Structural evolution of the postwar U.S. economy

We consider a time-varying parameter vector autoregressive model with stochastic volatility and mixture innovations to study the empirical relevance of the Lucas critique for the postwar U.S. economy. The model allows blocks of parameters to change at endogenously estimated points of time. Contrary to the Lucas critique, there are large changes at certain points of time in the parameters associated with monetary policy that do not correspond to changes in “reduced-form” parameters for inflation or the unemployment rate. However, the structure of the U.S. economy has evolved considerably over the postwar period, with an apparent reduction in the late 1980s in the impact of monetary policy shocks on inflation, though not on the unemployment rate. Related, we find changes in the Phillips curve tradeoff between inflation and cyclical unemployment (measured as the deviation from the time-varying steady-state unemployment rate implied by the model) in the 1970s and especially since the mid-1990s.     

The implications of financial frictions and imperfect knowledge in the estimated DSGE model of the U.S. economy

In this paper, I study how alternative assumptions about expectation formation can modify the implications of financial frictions for the real economy. I incorporate a financial accelerator mechanism into a version of the Smets and Wouters (2007) DSGE framework and explore the properties of the model assuming, on the one hand, complete rationality of expectations and, alternatively, several learning algorithms that differ in terms of the information set used by agents to produce the forecasts. I show that the implications of the financial accelerator for the business cycle may vary depending on the approach to modeling the expectations. The results suggest that the learning scheme based on small forecasting functions is able to amplify the effects of financial frictions relative to the model with Rational Expectations. Specifically, I show that the dynamics of real variables under learning is driven to a significant extent by the time variation of agents’ beliefs about financial sector variables. During periods when agents perceive asset prices as being relatively more persistent, financial shocks lead to more pronounced macroeconomic outcomes. The amplification effect rises as financial frictions become more severe. At the same time, a learning specification in which agents use more information to generate predictions produces very different asset price and investment dynamics. In such a framework, learning cannot significantly alter the real effects of financial frictions implied by the Rational Expectations model.     

Forecasting the resurgence of the U.S. economy in 2010: An expert judgment approach

This paper describes a forecast, performed in December 2008, of the time of the recovery of the U.S. economy from the contraction that began in December 2007. As in two earlier papers, the forecast uses an expert judgment approach, the Analytic Hierarchy Process (AHP), within the framework of decision theory, as well as its generalization to dependence and feedback in the form of the Analytic Network Process (ANP). The findings of this paper are that the economy would begin its recovery in July-August, 2010. While forecasting is always hazardous, our 2001 paper successfully forecast the date the recovery began. Since 1920 the validating authority for the turnaround dates has traditionally been the widely recognized National Bureau of Economic Research (NBER). The Bureau usually releases an official statement with their finding many months after the event (and of course after the forecasts had been done). Our results on the month in which the recovery began in 2001 were confirmed by the NBER in July 2003. We will again await the NBER determination of the time of recovery from the current recession.     

Efficient employment of cohorts of labor in the U.S. economy: An illustration of a method

This paper presents a model for the analysis of efficient labor force participation in the U.S. economy. Ridge regression estimates of the elasticities of cohorts of labor, classified by sex and occupation, are used in conjunction with wage data to illustrate the derivation of efficient allocation of labor cohorts in five economic sectors. These efficient constructs are compared with actual census data for 1960 and 1970. The results, while tentative, show a trend toward more efficient utilization of labor and greater participation by women in the work force.     

Assessing the effects of U.S. shocks on the Canadian economy using alternative identification methods

This paper investigates the extent of the transmission of U.S. supply and demand shocks to the Canadian economy using three different identification methods. Our findings are robust across identifications. We show that over the flexible exchange rate period, U.S. shocks tend to intensify Canadian business cycles, while they reduce the mean of Canadian prices and inflation. We also find that overall Canadian output is less sensitive to U.S. disturbances than found in earlier studies. Moreover, when the structural shocks are allowed to be correlated across countries, Canadian shocks explain around 18% of U.S. real GDP growth long run forecast error variance.     

Predictability of the U.S. Dollar Index using a U.S. export and import price index-based relative PPP model

We use U.S. export and import price indexes to construct a relative purchasing power parity-based model of the nominal U.S. Dollar Index. The model is successful in predicting the future direction of change in the U.S. Dollar Index over a six-month period up to 68% of the time. Finally, the model, in combination with a simple linear, recursive technique, is able to statistically significantly outperform the random walk in predicting the value of the U.S. Dollar Index at terms of less than four months for the period from 1996 to 2005. The paper provides important implications for investors who are interested in the direction of change in the Dollar’s value, forecasting the level of the U.S. Dollar Index, as well as the extent of over- and undervaluation of the U.S. Dollar, in general.     

Learning-by-doing and the sources of productivity growth: A dynamic model with application to U.S. agriculture

The significance of learning to productivity growth is formulated within a dynamic adjustment-cost framework. Explicitly treating the acquisition of knowledge as a firm-specific capital good entering the production function along with other conventional inputs, the dynamic optimization model integrates the learning-by-doing hypothesis with technical change, scale, and disequilibrium input use effects in the aggregate productivity analysis. The theoretical framework is applied to examining the dynamic components accounting for the growth of U.S. production agriculture over the 1950–82 period. The results imply a less important role for technical change and assign a substantial role to the previously unmeasured contribution of learning-by-doing to the growth of aggregate agriculture industry.The editor for this paper was Melvyn Fuss.     

An extreme value analysis of the last century crises across industries in the U.S. economy

The two large scale crises that hit the world economy in the last century, i.e. the Great Depression and the Great Recession, have similar outbreak and recovery patterns with respect to several macroeconomic variables. In particular, the largest depressions are likely to be accompanied by stock-market crashes. This study investigates the behavior of the U.S. stock market before, during and after deep downturns, focusing particularly on the tails of the return distribution. We develop two automatic procedures to identify multiple change-points in the tail of financial time series as well as in the co-crash and co-boom probabilities of different markets. We then apply our methodology to twelve time series representative of the sectors of the U.S. economy. We find that regime shifts in the lower tail of the distribution tend to co-occur before deep downturns. Our results contribute to a better understanding of the origin and systemic nature of large scale events to make policy interventions more timely and effective.     

U.S. uncertainty and Asian stock prices: Evidence from the asymmetric NARDL model

When uncertainty reduces spending among U.S. consumers, it may affect the bottom line stock performance of Asian producers that cater to their needs. Theory predicts that the impact of uncertainty will be asymmetrical: during the two phases of the business cycle, countercyclic shocks will outweigh procyclic shocks, resulting in phase-specific equilibrium price adjustments. We conjecture that relative to recessions, recoveries bring larger long-run price adjustments, a response to pent-up growth potential. This is an extension of existing theories, which predict that recoveries bring overshooting, a transient reaction to pent-up demand. We test for these asymmetric uncertainty effects on 11 Asian stock market indices over the 2000M08 – 2017M02 period. Our independent measures include the economic policy uncertainty index (EPU) of Baker, Bloom, and Davis (2016), the Chicago Board Options Exchange implied volatility index (VIX), and the financial uncertainty indicator (JLN) of Jurado, Ng, and Ludvigson (2015). To characterize asymmetry, we employ the nonlinear autoregressive distributed lag (NARDL) model of Shin, Yu, and Greenwood-Nimmo (2014), in which both short- and long-run nonlinearities are captured through positive and negative partial sum decompositions of the explanatory variable(s). Using the NARDL output, we test three hypotheses. The first, that increases in uncertainty (decreases in uncertainty) result in stock price drops (stock price rises), is broadly supported by our analysis. The second, that equilibrium adjustments following negative countercyclic uncertainty shocks exceed those following positive movements, is supported fully by the EPU analysis and partially by the VIX and JLN analyses. The third hypothesis, that recoveries are characterized by overshooting, is consistent only with the behavior of the Chinese stock responses to EPU and VIX shocks. Our results demonstrate the advantages of the NARDL model in characterizing asymmetry. They suggest that while long-run asymmetry is fairly consistent across countries, short-run asymmetry is more country-specific.     

Mortgage default in an estimated model of the U.S. housing market

This paper models the housing sector, mortgages and endogenous default in a DSGE setting with nominal and real rigidities. We use data for the period 1981–2006 to estimate our model using Bayesian techniques. We analyze how an increase in risk in the mortgage market raises the default rate and spreads to the rest of the economy, creating a recession. In our model two shocks are well suited to replicate the subprime crisis and the Great Recession: the mortgage risk shock and the housing demand shock. Next we use our estimated model to evaluate a policy that reduces the principal of underwater mortgages. This policy is successful in stabilizing the mortgage market and makes all agents better off.     

Forecasting U.S. population totals with the Box-Jenkins approach

"The use of the Box-Jenkins approach for forecasting the population of the United States up to the year 2080 is discussed. It is shown that the Box-Jenkins approach is equivalent to a simple trend model when making long-range predictions for the United States. An investigation of forecasting accuracy indicates that the Box-Jenkins method produces population forecasts that are at least as reliable as those done with more traditional demographic methods."     

U.S. Savings Bonds: the planned-gift forgotten asset

As older Americans take a close look at their assets, promote their interest in unlocking the wealth accumulation in their U.S. Saving Bond holdings. Use careful planning and advice when promoting this gift strategy.     

Joint Ventures in the U.S. Steel Industry:

A bstract . In 1958 Daniel Fusfeld examined the role of joint ventures in the U.S. steel industry and concluded that joint ventures served as a substitute for mergers forbidden by the Justice Department. Since the Fusfeld study, things have changed drastically for integrated domestic producers. Competition from imports and domestic mini- mills have forced steel firms into bankruptcies and missive plant closings. The contemporary industry's participation in joint ventures is examined in an attempt to understand steel's restructuring. Today's integrated producers jointly may hold tighter control over raw materials, participate in growing numbers of horizontal Joint ventures , and engage in numerous cooperative enterprises with foreign competitors, particularly the Japanese. Contemporary U.S. producers are becoming increasingly absorbed in the global economy.