Back to square one: Identification issues in DSGE models

We investigate identification issues in DSGE models and their consequences for parameter estimation and model evaluation when the objective function measures the distance between estimated and model-based impulse responses. Observational equivalence, partial and weak identification problems are widespread and typically produced by an ill-behaved mapping between the structural parameters and the coefficients of the solution. Different objective functions affect identification and small samples interact with parameters identification. Diagnostics to detect identification deficiencies are provided and applied to a widely used model.     

International comovements in inflation rates and country characteristics

Common shocks, similarities in central bank reaction functions, and international trade potentially produce common components in international inflation rates. This paper characterizes such links in international inflation rates with a dynamic latent factor model that decomposes 64 national inflation rates into world, regional, and idiosyncratic components. The world and regional components account for 35% and 16%, respectively, of annual inflation variability on average across countries, so that international influences together explain just over half of inflation variability. The importance of the world and regional components, however, differs substantially across countries. Economic policy choices and development measures strongly explain the cross-sectional variation in the relative importance of international influences. A subsample analysis reveals that the regional (world) factor increases in importance for a number of North American and European (Latin American and Asian) countries since 1980.     

International and historical dimensions of the financial crisis of 2007 and 2008

This article provides an interpretative overview of the papers in this special issue of JIMF devoted to international aspects of the 2007–2009 financial crisis. It then goes on to provide additional empirical evidence of two sorts. The first documents the difference between the monetary policies pursued by the European Central Bank, the Bank of Japan, the Bank of England and the Federal Reserve in this episode and the policies pursued by the Federal Reserve in the Great Depression. In the course of this episode, unlike the Great Depression, policies were not contractionary and the recessions were less severe than in the United States in 1929–1933. The second compares the recovery in the United States in the aftermath of the recent crisis and in recoveries following periods of previous banking crises. This recovery is much weaker than average.     

Credit Crunches from Occasionally Binding Bank Borrowing Constraints

We present a model in which banks and other financial intermediaries face both occasionally binding borrowing constraints, and costs of equity issuance. Near the steady state, these intermediaries can raise equity finance at no cost through retained earnings. However, even moderately large shocks cause their borrowing constraints to bind, leading to contractions in credit offered to firms, and requiring the intermediaries to raise further funds by paying the cost to issue equity. This leads to the occasional sharp increases in interest spreads and the countercyclical, positively skewed equity issuance that are characteristics of the credit crunches observed in the data.     

Money and Output: Friedman and Schwartz Revisited

More than 50 years ago, Friedman and Schwartz examined historical data for the United States and found evidence of procyclical movements in the money stock, which led corresponding movements in output. We find similar correlations in more recent data; these appear most clearly when Divisia monetary aggregates are used in place of the Federal Reserve's official, simple‐sum measures. When we use information in Divisia money to estimate a structural vector autoregression, identified monetary policy shocks appear to have large and persistent effects on output and prices, with a lag that has lengthened considerably since the early 1980s.     

One Size Fits All? Monetary Policy and Asymmetric Household Debt Cycles in U.S. States

I investigate the nonlinear effects of monetary policy through differences in household debt across U.S. states. After constructing a novel indicator of inflation for the states, I compute state‐specific monetary policy stances as deviations from an aggregate Taylor rule. I find that the effectiveness of monetary policy is curtailed during periods of large household debt imbalances. Moreover, a common U.S. monetary policy does not fit all; it may have asymmetric effects on the economic performance across states, particularly at times of high dispersion in the household debt imbalances, as it may have been the case around the Great Recession.     

Uncertainty,Financial Frictions,and Nominal Rigidities: A Quantitative Investigation

Are uncertainty shocks a major source of business cycle fluctuations? This paper studies the effect of a mean preserving shock to the variance of aggregate total factor productivity (macro‐uncertainty) and to the dispersion of entrepreneurs' idiosyncratic productivity (micro‐uncertainty) in a financial accelerator dynamic stochastic general equilibrium model with sticky prices. It explores the different mechanisms through which uncertainty shocks are propagated and amplified. The time‐series properties of macro‐ and micro‐uncertainty are estimated using U.S. aggregate and firm‐level data, respectively. While surprise increases in micro‐uncertainty have a larger impact on total output than macro‐uncertainty, these can only account for a small (but nontrivial) share of output volatility.     

International Transmission Channels of U.S. Quantitative Easing: Evidence from Canada

The U.S. Federal Reserve responded to the great recession by implementing quantitative easing, or large‐scale asset purchases, when its conventional policy rate reached the zero lower bound. We assess the international spillover effects of this quantitative easing program on the Canadian economy in a factor‐augmented vector autoregression (FAVAR) framework, by considering a counterfactual scenario in which the Federal Reserve's long‐term asset holdings do not rise in response to the recession. We find that U.S. quantitative easing boosted Canadian output, mainly through the financial channel.     

Pulling up the tarnished anchor: The end of silver as a global unit of account

We use the demise of silver-based standards in the 19th century to explore price dynamics when a commodity-based money ceases to function as a global unit of account. We develop a general equilibrium model of the global economy with gold and silver money. Calibration of the model shows that silver ceased functioning as a global price anchor in the mid-1890s—the price of silver is positively correlated with agricultural commodities through the mid-1890s, but not thereafter. In contrast to Fisher (1911) and Friedman (1990), both of whom predict greater price stability under bimetallism, our model suggests that a global bimetallic system, in which the gold price of silver fluctuates, has higher price volatility than a global monometallic system. We confirm this result using agricultural commodity price data for 1870–1913.     

International Business Cycle and Financial Intermediation

The paper extends a standard two‐country international real business cycle model to include financial intermediation by banks of loans and government bonds. The paper contributes an explanation for both the United States relative to the Euro‐area, and the United States relative to China, of cross‐country correlations of loan rates, deposit rates, and the loan premia. It shows a type of financial retrenchment for the United States relative to both Europe and China following a negative bank productivity shock, such as during the 2008 crisis. After 2008, results suggest that the Euro‐area has been more financially integrated with the United States, and China less financially integrated.     

Housing and the Macroeconomy: Inflation and the Financial Accelerator

Three themes connecting housing and the macroeconomy are discussed. First, evidence is presented for the property market as one of the drivers of U.S. consumer price inflation. Second, key drivers of house prices are explained to account for the remarkable diversity of international experience. Finally, three potential links between housing, credit, and the financial accelerator are discussed. These are the consumption channel, the investment channel, and feedback between bad loans and risk‐spreads via the financial system—and how institutional differences between countries can explain the presence, absence and magnitudes of these linkages.