Trend/cycle decomposition of regime-switching processes

We present a new approach to trend/cycle decomposition of time series that follow regime-switching processes. The proposed approach, which we label the “regime-dependent steady-state” (RDSS) decomposition, is motivated as the appropriate generalization of the Beveridge and Nelson decomposition [Beveridge, S., Nelson, C.R., 1981. A new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the business cycle. Journal of Monetary Economics 7, 151–174] to the setting where the reduced-form dynamics of a given series can be captured by a regime-switching forecasting model. For processes in which the underlying trend component follows a random walk with possibly regime-switching drift, the RDSS decomposition is optimal in a minimum mean-squared-error sense and is more broadly applicable than directly employing an Unobserved Components model.     

PRODUCTIVE RECESSIONS AND JOBLESS RECOVERIES

We explore international variation in business cycle dynamics to gain insights into the recent pattern of robust productivity growth during downturns (productive recessions) and weak employment growth during recoveries (jobless recoveries) seen in some advanced economies. We find that sectoral change is associated with productive recessions but that labor market rigidity can impede reallocation and reduce the probability of a productive recession. We also find evidence of a link between productive recessions and jobless recoveries and that recessions dominated by reductions to employment, rather than changes in average employee hours, are more likely to be associated with jobless recoveries. (JELF44, E32)     

Incentive Contracts,Market Risk,and Cost of Capital

Should incentive contracts expose the agent to market‐wide shocks? Counterintuitively, I show that market risk cannot be filtered out from the compensation and managed independently by the agent. Under plausible risk preferences, the principal should offer a contract in which performance pay increases following a favorable market shock. In the aggregate, however, the effect of market risk on individual contracts diversifies away and the agency problem does not directly affect the cost of capital. The analysis suggests caution in interpreting changes in cost of capital in terms of the stewardship role of accounting information.     

The Regressive Recovery: Distribution,Inequality and State Power in Britain's Post-Crisis Political Economy

This article interrogates the underlying mechanisms at the heart of Britain's post-crisis political economy. We argue that the contemporary economic recovery has been characterised by a dynamic of ‘regressive redistribution’: a socially regressive dynamic of state-led economic restructuring that has worked through two axes at the centre of the recovery. The first axis, a monetary policy framework centred upon Quantitative Easing, has driven asset-price inflation to the benefit of the wealthiest asset holders. The second axis centres upon the politics of regressive labour market restructuring which has provoked widespread wage deflation. In combination, these two axes have been central to defining the contours of the Britain's post-crisis political economy paradigm: characterised by rising asset wealth for the few, and falling living standards alongside increasing economic insecurity for wage earners. The opportunity to change path from the trends of deepening inequality that defined the pre-crisis era has not been taken. Instead, the prevailing policy paradigm of the post-crisis period – discursively unified and sustained by David Cameron's government – has intensified the regressively redistributive dynamics at the core of the neo-liberal project. Ultimately, this is likely to further entrench structural weaknesses in Britain's economy in the years ahead.     

Comovement in GDP trends and cycles among trading partners

It has long been recognized that business cycle comovement is greater between countries that trade more intensively with one another. However, nations face shocks to both the cyclical and trend components of their GDP series. Contrary to the result for cyclical fluctuations, we find comovement of shocks to the trend component of real GDP is weaker among countries that trade more intensively with one another. We simulate changes in ten-year output growth correlations corresponding to the estimated effects of trade and show that the impact of trade on trend comovement is quantitatively more important than its effect on cyclical comovement.