What (really) accounts for the fall in hours after a technology shock?

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

Labor Market Dynamics: A Time‐Varying Analysis

This paper studies how key labour market stylized facts and the responses of labour market variables to technology shocks vary over the US postwar period. It uses a benchmark dynamic, stochastic, general equilibrium model enriched with labour market frictions and investment‐specific technological progress that enables a novel identification scheme based on sign restrictions on a SVAR with time‐varying coefficients and stochastic volatility. Key findings are: (i) the volatility in job finding and separation rates has declined over time, while their correlation varies across time; (ii) the job finding rate plays an important role for unemployment, and the two series are strongly negatively correlated over the sample period; (iii) the magnitude of the response of labour market variables to technology shocks varies across the sample period.     

R&D and aggregate fluctuations

Empirical observations raise interesting questions regarding the sources of the excessive volatility in the R&D sector as well as the nature of the relation between the sector and aggregate fluctuations. Using US data for the period 1959–2007, we identify sectoral technology and capital investment-specific shocks by employing a Vector Autoregression. The identifying assumptions are motivated by a two-sector dynamic general equilibrium model. Controlling for real and nominal factors, we find that capital investment-specific shocks explain 70 percent of fluctuations of R&D investment, while R&D technology shocks explain 30 percent of the variation of aggregate output, net of R&D investment. Technology shocks jointly explain almost all the variation of output in the R&D sector and 78 percent of the variation of output in the rest of the economy. They also constitute the main factor of the procyclicality of R&D investment.     

SALES,INVENTORIES AND REAL INTEREST RATES: A CENTURY OF STYLIZED FACTS

We use Bayesian time‐varying parameter structural vector autoregressions with stochastic volatility to investigate changes in reduced‐form and structural correlations between inventories and either sales growth or the real interest rate in the USA during both the inter‐war and post‐World War II periods. We identify four structural shocks by combining a single long‐run restriction to identify a permanent output shock with three sign restrictions to identify demand‐ and supply‐side transitory shocks. We show that during both the inter‐war and post‐war periods the structural correlation between inventories and real interest rate conditional on identified interest rate shocks is systematically positive; the reduced‐form correlation between the two series is positive during the post‐war period, but in line with the predictions of theory it is robustly negative during the inter‐war era; during that era the correlations between inventories and either of the two other series exhibit a remarkably strong co‐movement with output at business cycle frequencies. Copyright © 2014 John Wiley & Sons, Ltd.     

Long‐term Effects of Fiscal Stimulus and Austerity in Europe

We analyze whether there are ne gative (positive) long‐term effects of austerity measures (stimulus measures) on potential output growth. Based on the approach of Blanchard and Leigh ( 2013 ) and Fatás and Summers ( 2018 ) and using a novel data set of narratively identified fiscal policy shocks, we estimate the impact of these shocks on potential output. We robustly find a considerable underestimation of multiplier effects and their persistence for most European countries in the early years after the financial crisis and subsequent Euro Area crisis. We conclude that fiscal consolidation was badly timed and thus not only deepened the crisis but may have caused evitable hysteresis effects.     

When Does Government Debt Crowd Out Investment?

We examine when government debt crowds out investment for the US economy using an estimated New Keynesian model with detailed fiscal specifications and accounting for monetary and fiscal policy interactions. Whether investment is crowded in or out in the short term depends on policy shocks triggering debt expansions: higher debt can crowd in investment for cutting capital tax rates or increasing government investment. Contrary to the conventional view, no systematic relationships between real interest rates and investment exist, explaining why reduced‐form regressions are inconclusive about crowding out. At longer horizons, distortionary financing is important for the negative investment response to debt. Copyright © 2013 John Wiley & Sons, Ltd.     

Keynesian impulses versus Solow residuals: identifying sources of business cycle fluctuations

We employ a neoclassical business‐cycle model to study two sources of business‐cycle fluctuations: marginal efficiency of investment shocks, and total factor productivity shocks. The parameters of the model are estimated using a Bayesian procedure that accommodates prior uncertainty about their magnitudes; from these estimates, posterior distributions of the two shocks are obtained. The postwar US experience suggests that both shocks are important in understanding fluctuations, but that total factor productivity shocks are primarily responsible for beginning and ending recessions. Copyright © 2000 John Wiley & Sons, Ltd.     

Investment shocks and the comovement problem

Recent work based on sticky price-wage estimated dynamic stochastic general equilibrium (DSGE) models suggests investment shocks are the most important drivers of post-World War II US business cycles. Consumption, however, typically falls after an investment shock. This finding sits oddly with the observed business cycle comovement where consumption, along with hours-worked and investment, moves with economic activity. We show that this comovement problem is resolved in an estimated DSGE model when (i) the cost of capital utilization is specified in terms of increased depreciation of capital, as originally proposed by Greenwood et al. (1988) in a neoclassical setting, or (ii) there is no wealth effect on labor supply. The data, however, favors the first channel. Traditionally, the cost of utilization is specified in terms of forgone consumption following Christiano et al. (2005), who studied the effects of monetary policy shocks. The alternative specification we consider has two additional implications relative to the traditional one: (i) it has a substantially better fit with the data and (ii) the contribution of investment shocks to the variance of consumption is over three times larger. The contributions to output, investment, and hours, are also relatively higher, suggesting that these shocks may be quantitatively even more important than previous estimates based on the traditional specification.     

Long‐run neutrality of demand shocks: Revisiting Blanchard and Quah (1989) with independent structural shocks

With reference to a stylized theoretical macromodel, Blanchard and Quah (American Economic Review, 1989, 79, 655–673) identify empirical aggregate supply (e.g., productivity) and demand shocks by assuming that the latter are neutral for economic activity in the long run. Taking advantage of recent contributions to the structural VAR literature and data‐based identification, we find that effects of unique independent non‐Gaussian structural shocks support this assumption. Moreover, unlike the results in Blanchard and Quah, statistically identified supply shocks exhibit (insignificantly) opposite impacts on gross domestic product and unemployment in the short run. In comparison with benchmark results obtained under assumed long‐run neutrality, statistical identification points to a stronger role of aggregate supply shocks for shaping temporary profiles of US unemployment during the recessionary period 1973:Q3–1975:Q1.     

Macroeconomic Effects of Precautionary Demand for Oil

We evaluate the macroeconomic effects of shocks specific to the oil market, which mainly reflect fluctuations in precautionary demand for oil driven by uncertainty about future supplies. A two‐stage identification procedure is used. First, daily changes in the futures–spot price spread proxy for precautionary demand shocks and the path of oil prices is estimated. This information is then exploited to restrict the oil price response in a vector autoregression. Impulse responses suggest that such shocks reduce output and raise prices. Historical decomposition shows that they contributed significantly to the US recessions in the 1990s and in the early 2000s, but not to the most recent slump. Copyright © 2014 John Wiley & Sons, Ltd.     

What are the macroeconomic effects of high‐frequency uncertainty shocks?

This paper evaluates the effects of high‐frequency uncertainty shocks on a set of low‐frequency macroeconomic variables representative of the US economy. Rather than estimating models at the same common low frequency, we use recently developed econometric models, which allow us to deal with data of different sampling frequencies. We find that credit and labor market variables react the most to uncertainty shocks in that they exhibit a prolonged negative response to such shocks. When looking at detailed investment subcategories, our estimates suggest that the most irreversible investment projects are the most affected by uncertainty shocks. We also find that the responses of macroeconomic variables to uncertainty shocks are relatively similar across single‐frequency and mixed‐frequency data models, suggesting that the temporal aggregation bias is not acute in this context.     

Do TFP and the relative price of investment share a common I(1) component?

Results from cointegration tests clearly suggest that TFP and the relative price of investment (RPI) are not cointegrated. Evidence on the alternative possibility that they may nonetheless contain a common I(1) component generating long-horizon co-variation between them crucially depends on the fact that (i) structural breaks are, or are not allowed for, and (ii) the precise nature and timing of such breaks. Not allowing for breaks, evidence points towards the presence of a common component inducing positive long-horizon covariation, which is compatible with the notion that the technology transforming consumption goods into investment goods is non-linear, and the RPI is also impacted upon by neutral shocks. Allowing for breaks, evidence suggests that long-horizon covariation is either nil or negative.Assuming, for illustrative purposes, that the two series contain a common component inducing negative long-horizon covariation, evidence based on structural VARs shows that this common shock (i) plays an important role in macroeconomic fluctuations, explaining sizeable fractions of the forecast error variance of main macro series, and (ii) generates ‘disinflationary booms’, characterized by transitory increases in hours, and decreases in inflation.     

Labor and investment frictions in a real business cycle model

This paper develops a prototype real business cycle model in which labor and investment frictions may compete directly with technology shocks in accounting for fluctuations in the postwar US economy. Using Ireland's [2004a. A method for taking models to the data. Journal of Economic Dynamics and Control 28, 1205–1226] methodology, we establish that both types of friction are quantitatively important. Technology shocks still explain a substantial fraction of the fluctuations in aggregate output, as the baseline real business cycle model predicts. Formal hypothesis tests suggest that changes in the recurrence of shocks, frictions, and structural parameters all play a role in accounting for the shift in the time series properties of the data between the periods before and after 1980.     

Leaning into the Wind: A Structural VAR Investigation of UK Monetary Policy*

This paper adapts Uhlig's [Journal of Monetary Economics (2005) forthcoming] sign restriction identification methodology to investigate the effects of UK monetary policy using a structural vector autoregression (VAR). It shows that shocks which can reasonably be described as monetary policy shocks have played only a small role in the total variation of UK monetary and macroeconomic variables. Most of the variation in UK monetary variables has been due to their systematic reaction to other macroeconomic shocks, namely non‐monetary aggregate demand, aggregate supply, and oil price shocks. We also find, without imposing any long run identifying restrictions, that aggregate supply shocks have permanent effects on output.     

Constructing Multi‐Country Rational Expectations Models

This article considers some of the technical issues involved in using the global vector autoregression (GVAR) approach to construct a multi‐country rational expectations (RE) model and illustrates them with a new Keynesian model for 33 countries estimated with quarterly data over the period 1980–2011. The issues considered are: the measurement of steady states; the determination of exchange rates and the specification of the short‐run country‐specific models; the identification and estimation of the model subject to the theoretical constraints required for a determinate rational expectations solution; the solution of a large RE model; the structure and estimation of the covariance matrix and the simulation of shocks. The model used as an illustration shows that global demand and supply shocks are the most important drivers of output, inflation and interest rates in the long run. By contrast, monetary or exchange rate shocks have only a short‐run impact in the evolution of the world economy. The article also shows the importance of international connections, directly as well as indirectly through spillover effects. Overall, ignoring global inter‐connections as country‐specific models do, could give rise to misleading conclusions.     

ARE THE OUTPUT EFFECTS OF MONETARY POLICY ASYMMETRIC? EVIDENCE FROM A SAMPLE OF EUROPEAN COUNTRIES

ABSTRACT This paper examines whether the effects of monetary policy on output in Europe are asymmetric. Data from the 1953–90 period are used to identify money-supply shocks and their effects on output for a panel of 18 European countries. Many different specifications and estimation methods strongly support asymmetry: negative money-supply shocks are shown to have a statistically significant effect on output, whereas the effect of positive shocks is statistically insignificant. A similar asymmetry governs the output effects of interest rate changes. The sources of these asymmetries are traced to similar behavior for consumption and investment. These findings imply that positive money-supply shocks may be an ineffective anti-recession policy, and more generally, that the monetary component of the optimal stabilization policy should be less activist than generally thought.     

By force of demand: Explaining cyclical fluctuations of international trade and government spending

This paper explores the role of demand shocks, as an alternative to productivity shocks, in driving both domestic and international business cycles within the international real business cycle (IRBC) framework. In addition to those well-documented domestic business cycle fluctuations (e.g., the volatility and cyclicality of output, consumption, investment, labor hours, and labor productivity) and international business cycle properties (e.g., the countercyclical net export and the comovement puzzle), this paper focuses on two additional stylized facts in the industrialized countries: the procyclical trade openness (the GDP fraction of trade volume) and the countercyclical government size (the GDP fraction of government spending). Using a parsimonious dynamic stochastic general equilibrium model, we show that the model׳s predictions under productivity shocks are not consistent with these facts. Instead, a demand-shock-driven model replicates the above facts while matching other domestic and international business cycle properties. An estimated version of the model confirms the quantitatively important impacts of demand shocks.     

A dual measure of correlation between the Solow residual and output growth

In this paper, we measure U.S. technology shocks by implementing a dual approach, which is based on price data instead of aggregate quantity data. By doing so, we find the relative volatility of technology shocks and the correlation between output fluctuation and technology shocks to be much smaller than those revealed in most real-business-cycle (RBC) studies. Our results support the findings of Burside et al. (Eur Econ Rev 40:861–869, 1996), who showed that the correlation between technology shocks and output is exaggerated in the RBC literature. This suggests that one should examine other sources of fluctuations for a better understanding of the business cycle phenomena.     

Stochastic optimal growth with nonconvexities

This paper studies optimal investment and dynamic behavior in stochastically growing economies. We assume neither convex technology nor bounded support of the productivity shocks. A number of basic results concerning the investment policy and the Ramsey–Euler equation are established. We also prove a fundamental dichotomy pertaining to optimal growth models perturbed by standard econometric shocks: either an economy is globally stable or it is globally collapsing to the origin.     

Comovements and heterogeneity in the euro area analyzed in a non‐stationary dynamic factor model

This paper establishes stylized facts on comovements and heterogeneity of individual euro area countries' output and price developments in the past two decades. For this purpose, a non‐stationary structural dynamic factor model is fitted to a large dataset of euro area macroeconomic variables. The main results are as follows. Both common factors and idiosyncratic components are important in explaining individual countries' output and price developments in the euro area and are also both very persistent. Idiosyncratic shocks and adjustments to these shocks are mainly responsible for cross‐country heterogeneity. The asymmetric transmission of common shocks plays a minor role. Finally, there is no strong evidence that some common shocks lead to greater heterogeneity than others. Copyright © 2009 John Wiley & Sons, Ltd.