A Bayesian Model Comparison for Trend‐Cycle Decompositions of Output

We compare a number of widely used trend‐cycle decompositions of output in a formal Bayesian model comparison exercise. This is motivated by the often markedly different results from these decompositions—different decompositions have broad implications for the relative importance of real versus nominal shocks in explaining variations in output. Using U.S. quarterly real GDP, we find that the overall best model is an unobserved components model with two features: (i) a nonzero correlation between trend and cycle innovations and (ii) a break in trend output growth in 2007. The annualized trend output growth decreases from about 3.4% to 1.2%–1.5% after the break. The results also indicate that real shocks are more important than nominal shocks. The slowdown in trend output growth is robust when we expand the set of models to include bivariate unobserved components models.     

An Unobserved Components Model that Yields Business and Medium‐Run Cycles

We generalize the unobserved components (UC) model to allow the permanent component to have different dynamics than the transitory components when decomposing U.S. economic activity using a multivariate UC model of (log) output, consumption, and investment. We find that these proposed dynamics in the permanent component are statistically significant and distinct from those of the transitory components. Our approach provides an alternative explanation for the growth cycles identified by Comin and Gertler ( 2006 ) that is related to the cyclical movements in technology, in a framework consistent with the Beveridge and Nelson ( 1981 ) decomposition.     

Forecasting National Recessions Using State‐Level Data

We investigate whether there is information useful for identifying U.S. business cycle phases contained in subnational measures of economic activity. Using a probit model to forecast the National Bureau of Economic Research expansion and recession classification, we assess the incremental information content of state‐level employment growth over a commonly used set of national‐level predictors. As state‐level data adds a large number of predictors to the model, we employ a Bayesian model averaging procedure to construct forecasts. Based on a variety of forecast evaluation metrics, we find that including state‐level employment growth substantially improves nowcasts and very short‐horizon forecasts of the business cycle phase. The gains in forecast accuracy are concentrated during months of national recession.     

State‐Dependent Transmission of Monetary Policy in the Euro Area

We estimate a logit mixture vector autoregressive model describing monetary policy transmission in the euro area over the period 1999–2015. In contrast to other classes of nonlinear vector autoregressive models, regime affiliation is neither strictly binary, nor binary with a transition period, and based on multiple variables. We show that monetary policy transmission in the euro area can be described as a mixture of two states. In both states, output and prices are found to decrease after contractionary monetary policy shocks. However, the effects of monetary policy are less enduring in the “crisis state.”     

Intrinsic Persistence of Wage Inflation in New Keynesian Models of the Business Cycles

We derive and estimate a New Keynesian wage Phillips curve that accounts for intrinsic inertia. In line with microevidence on wage setting, we consider a wage‐setting model featuring an upward‐sloping hazard function, based on the notion that the probability of resetting a wage depends on the time elapsed since the last reset. Our wage Phillips curve embeds also backward terms. We test the hazard function slope using generalized method of moment estimation. Then, placing our equation in a small‐scale New Keynesian model, we investigate its dynamic properties using Bayesian estimation. Model comparison shows that our model outperforms commonly used alternative methods to introduce persistence.     

The Real‐Time Properties of the Bank of Canada's Staff Output Gap Estimates

We study the revision properties of the Bank of Canada's staff output gap estimates since the mid‐1980s and show that the average revision has been significantly smaller since the early 2000s. Alternatively, revisions from econometric output gap estimates have not experienced a similar improvement. We show that the overestimation of potential output in real time following the 1991–92 recession explains the large revisions in the first half of the sample. Although Phillips‐curve inflation forecasts slightly worsen when conditioned on real time instead of final gaps, their relative poor performance reflects the general lack of inflation predictability rather than real‐time gap measurement issues.     

Inventory Shocks and the Great Moderation

Why did the volatility of U.S. real GDP decline by more than the volatility of final sales with the Great Moderation in the mid‐1980s? One explanation is that firms shifted their inventory behavior toward a greater emphasis on production smoothing. We investigate the role of inventories in the Great Moderation by estimating an unobserved components model that identifies inventory and sales shocks and their propagation in the aggregate data. Our estimates provide no support for increased production smoothing. Instead, smaller transitory inventory shocks are responsible for the excess volatility reduction in output compared to sales. These shocks behave like informational errors related to production that must be set in advance and their reduction also helps explain the changed forecasting role of inventories since the mid‐1980s. Our findings provide an optimistic prognosis for a continuation of the Great Moderation, despite the dramatic movements in output during the recent economic crisis.     

Deep Habits in the New Keynesian Phillips Curve

We derive and estimate a New Keynesian Phillips Curve (NKPC) in a model with deep habits. Habits are deep in that they apply to individual consumption goods instead of aggregate consumption. This alters the NKPC in a fundamental manner since it introduces consumption growth and future demand terms into the NKPC equation. We construct the driving process in the deep habits NKPC by using the model's optimality conditions to impute time series for unobservable variables. The resulting series is considerably more volatile than unit labor cost. Generalized methods of moments estimation shows an improved fit and a much lower degree of indexation compared to the standard NKPC.     

Trend Inflation and the Nature of Structural Breaks in the New Keynesian Phillips Curve

We show that with a unit root in inflation, the new Keynesian Phillips curve (NKPC) implies an unobserved components model with a stochastic trend component and an inflation gap. Our empirical results suggest that with an increase in trend inflation during the Great Inflation, the response of inflation to real economic activity decreases and the persistence of the inflation gap increases due to an increase in the persistence of the unobserved stationary component. These results are in line with the predictions of Cogley and Sbordone ( 2008 ), who show that the coefficients of the NKPC are functions of time‐varying trend inflation.     

A New Time‐Varying Parameter Autoregressive Model for U.S. Inflation Expectations

We study the evolution of U.S. inflation by means of a new noncausal autoregressive model with time‐varying parameters that outperforms the corresponding causal and constant‐parameter noncausal models in terms of fit and forecast accuracy. Our model also beats the unobserved component stochastic volatility (UCSV) model, one of the best‐performing univariate inflation forecasting models, in terms of both point and density forecasts. We also show how the new Keynesian Phillips curve can be estimated based on our noncausal model. Both expected and lagged inflation turn out important, but the former dominates in determining the current inflation.     

Making Weak Instrument Sets Stronger: Factor‐Based Estimation of Inflation Dynamics and a Monetary Policy Rule

The problem of weak identification has recently attracted attention in the analysis of structural macroeconomic models. Using robust methods can result in large confidence sets making precise inference difficult. We overcome this problem in the analysis of the hybrid New Keynesian Phillips Curve and a forward‐looking Taylor rule by employing stronger instruments. We suggest exploiting information from a large macroeconomic data set by generating factors and using them as additional instruments. This approach results in stronger instrument sets and hence smaller weak‐identification robust confidence sets. It allows us to conclude that there has been a shift toward more active monetary policy from the pre‐Volcker regime to the Volcker–Greenspan tenure.     

Measuring Inflation Anchoring and Uncertainty: A U.S. and Euro Area Comparison

We use several U.S. and euro‐area surveys of professional forecasters to estimate a dynamic factor model of inflation featuring time‐varying uncertainty. We obtain survey‐consistent distributions of future inflation at any horizon, both in the U.S. and the euro area. Equipped with this model, we propose a novel measure of the anchoring of inflation expectations that accounts for inflation uncertainty. Our results suggest that following the Great Recession, inflation anchoring improved in the United States, while mild de‐anchoring occurred in the euro area. As of our sample end, both areas appear to be almost equally anchored.     

Supply‐Side Policies in the Depression: Evidence from France

The effects of supply‐side policies in depressed economies are controversial. We shed light on this debate using evidence from France in the 1930s. In 1936, France departed from the gold standard and implemented mandatory wage increases and hours restrictions. Deflation ended but output stagnated. We present time‐series and cross‐sectional evidence that these supply‐side policies, in particular the 40‐hour law, contributed to French stagflation. These results are inconsistent both with the standard one‐sector New Keynesian model and with a medium scale, multisector model calibrated to match our cross‐sectional estimates. We conclude that the New Keynesian model is a poor guide to the effects of supply‐side shocks in depressed economies.     

Bond Pricing with a Time‐Varying Price of Risk in an Estimated Medium‐Scale Bayesian DSGE Model

New Keynesian model in which households have Epstein–Zin preferences with time‐varying risk aversion and the central bank has a time‐varying inflation target can match the dynamics of nominal bond prices in the U.S. economy well. The model generates a large steady‐state term spread and its fitting errors for bond yields are comparable to those obtained from a nonstructural three‐factor model, and one‐third smaller than in models with a constant inflation target or risk aversion. Including data on interest rates has large effects on variance decompositions, making investment technology shocks much less important than found in other recent papers.     

Credit Indicators as Predictors of Economic Activity: A Real‐Time VAR Analysis

Using readily available indicators of the profitability, price, and availability of credit—the term spread, junk‐bond spread, and banks’ “willingness to lend” as reported by the Federal Reserve—we show that it is possible to significantly improve on the real‐time output and employment predictions of forecasting professionals at the medium‐run horizons that are most relevant to policymakers and private decision makers. Key to this improvement is a flexible state–space model of data revisions. The willingness‐to‐lend variable is the best real‐time predictor of GDP growth. For forecasting job growth, all three credit indicators prove helpful.     

Long‐Run Inflation and the Distorting Effects of Sticky Wages and Technical Change

We show that the Calvo price‐setting model is not necessarily inconsistent with evidence of a weak relation between positive trend inflation and price dispersion. We identify the interaction between sticky wages and technical change as factors disrupting the allocative role of the wage system under positive trend inflation. In turn, this interaction generates inefficient wage dispersion, as opposed to price dispersion, which fuels inflation costs. We conclude that it is too early to dismiss the New Keynesian model as a useful vehicle to assess the costs of inflation.     

Evidence on the Relationship between Housing and Consumption in the United States: A State‐Level Analysis

We estimate the dynamic effects of U.S. housing market shocks on state‐level spending and home prices from a dynamic common factor model, and identify housing demand and supply shocks using a sign‐restrictions approach. While state‐level spending and house prices gradually respond positively and persistently to aggregate housing demand shocks, there is significant variation across states in the magnitude of these responses. Cross‐state regressions of the estimated responses on an index of mortgage market development suggest that spending in states with greater opportunities for home equity borrowing is more sensitive to housing demand shocks than in states with fewer opportunities, which is consistent with the prominence of a “collateral” channel over a “wealth” channel in explaining the link between housing and the overall economy.     

The Effectiveness of Unconventional Monetary Policy at the Zero Lower Bound: A Cross‐Country Analysis

This paper assesses the macroeconomic effects of unconventional monetary policies by estimating a panel vector autoregression (VAR) with monthly data from eight advanced economies over a sample spanning the period since the onset of the global financial crisis. It finds that an exogenous increase in central bank balance sheets at the zero lower bound leads to a temporary rise in economic activity and consumer prices. The estimated output effects turn out to be qualitatively similar to the ones found in the literature on the effects of conventional monetary policy, while the impact on the price level is weaker and less persistent. Individual country results suggest that there are no major differences in the macroeconomic effects of unconventional monetary policies across countries, despite the heterogeneity of the measures that were taken.     

Fiscal Stimulus in Times of High Debt: Reconsidering Multipliers and Twin Deficits

We investigate the impact of fiscal stimuli at different levels of the government debt‐to‐GDP ratio for a sample of 17 European countries from 1970 to 2010. This is implemented in an interacted panel VAR framework in which all coefficient parameters are allowed to change continuously with the debt‐to‐GDP ratio. We find that responses to government spending shocks exhibit strong nonlinear behavior. While the overall cumulative effect of a spending shock on real GDP is positive and significant at moderate debt‐to‐GDP ratios, this effect turns negative as the ratio increases. The total cumulative effect on the trade balance as a share of GDP is negative at first but switches sign at higher levels of debt. Consequently, depending on the degree of public indebtedness, our results accommodate long‐run fiscal multipliers that are greater and smaller than one or even negative as well as twin deficit and twin divergence behavior within one sample and time period. From a policy perspective, these results lend additional support to increased prudence at high public debt ratios because the effectiveness of fiscal stimuli to boost economic activity or resolve external imbalances may not be guaranteed.     

Cross‐Border Auction Cycle Effects of Sovereign Bond Issuance in the Euro Area

We provide evidence for the euro area of spillovers from foreign public debt auctions into domestic secondary‐market auction cycles. We also confirm existing evidence of such spillovers from domestic issues into the domestic secondary market. Consistent with a theory of primary dealers’ limited risk‐bearing capacity, we find that auction cycles from domestic issues are stronger during the recent crisis period, whereas cross‐border effects are stronger in the precrisis period, but this evidence is not strong. This finding likely reflects the opposing effects of reduced sovereign bond market integration during the crisis and higher yield covariances caused by more market volatility.