Why have business cycle fluctuations become less volatile?

This paper shows that a standard Real Business Cycle model driven by productivity shocks can successfully account for the 50% decline in cyclical volatility of output, its components, and labor input that has occurred since 1983. The model is successful because the volatility of productivity shocks has also declined significantly over the same time period. We then investigate whether the decline in the volatility of the Solow Residual is due to changes in the volatility of some other shock operating through a channel that is absent in the standard model. We therefore develop a model with variable capacity and labor utilization. We investigate whether government spending shocks, shocks that affect the household’s first order condition for labor, and shocks that affect the household’s first order condition for saving can plausibly account for the change in TFP volatility and in the volatility of output, its components, and labor. We find that none of these shocks are able to do this. This suggests that successfully accounting for the post-1983 decline in business cycle volatility requires a change in the volatility of a productivity-like shock operating within a standard growth model. We thank Stephen Parente, Ed Prescott, John Taylor, and two anonymous referees for helpful comments and suggestions.     

Reexamining the permanent income hypothesis with uncertainty in permanent and transitory innovation states

In this paper, we reexamine the permanent income–consumption relationship analytically and empirically, based on the innovation regime-switching (IRS) model developed in [Kuan, C.M., Huang, Y.L., Tsay, R.S., 2005. An unobserved component model with switching permanent and transitory innovations. Journal of Business and Economic Statistics, 23, 443–454]. A novel feature of the IRS model is that it explicitly allows for uncertainty in innovation states. When the labor income follows an IRS process, it is shown that the agent’s perception on the likelihoods of income innovations being permanent and transitory plays a crucial role in determining the optimal forecasts on the change of consumption. The effect of a current labor income innovation on consumption is a weighted average of two distinct effects resulting from permanent and transitory innovations with the weights equal to the perceived likelihoods of the respective states. Also, past innovations may affect consumption when there are revisions in the perceived likelihoods of previous states. Our empirical study on US data shows that consumption indeed reacts significantly to the perceived likelihoods of innovation states. However, even after controlling for the effect of state uncertainty, we find consumption vastly underreacts to permanent innovations in labor income but reacts about the right magnitude to transitory ones when compared with the prediction of the permanent income hypothesis. This evidence is similar to [Elwood, S.K., 1998. Testing for excess sensitivity in consumption: A state-space unobserved components approach. Journal of Money, Credit, and Banking, 30, 64–82] but in sharp contrast with that found in [Hall, R.E., Mishkin, F.S., 1982. The sensitivity of consumption to transitory income: Estimates from panel data on households. Econometrica, 50, 461–480].     

Monetary policy, oil shocks, and TFP: Accounting for the decline in US volatility

An equilibrium model is used to assess the quantitative importance of monetary policy for the post-1984 decline in US inflation and output volatility. The principal finding is that monetary policy played a substantial role in reducing inflation volatility, but a small role in reducing real output volatility. The model attributes much of the decline in real output volatility to smaller TFP shocks. We also investigate the pattern of output and inflation volatility under an optimal monetary policy counterfactual. We find that real output volatility would have been somewhat lower, and inflation volatility substantially lower, had monetary policy been set optimally.     

Worker heterogeneity and labor market volatility in matching models

Shimer demonstrated that aggregate productivity shocks in a standard matching model cause fluctuations in key labor market statistics—such as the job-finding rate, the vacancy/unemployment ratio, and the unemployment rate—that are too small by an order of magnitude [Shimer, R., 2005. The cyclical behavior of equilibrium unemployment and vacancies. American Economic Review 95 (1) 25–49]. This paper shows that when the standard model is extended to allow for worker heterogeneity, it exhibits considerably greater volatility. In the model, marginal workers, whose productivity only slightly exceeds the value of their alternative use of time, constitute a disproportionate share of unemployment on average, and that share rises when aggregate conditions deteriorate. These composition effects cause firms to open fewer vacancies during downturns.     

Entry, exit and business cycles in a general equilibrium model

This paper studies the role of entry and exit in the short run behavior of a general equilibrium model with industry dynamics. For tractability, and to preserve potential asymmetries in the impulse responses, I focus on the transition dynamics of the economy after shocks. Entry and exit are found to be insensitive to productivity shocks of reasonable magnitude. Moreover, the dynamics of GDP are insensitive to fluctuations in entry and exit rates, and any asymmetries are negligible. As an application of the model, the paper also asks whether firing costs may interact with entry and exit to affect transition dynamics after shocks, finding that they do not.     

The impact of institutional volatility on financial volatility in transition economies

What have been the determinants of financial volatility in the transition countries of Central and Eastern Europe and the former Soviet Union? This paper posits that institutional changes, and in particular the volatility of crucial institutions such as property rights, have been the major causes of financial volatility in transition. Building a unique monthly database of 20 transition economies from 1991 to 2017, this paper applies the GARCH family of models to examine financial volatility as a function of institutional volatility. The results show that more advanced institutions help to dampen financial sector volatility, while institutional volatility feeds through directly to financial sector volatility in transition. Democratic changes in particular engender much higher levels of volatility, while property rights are sensitive to the metric used for their measurement.     

Permanent and transitory shocks in the presence of asymmetric error correction

This article highlights the potential importance of asymmetries in the loading vector of a set of cointegrated variables for the construction, analysis and interpretation of permanent and transitory shocks using impulse response functions. We derive an asymmetric version of the Permanent–Transitory decomposition suggested by Gonzalo and Ng (2001) and illustrate the potential importance of such asymmetries using the ‘cay’ data of Lettau and Ludvigson (2004).     

The role of real and monetary shocks in explaining business cycle fluctuations

The essay brings empirical evidence to bear on the ability of real and monetary shocks to explain busines cycles. Using vector autoregressive techniques it is found that both real and monetary shocks are able to explain substantial portions of the innovations in output and unemployment.     

Dynamics in transitory and permanent variation of wages in Germany

We employ covariance structure models to decompose the cross-sectional variance of male wages in Germany into its permanent and transitory parts. We find that the steep growth of cross-sectional inequality during the early 2000s is predominantly driven by transitory factors.     

Firm dynamics in news-driven business cycles: the role of endogenous survival rate

Evidences from the structural vector-error correction model shows that the new business formation and stock prices co-moves with output under news shocks. However, simply incorporating firm dynamics into Jaimovich and Rebelo’s (Jaimovich and Rebelo, 2009) model cannot explain these empirical findings. We show that this problem can be resolved by introducing endogenous survival rates for the new entrants.     

A spatial econometric analysis of the regional growth and volatility in Europe

Based on a sample of 1,084 European regions (EU15) from 1995 to 2004, we estimate the relationship between the average growth rate of GDP per capita and the volatility of the growth rate allowing for spatial effects. The spatial lag and spatial error models show that the regional per capita growth rate and volatility are significantly positively related on average. However, the inclusion of country interaction terms reveals that the volatility impact is not uniform across countries. In particular, the relationship between growth and volatility is significantly positive for the majority of countries but significantly negative for three countries (namely Finland, Italy, and Ireland).

Banking and the role of money in the business cycle

This paper enriches a standard New Keynesian model with a simple banking sector to investigate the role of money in the business cycle. Maximum likelihood estimation of the model suggests that money balances play a significant role in explaining the intertemporal allocation of consumption and the dynamics of inflation as described by the forward-looking IS and Phillips curves. Nonetheless, the responses of the model’s variables to shocks remain qualitatively similar to a model without money, suggesting that the omission of money balances leaves the model’s transmission mechanism unaffected.     

The Schumpeterian role of financial innovations in the New Economy's business cycle

Alan Greenspan claims that modern financial innovations, especiallyfinancial derivatives, were major contributors to a Schumpeterianprocess of ‘creative destruction’ which produceda high-growth ‘New Economy’ and opposes their regulation.A different perspective emerges when it is recognised that the‘New Economy’ followed the general contours of aSchumpeterian business cycle, and the role of modern financialinnovations is examined in that context. The authors argue thatthe primary role of financial derivatives has been in contributingto ‘reckless finance’ and speculative excesses inthe second phase of that cycle, and that Schumpeter would favoursubjecting the use of derivatives to more regulation.     

The changing role of house price dynamics over the business cycle

In this paper, we attempt to analyse the relationship between house price dynamics and the business cycle. Employing a time-varying transition probability Markov switching framework, we provide empirical evidence that house price growth may prove a useful leading indicator for turning point detection. Focusing on three countries, the US, UK and Spain, we furthermore provide evidence that although potentially informative from an overall perspective in business cycle modelling, the significance of signals contained in house prices may not be symmetric across the identified high growth and low growth states. In addition, we suggest a possible range of values for house price deflation which may trigger a recession the following period.     

我国粮食生产的波动性及增长趋势:基于H-P滤波法的实证研究

实现粮食持续增产对保障我国粮食安全战略具有重要意义。本文采用H-P滤波法实证分析了1978—2007年我国粮食生产的波动性及其增长趋势问题,研究结果表明:我国粮食生产具有明显的波动中增长的特征,在品种结构、区域分布和影响因素等方面,粮食生产波动均具有非对称特征。粮食产量波动对稻米产量波动最为敏感,对东部地区(特别是江苏、浙江、河北)的粮食生产波动最为敏感,对粮食单产水平波动最为敏感。未来我国粮食生产仍将保持增长趋势,但粮食单产以及由此决定的粮食总产量与目标值相比仍存在一定的差距。依据结论,可以给出我国实现粮食持续增产的若干政策含义。     

The response of capital goods shipments to demand over the business cycle

We study how producers of capital goods set shipments in response to fluctuations in new orders. We find that shipments respond more to orders when new orders fall below a certain level relative to shipments, usually after orders plunge in recessions. This cyclical change in producers’ behavior accounts for a considerable portion of the downturn in equipment investment in the 2001 and 2008–9 recessions. A simple model of production to order suggests that heightened persistence in new orders growth may explain the greater responsiveness of shipments, as may increases in the producers’ target delivery lag.     

Financial development and instability: The role of the labour share

This paper examines the role of the labour share in creating instability in a small open economy. We assume that financial markets are imperfect so that entrepreneurs are credit constrained, and that this constraint is tighter for low levels of financial development. Aghion, Bacchetta and Banerjee [Aghion, P., Bacchetta, P., Banerjee, A., 2004. Financial development and the instability of open economies. Journal of Monetary Economics 51, 1077–1106] have shown that as the degree of financial development increases, output rises but instability appears for intermediate levels of financial development. Crucially, they assume that labour is paid before production takes place, and hence crises are solely due to the increased cost of debt repayment as firms accumulate capital. We show that under the more reasonable assumption that wages are paid at the end of the period, changes in the labour share also play a role in eroding profitability. Our analysis also predicts that financial crises are associated with substantial movements in the sharing of value added between capital and labour.     

The business cycle implications of the euro adoption in Poland

This article analyses the macroeconomic impact of the loss of autonomous monetary policy after the euro adoption in Poland. Using a two-country Dynamic Stochastic General Equilibrium (DSGE) model with sticky prices and wages, we find that the euro adoption will have a noticeable impact on the magnitude of economic fluctuations. In particular, the volatility of output, interest rate, consumption and employment is expected to increase while the volatility of inflation should decrease. Also, in order to quantify the effect of the euro adoption, we compute the welfare effect of this monetary policy change. Our findings suggest that the welfare cost is not large.     

Realized volatility transmission: The role of jumps and leverage effects

This paper is the first to employ a multivariate extension of the LHAR–CJ model for realized volatility of Corsi and Renó (2012) considering continuous and jump volatility components and leverage effects. The model is applied to financial (S&P 500), commodity (WTI crude oil) and forex (US$/EUR) intraday futures data and allows new insights in the transmission mechanisms among these markets. Besides significant leverage effects, we find that the jump components of all considered assets do not contain incremental information for the one-step ahead realized volatility. The volatility of S&P 500 and US$/EUR exchange rate futures exhibits significant spillovers to the realized volatility of WTI. Moreover, decreasing equity prices appear to increase volatility in other markets, while strengthening of the US$ seems to calm down the crude oil market.