s rule

inflation persistence and robust monetary policy design this paper examines the performance of optimised interest rate rules when there is uncertainty about a key determinant of the monetary transmission mechanism namely the degree of persistence characterising the inflation process the paper focuses on the euro area and utilises two variants of an estimated small scale macroeconomic model featuring distinct types of staggered contracts specifications which induce quite different degrees of inflation persistence the paper shows that a cautious monetary policy maker is well advised to design and implement interest rate policies under the assumption that inflation persistence is high when there is considerable uncertainty about the prevailing degree of inflation persistence such policies are characterised by a relatively aggressive response to inflation developments and exhibit a substantial degree of inertia

evaluating point and density forecasts of dsge models this paper investigates the accuracy of point and density forecasts of four dsge models for inflation output growth and the federal funds rate model parameters are estimated and forecasts are derived successively from historical u s data vintages synchronized with the fed s greenbook projections point forecasts of some models are of similar accuracy as the forecasts of nonstructural large dataset methods despite their common underlying new keynesian modeling philosophy forecasts of different dsge models turn out to be quite distinct weighted forecasts are more precise than forecasts from individual models the accuracy of a simple average of dsge model forecasts is comparable to greenbook projections for medium term horizons comparing density forecasts of dsge models with the actual distribution of observations shows that the models overestimate uncertainty around point forecasts

output volatility in australia a number of papers have documented a significant decline in real gdp volatility in several major oecd economies some authors have presented evidence to suggest that this is the outcome of a one off structural break from a high to low volatility state whilst others have estimated regime switching models that indicate low volatility regime states have dominated in recent years this article provides further evidence on the general properties of output volatility for australia including evidence of a significant moderation in output volatility for the country that occurred in the early 1980s estimates of various garch models of real gdp growth are also provided to further examine shorter term volatility features of the australian economy that are associated with its business cycle a regime shift dummy is maintained in all models of the conditional variance in order to account for the regime shift in volatility and evidence is found of significant business cycle effects including leverage effects and asy

some simple results on the gains from trade from growth and from public production abstract a simple compact but general revealed preference type of argument is used to derive results on the gains from trade from terms of trade changes and from exogenous resource growth the approach extends to the welfare evaluation of public sector production the relation between the sufficiency conditions for welfare improvement derived from this approach and the necessary and sufficient conditions derived in an alternative approach are briefly discussed most of the argument is conducted in the context of a representative individual economy though it is shown to extend in an essentially unchanged way to cases where redistribution is an issue

shadow prices for project evaluation under alternative macroeconomic specifications for purposes of social cost benefit analysis a project may be viewed as a disturbance to the economy displacing it from some initial equilibrium to a new one but the new configuration will depend on which particular variables adjust to restore equilibrium this paper examines the shadow prices for project evaluation under alternative assumptions about how equilibrium is restored when the government reacts by altering its foreign exchange reserves the shadow prices coincide with those advocated in the manuals on social cost benefit analysis however if the government adjusts its domestic expenditures or tariff rates the shadow prices will differ from those of the manuals except insofar as the relative shadow prices of tradeables remain their relative border prices the paper first presents the model followed by two cases in which domestic prices and wage rates do not vary because ad valorem tariffs are fixed and one case in which they are endogenous

uncertainty hiring and subsequent performance the nfl draft in this article we analyze the impact of uncertainty on the hiring process we show the connection between models of statistical discrimination where uncertainty can work against groups that have less reliable indicators of future productivity and models of option value where uncertainty about future productivity can be beneficial for these groups these models generate hypotheses about the relationship between ex ante hiring patterns and ex post productivity this is applied to the market for nfl football players we provide various estimates of nfl success which suggest that statistical discrimination and option value influence choices in this market

a happy half way house medium term inflation targeting in new zealand abstract the 2002 policy targets agreement pta between the government and central bank of new zealand asks the central bank to target inflation over the medium term rather than over an annual target delegating such a medium term objective to the central bank shifts inflation targeting towards a halfway house between inflation targeting and price level targeting we show empirically that this helps time consistent policy approximate the first best commitment policy even when the government asks the central bank to weight output stabilisation differently to society we estimate the new zealand economy with a small open economy dsge model and show that the happiest halfway house is located around a two year averaging horizon at most which leads to mild improvements in monetary policy efficiency

does the fed act gradually a var analysis abstract the tendency for changes in the federal funds rate to be implemented gradually has been considered evidence of an interest rate smoothing objective for the federal reserve this paper investigates whether gradual funds rate movements can be explained by the dynamic structure of the economy and the uncertainty surrounding that structure without recourse to including an ad hoc interest rate smoothing argument in the fed s objective function in the absence of parameter uncertainty the optimal policy involves more aggressive movements in the funds rate than observed parameter uncertainty however limits the responsiveness of the interest rate as a result the optimal policy under parameter uncertainty can account for a considerable portion of the gradualism observed

declining us output volatility and its effect on labour flow volatility an mgarch analysis this article analyses flow rates of us workers between employment and unemployment using new quarterly data for the period 1967 to 2002 multivariate garch models are used to investigate links between flow rate volatilities the results suggest that links changed substantially in the mid 1980s coinciding with the documented decline in output volatility these changes in adjustment dynamics are consistent with a move to greater use of hours rather than worker adjustment

declining output volatility in germany impulses propagation and the role of monetary policy the decline in output volatility in germany is analysed a lower level of variance in an autoregressive model of output growth can be either due to a change in the structure of the economy a change in the propagation mechanism or a reduced error term variance reduced impulses in germany the decline output volatility is due to a decline in the persistence of the growth process this is in contrast to the us results where a break in the variance seems to dominate the decline in persistence a change in the conduct of monetary policy the establishment of another monetary policy regime could be part of an explanation for the change in propagation stochastic simulations with a new keynesian dsge model support the hypothesis

estimates of the variance of u s inflation based upon the arch model it is generally agreed that the unpredictability of future inflation is a major component of the welfare loss associated with inflation perfectly predicted inflation might induce some costs through institutional rigidities governmental interference and transaction costs but in the long run these should be rather minimal as these institutions adopt various forms of indexing when inflation is unpredictable risk averse economic agents will incur a loss even if prices and quantities are perfectly flexible in all markets inflation is a measure of the relative price of goods today and goods tomorrow thus uncertainty in tomorrow s price impairs the efficiency of today s allocation decisions friedman in his nobel lecture 8 argues convincingly that higher variability of inflation would lead to decreased output ceteris paribus he then conjectures that higher rates of inflation are generally associated with higher variability of inflation and presumably greater uncertainty about future rates if this is true then higher rates of inflation would also be associated with low levels of output which implies a positively sloped phillips curve this paper uses a new statistical technique arch to estimate the conditional mean and variance of inflation from u s time series data the main finding is that the variance of inflation in the seventies was only slightly greater than in the sixties

venture theory a model of decision weights several theories suggest that people replace probabilities by decision weights when evaluating risky outcomes this paper proposes a model called venture theory of how people assess decision weights it is assumed that people first anchor on a stated probability and then adjust this by mentally simulating other possible values the amount of mental simulation is affected by the absolute size of payoffs the extent to which the anchor deviates from the extremes of 0 and 1 and the level of perceived ambiguity concerning the relevant probability the net effect of the adjustment i e up or down vis i vis the anchor reflects the relative weight given in imagination to values above as opposed to below the anchor this in turn is taken to be a function of both individual and situational variables and in particular the sign and size of payoffs cognitive and motivational factors therefore both play important roles in determining decision weights assuming that people evaluate outcomes by a prospect theory value function kahneman and tversky 1979 and are cautious in the face of risk fourteen predictions are derived concerning attitudes toward risk and ambiguity as functions of different levels of payoffs and probabilities the results of three experiments are reported whereas only a subset of the model s predictions can be tested in experiment 1 all fourteen are tested in experiments 2 and 3 using hypothetical and real payoffs respectively several of the model s predictions are not supported in experiment 2 but almost all are validated in experiments 1 and 3 the failures relate to the exact nature of probability payoff interactions in attitudes toward risk and ambiguity for losses the theory and results are discussed in relation to other experimental evidence future tests of the theory alternative models of risky choice and implications of venture theory for explaining further phenomena

a historical analysis of the taylor curve taylor 1979 shows that there is a permanent tradeoff between the volatility of the output gap and the volatility of inflation although a number of papers argue that the so called taylor curve is a policy menu friedman 2006 points out that it is more likely to serve as an efficiency locus that can be used to gauge the appropriateness of monetary policy using data from 1875 onward we examine the efficiency of u s monetary policy by measuring the orthogonal distance between the observed volatilities of the output gap and inflation from the taylor curve in addition we identify time periods in which the variability of the u s economy changed by observing shifts in this efficiency frontier

the link between macroeconomic performance and variability in the uk abstract this paper examines the link between inflation output growth and their respective variabilities we employ a bivariate garch model which incorporates mean and level effects to investigate in a unified empirical framework all the possible interactions between the four variables we show that not only does variability affect performance but the latter influences the former as well specifically inflation has a positive impact on both variabilities

solving for optimal simple rules in rational expectations models this paper presents algorithms that solve for optimal simple monetary policy rules in rational expectations models with precommitment and discretion the algorithms are applied to the models in fuhrer j money credit banking 29 1997 214 clarida et al j econ lit 37 1999 1661 and rudebusch econ j 112 2002 402 to examine the efficiency properties of operational policy rules we show that optimized taylor type rules preform well in these models but that aside from the fuhrer moore model this result is sensitive to whether the central bank can respond to current period shocks taylor type rules that are operational in the sense that they do not respond to current period information are found to be highly inefficient in the rudebusch model and in the clarida et al 1999 model

the performance of forecast based monetary policy rules under model uncertainty we investigate the performance of forecast based monetary policy rules using five macroeconomic models that reflect a wide range of views on aggregate dynamics we identify the key characteristics of rules that are robust to model uncertainty such rules respond to the one year ahead inflation forecast and to the current output gap and incorporate a substantial degree of policy inertia in contrast rules with longer forecast horizons are less robust and are prone to generating indeterminacy in light of these results we identify a robust benchmark rule that performs very well in all five models over a wide range of policy preferences