News about aggregate demand and the business cycle

The plausibility of expectations-driven cyclical fluctuations in an otherwise standard one-sector real business cycle model with variable capital utilization and mild increasing returns-to-scale in production is examined. Due to a dominating wealth effect, our model is able to generate qualitatively as well as quantitatively realistic aggregate fluctuations driven by news impulses to future consumption demand or government spending on goods and services. When the economy is subject to anticipated total factor productivity or investment-specific technology shocks, the relative strength of the intertemporal substitution effect needs to be enhanced for our model to exhibit positive macroeconomic co-movement and business cycle statistics that are consistent with the data.     

Durable goods,financial frictions,and business cycles in emerging economies

Business cycles in emerging economies display very volatile consumption and strongly countercyclical trade balance. We show that aggregate consumption in these economies is not more volatile than output once durables are accounted for. Then, we present and estimate a real business cycles model for a small open economy that accounts for this empirical observation. Our results show that the role of permanent shocks to aggregate productivity in explaining cyclical fluctuations in emerging economies is considerably lower than previously documented. Moreover, we find that financial frictions are crucial to explain some key business cycle properties of these economies.     

Can News Be a Major Source of Aggregate Fluctuations? A Bayesian DSGE Approach

We examine whether the news shocks, as explored in Beaudry and Portier (2004) , can be a major source of aggregate fluctuations. For this purpose, we extend a standard dynamic stochastic general equilibrium model of Christiano, Eichenbaum, and Evans (2005) and Smets and Wouters (2003, 2007) by allowing news shocks on the total factor productivity (TFP), and estimate the model using Bayesian methods. Estimation results on the U.S. and Japanese economies suggest that (i) news shocks play a relatively more important role in the United States than in Japan, (ii) a news shock with a longer forecast horizon has larger effects on nominal variables, and (iii) the overall effect of the TFP on hours worked becomes ambiguous in the presence of news shocks.     

Financial Development,Credit, and Business Cycles

How does financial development affect the magnitude of the business cycles fluctuations? We examine this question in a general equilibrium model with heterogeneous agents and endogenous credit constraints based on Kiyotaki (1998). We show that there is a hump‐shaped relationship between the degree of financial frictions and the amplification of unexpected productivity shocks. This nonmonotonic relation is due to the fall in financial frictions having two opposite effects on the response of output. One effect is the reallocation of productive inputs between agent types, which, while active, increases with the fall in financial frictions. The other effect is the change in the demand of inputs, which decreases with the fall in financial frictions. At low levels of financial development, the reallocation effect dominates and a fall in financial frictions increases the amplification of productivity shocks. In contrast, at higher levels of financial development, a fall in financial frictions decreases the shock amplification because the reallocation effect disappears while the effect on the demand of inputs is still present.     

Nonconvex factor adjustments in equilibrium business cycle models: do nonlinearities matter?

Recent empirical analysis has found nonlinearities to be important in understanding aggregated investment. Using an equilibrium business cycle model, we search for aggregate nonlinearities arising from the introduction of nonconvex capital adjustment costs. We find that, while such costs lead to nontrivial nonlinearities in aggregate investment demand, equilibrium investment is effectively unchanged. Our finding, based on a model in which aggregate fluctuations arise through exogenous changes in total factor productivity, is robust to the introduction of shocks to the relative price of investment goods.     

News shocks and business cycles

This paper proposes and implements a novel structural VAR approach to the identification of news shocks about future technology. The news shock is identified as the shock orthogonal to the innovation in current utilization-adjusted TFP that best explains variation in future TFP. A favorable news shock leads to an increase in consumption and decreases in output, hours, and investment on impact - more suggestive of standard DSGE models than of recent extensions designed to generate news-driven business cycles. Though news shocks account for a significant fraction of output fluctuations at medium frequencies, they contribute little to our understanding of recessions.     

房价波动、金融稳定与最优宏观审慎政策

本文通过构建包含家庭住房抵押借款摩擦和银行贷款摩擦的动态随机一般均衡模型,重点考察了异质性冲击下房价波动对金融稳定的影响。研究发现,房价上涨会导致银行风险溢价及杠杆率显著上升,进而加剧金融体系的内在不稳定。为降低房价波动及维护金融稳定,选取两类宏观审慎政策工具进行逆周期调控实验,结果表明,在住房需求冲击下,金融管理部门应选取贷款价值比政策,且应对房贷积极调控,而对房价进行中性调控。在最终产品部门生产率冲击、房地产部门生产率冲击及跨期偏好冲击下,应选取资本充足率政策,但对房贷和房价调控力度的把握则存在差异。本研究为厘清房价波动对金融稳定的动态传导机制,以及金融管理部门如何选取宏观审慎政策工具以稳定房价并降低系统性金融风险提供了启示。     

Credit and Banking in a DSGE Model of the Euro Area

This paper studies the role of credit supply factors in business cycle fluctuations using a dynamic stochastic general equilibrium (DSGE) model with financial frictions enriched with an imperfectly competitive banking sector. Banks issue collateralized loans to both households and firms, obtain funding via deposits, and accumulate capital out of retained earnings. Loan margins depend on the banks' capital‐to‐assets ratio and on the degree of interest rate stickiness. Balance‐sheet constraints establish a link between the business cycle, which affects bank profits and thus capital, and the supply and cost of loans. The model is estimated with Bayesian techniques using data for the euro area. The analysis delivers the following results. First, the banking sector and, in particular, sticky rates attenuate the effects of monetary policy shocks, while financial intermediation increases the propagation of supply shocks. Second, shocks originating in the banking sector explain the largest share of the contraction of economic activity in 2008, while macroeconomic shocks played a limited role. Third, an unexpected destruction of bank capital may have substantial effects on the economy.     

Animal Spirits,Financial Markets,and Aggregate Instability

This paper examines whether people's animal spirits were drivers of U.S. business cycle fluctuations. In the context of an estimated macroeconomy with endogenous financial market frictions, allowing for “psychological” or nonfundamental expectational shocks improves the fit of the model and, at the posterior mode, these shocks account for well over one-third of output fluctuations. Exogenous financial frictions are considerably less important. U.S. data favor the indeterminacy model over versions of the economy in which animal spirits cannot play a role.     

Demand or productivity: what determines firm growth?

We disentangle the contribution of unobserved heterogeneity in demand and productivity to firm growth using Italian data containing unique information on firm‐level prices. Demand and total factor productivity (TFP) shocks are equally important in shaping firm growth. However, the pass‐through of shocks to growth is highly incomplete, more so for productivity shocks. We argue that incompleteness and asymmetry of the pass‐through can be explained by frictions that, unlike those studied by the literature on factor misallocation, have differential effects according to the nature of the shock. We propose hurdles to firms' ability to reorganize as an example of these types of frictions.     

News Shocks,Business Cycles,and the Disinflation Puzzle

We argue that key findings of the empirical literature on the effects of news about future technology—including their tendency to generate negative comovement of macro-economic aggregates, and their puzzling disinflationary nature—are due to measurement errors in total factor productivity (TFP). In this paper, we estimate the macro-economic effects of news shocks in the United States using an agnostic identification approach that is robust to measurement errors. We find no evidence of negative comovement conditional on a news shock, and the disinflation puzzle essentially vanishes under our identification strategy. Our results also indicate that news shocks have become an important driver of business-cycle fluctuations in recent years.     

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.     

The Quantitative Importance of News Shocks in Estimated DSGE Models

We estimate a dynamic stochastic general equilibrium (DSGE) model with several frictions and both unanticipated and news shocks, using quarterly U.S. data from 1954 to 2004 and Bayesian methods. We find that unanticipated shocks dominate news shocks in accounting for the unconditional variance of output, consumption, and investment growth, interest rate, and the relative price of investment. The unanticipated shock to the marginal efficiency of investment is the dominant shock, accounting for over 45% of the variance in output growth. News shocks account for less than 15% of the variance in output growth. Within the set of news shocks, nontechnology sources of news dominate technology news, with wage markup news shocks accounting for about 60% of the variance share of both hours and inflation. We find that in the estimated DSGE model (i) the presence of endogenous countercyclical price and wage markups due to nominal frictions substantially diminishes the importance of news shocks relative to a model without these frictions, and (ii) while there is little change in the estimated contributions of technology news when we restrict wealth effects on labor supply, the contributions of nontechnology news shocks are relatively more sensitive.     

Welfare Cost of Fluctuations When Labor Market Search Interacts with Financial Frictions

We study the welfare costs of business cycles in a search and matching model with financial frictions. The model replicates the volatility on labor and financial markets. Business cycle costs are sizable. Indeed, the interactions between labor market and financial frictions magnify the impact of shocks via (i) a credit multiplier effect and (ii) an endogenous wage rigidity inherent to financial frictions. In addition, in a nonlinear framework, large welfare costs of fluctuations are explained by the high average unemployment and the low job finding rates with respect to their deterministic steady‐state values.     

Liquidity,assets and business cycles

The objective here is to evaluate the quantitative importance of financial frictions in business cycles. The analysis shows that a negative financial shock can cause aggregate investment, employment and consumption to fall with output. Despite this realistic comovement among macro quantities, a negative financial shock generates an equity price boom as the shock tightens firms׳ financing constraint. This counterfactual response of the equity price is robust to a wide range of variations in how financial frictions are modeled and whether financial shocks affect asset liquidity or firms׳ collateral constraints. Some possible resolutions to this puzzle are discussed.     

Consumption heterogeneity,employment dynamics and macroeconomic co-movement

Real-business-cycle models rely on total factor productivity (TFP) shocks to explain the observed co-movement among consumption, investment and hours. However an emerging body of evidence identifies “investment shocks” as important drivers of business cycles. This paper shows that a neoclassical model consistent with observed heterogeneity in labor supply and consumption across employed and non-employed can generate co-movement in response non-TFP shocks. Estimation reveals fluctuations in the marginal efficiency of investment that explain the bulk of business-cycle variance in consumption, investment and hours. A corollary of the model׳s empirical success is the labor wedge that is not important at business-cycle frequencies.     

What inventory behavior tells us about how business cycles have changed

Beginning in the mid-1980s, U.S. business cycles changed in important ways, notably via distinctive shifts in the comovement and relative volatilities of labor productivity, hours, output, and inventories. Inventories provide additional information relative to aggregate investment regarding firms׳ intertemporal decisions, and thus additional insight in explaining business cycles. We show that variations in the discount factor estimated using inventories, which may be interpreted as fluctuations in a generalized investment wedge, play a key role in explaining the shifts in U.S. business cycles observed after the mid-1980s. Moreover, these variations correlate well with independent measures of credit market frictions.     

Capital regulation and credit fluctuations

Credit cycle stabilization can be a rationale for imposing counter-cyclical capital requirements on banks. The model comprises two productive sectors: in one sector, firms can finance investments through a bond market. In the other, firms rely on bank credit. Financial frictions limit banks’ borrowing capacity. Aggregate shocks impact firms’ productivity. From a welfare perspective, banks lend too much in high productivity states and too little in bad states, although financial markets are complete. Imposing a (stricter) capital requirement in good states corrects capital misallocation, increases expected output and social welfare. Even with risk-neutral agents, stabilization of credit cycles is socially beneficial.     

Imperfect financial contracting and macroeconomic stability

This paper studies the implications of imperfect financial contracting for macroeconomic stability in the context of a stochastic dynamic general equilibrium model. We find that the equilibrium growth path might be indeterminate in an economy with financing frictions even if the aggregate production function exhibits constant returns to scale. Self-fulfilling expectations about the future price of capital lead to macroeconomic fluctuations in this economy.