FISCAL POLICY, MACROECONOMIC STABILITY AND FINITE HORIZONS

In this paper we analyse the stabilisation properties of distortionary taxes in a new‐Keynesian model with overlapping generations of finitely lived consumers. In this framework, government debt is part of net wealth and this adds a number of interesting channels through which fiscal policy could affect output and inflation. Output volatility, in the presence of technology shocks, is not substantially affected by the operation of automatic stabilisers, but we find interesting composition effects. While the presence of finitely lived households strengthens the stabilisation performance of distortionary taxes through the reduction of the volatility of consumption, it does so at the cost of more volatile investment and real money balances.     

Macroeconomic implications of financial policy

This paper studies the effects of financial policy in a model with heterogeneous agents, incomplete markets and portfolio restrictions. For an economy calibrated to replicate key aspects of the U.S. wealth distribution, we find that the quantitative effects of financial policy are relatively small. The reason is that the households determining aggregate behavior are relatively well insured and can therefore offset the actions of the firm by modifying their portfolio allocations. However, financial policy has important effects on asset prices. Whereas a higher level of debt in the capital structure of the firm introduces more risk into the economy by increasing the volatility of the equity return, it enhances the liquidity of households by increasing the supply of bonds. In an economy with a substantial amount of heterogeneity, this last effect dominates and leverage leads to a decrease in the equity premium. This is in contrast to the findings in representative agent models, in which leverage unambiguously increases the premium through a higher equity return volatility.     

Accounting for regional variance heterogeneity of growth

This article explores heterogeneous behaviour in the conditional variance of growth. We find that regional effects account for a good part of this behaviour when modelled alone; however, regional effects themselves have no particular meaning. To this end, we try to empirically account for the regional effects using a large set of economic, political and demographic variables. Our results indicate that countries with past high levels of both investment and inflation cause growth to be less volatile today. Countries that have a greater number of changes in heads of government tend to experience lower growth volatility except in parliamentary democracies where the relationship reverses. The greater the number of effective parties the lower the volatility for all regime types. More strikes have no effect on volatility except for presidential democracies where volatility actually increases, while more open economies that share presidential and legislative powers also have more volatile growth rates.     

THE SOURCES OF THE DECLINE IN U.S. OUTPUT VOLATILITY

In this paper, we investigate the sources of the decline in U.S. output volatility. We estimate structural vector autoregression models before and after the structural break date of the first quarter of 1984. We find that the magnitude of both supply and demand shocks in the pre-1984 period is greater than that in the post-1984 period. We also find that the relative importance of the demand shocks in the post-1984 has decreased drastically compared to the pre-1984 period. Further counterfactual analyses show that good luck, good policies, and better business practices might have played a role in reducing U.S. output volatility. ( JEL E30, E60, C32)     

The business cycle with nominal contracts

Summary In this paper we study the quantitative implications of nominal wage contracts for business cycle fluctuations. We address this issue using a model economy based on the neoclassical growth model supplemented by the assumption that cash is needed to purchase goods. We consider a variation of the standard recursive competitive equilibrium concept that is intended to capture the important features of wage contracting. We use this equilibrium construct to address three issues. First, we consider whether monetary shocks, propagated by nominal contracts, constitute a viable alternative to technology shocks as a source of aggregate fluctuations. Our results suggest that, while monetary shocks and nominal rigidities succeed in causing output volatility of the required magnitude, the resulting data have properties that are inconsistent with several key features of U.S. data. Second, we consider how the behavior of the economy varies with contract length. We find that the volatility induced by both monetary and technology shocks increases sharply with contract length. Finally we consider how much rigidity would be necessary to match the volatility of U.S. output. We find that only a very small amount of rigidity would be necessary to cause output volatility of the magnitude observed.We have received helpful comments from David Chapman, Paul Gomme, Jeremy Greenwood, Gary Hansen, Michael Keane, Tim Kehoe, Lee Ohanian, Edward Prescott, and Warren Weber. The usual disclaimer applies. This research is supported in part by NSF Grant SES-8921346 and the John M. Olin Foundation.     

EVIDENCE ON FEATURES OF A DSGE BUSINESS CYCLE MODEL FROM BAYESIAN MODEL AVERAGING*

The empirical support for features of a Dynamic Stochastic General Equilibrium model with two technology shocks is evaluated using Bayesian model averaging over vector autoregressions. The model features include equilibria, restrictions on long‐run responses, a structural break of unknown date, and a range of lags and deterministic processes. We find support for a number of features implied by the economic model, and the evidence suggests a break in the entire model structure around 1984, after which technology shocks appear to account for all stochastic trends. Business cycle volatility seems more due to investment‐specific technology shocks than neutral technology shocks.     

The consequences of an unknown debt target

Several proposals to reduce U.S. debt reveal large differences in their targets. We examine how an unknown debt target affects economic activity using a real business cycle model in which Bayesian households learn about a state-dependent debt target in an endogenous tax rule. Recent papers use stochastic volatility shocks to study fiscal uncertainty. In our setup, the fiscal rule is time-varying due to unknown changes in the debt target. Households infer the current debt target from a noisy tax rule and jointly estimate the transition probabilities. Three key findings emerge from our analysis: (1) limited information about the debt target amplifies the effect of tax shocks through changes in expected tax rates; (2) the welfare losses are an order of magnitude larger when both the debt target state and transition matrix are unknown than when only the debt target state is unknown to households; (3) an unknown debt target likely reduced the stimulative effect of the ARRA and uncertainty about the sunset provision in the Bush tax cuts may have slowed the recovery and led to welfare losses.     

The decline in German output volatility: a Bayesian analysis

Using Bayesian methods, we analyze whether a volatility reduction as documented for growth of U.S. gross domestic product (GDP) in the mid-1980s can also be detected for German GDP growth. Our analysis is based on different time series models allowing for alternative characterizations of output stabilization. Across all models we find empirical evidence for a decline in the output volatility around 1993. Furthermore, we assess competing explanations for reduced output volatility. Our empirical results suggest that the main source for the volatility reduction is an ongoing structural shift accelerated by the German reunification and accompanied by changes in the correlation structure between individual GDP components.     

The Role of Productivity and Financial Frictions in the Business Cycles of a Small Open Economy: Hong Kong 1984–2011

This paper analyzes the business cycle properties of the Hong Kong economy during the 1984–2011 period, which includes the financial crisis experienced in 1997/98 and the economic crisis of 2008–2010. We show that the volatility respectively, of output, of the growth rate of output and of real interest rates in Hong Kong are higher than the corresponding average volatility among developed economies. Furthermore, interest rates are countercyclical. We build a stochastic neoclassical small open‐economy model estimated with a Bayesian likelihood approach that seeks to replicate the main business cycle characteristics of Hong Kong, and through which we try to quantify the role played by exogenous total factor productivity (TFP) shocks (transitory and permanent), real interest rate shocks and financial frictions. The main finding is that financial frictions, jointly with the assumption that the country spread is endogenous, seem important in explaining the countercyclicality of the real interest rates.     

Improving GARCH volatility forecasts with regime-switching GARCH

Many researchers use GARCH models to generate volatility forecasts. Using data on three major U.S. dollar exchange rates we show that such forecasts are too high in volatile periods. We argue that this is due to the high persistence of shocks in GARCH forecasts. To obtain more flexibility regarding volatility persistence, this paper generalizes the GARCH model by distinguishing two regimes with different volatility levels; GARCH effects are allowed within each regime. The resulting Markov regime-switching GARCH model improves on existing variants, for instance by making multi-period-ahead volatility forecasting a convenient recursive procedure. The empirical analysis demonstrates that the model resolves the problem with the high single-regime GARCH forecasts and that it yields significantly better out-of-sample volatility forecasts. First Version Received: November 2000/Final Version Received: August 2001     

Are Flexible Exchange Rate Regimes more Volatile? Panel GARCH Evidence for the G7 and Latin America

This paper investigates empirically the relationship between exchange rate (ER) regimes and volatility of real exchange rate depreciation (RERD), comparing the G7 and 17 Latin American (LA17) countries, during 1970–2010. We estimate a panel autoregressive model with generalized autoregressive conditional heteroskedasticity (GARCH) errors and regime‐specific effects on both the conditional mean and conditional variance. For the G7, we find that, relative to the fixed ER regime, only the freely floating regime shows higher RERD volatility; under the managed floating regime the RERD is equally volatile and under the crawling peg it is actually less volatile. Instead, in the case of the LA17, more flexible ER regimes are associated with more volatile RERD rates, with higher volatility under the managed floating regime than under the crawling peg and with extremely high volatility under the “freely falling” ER regime.     

Spillovers of volatility index: evidence from U.S., European,and Asian stock markets

We investigated the cross-market relations of volatility indexes with U.S. and non-U.S. stock market returns. We found that the pervasive VIX influence at both U.S. and non-U.S. stock markets. The VSTOXX and VKOSPI capture the major shocks to the global economy and show movements similar to the VIX. The empirical findings indicate that volatility index changes are important in explaining stock returns. We also examined spillover effects across volatility indexes. The VIX is a main transmitter, and the VKOSPI the main receiver, of these spillovers. The results point to a leading role for the VIX in the international market.     

Exchange-rate variability and U.S.-French trade flows: evidence from industry data

Recent studies have greatly expanded the literature on the effects of exchange-rate volatility on industry-level bilateral trade flows. In this study, we examine the case of the United States and France, applying cointegration analysis to a set of 146 U.S. export and 115 U.S. import industries. We find that the majority of industries show little or no relationship between risk and trade volumes, but that small industries—particularly for exports—show more sensitivity than do large ones. A disproportionate share of industries respond positively to increased volatility, particularly among U.S. importers, suggesting the presence of “risk loving” behavior.     

美国经济周期稳定化研究述评

近50年来美国经济周期出现了稳定化的趋势,其中二战之后经济周期的波动性比二战之前有明显下降,20世纪80年代中期之后比80年代之前亦有显著下降。引起这种经济周期稳定化的原因是多方面的,美国宏观经济学界对这一现象展开了热烈的讨论。本文对该领域的主要文献进行了梳理,对不同的观点进行了比较,并从美国的争论中得出了对中国有借鉴意义的启示。     

Bonus pay for teachers,spatial sorting,and student achievement

Bonus pay policy for teachers in the U.S. is analyzed in this paper. We quantitatively argue that, because of the decentralized education finance system in the U.S., this policy may lead to higher teacher and household sorting across school districts. This then may lead to higher variance of achievement and lower mean achievement. Formally, we use an equilibrium political economy model of education at which households, heterogeneous in exogenously set income, and teachers, heterogeneous in exogenously set quality, are endogenously allocated across two school districts. Public education expenditures, which includes teachers’ wage payment and non-teacher related education spending, are financed through local income taxation. Income tax rate in each district is determined via majority voting. Achievement depends on the efforts chosen by teachers and non-teacher related education spending. Teacher efficiency wage per unit of quality is determined at the national teacher labor market. We first calibrate our benchmark model by matching certain statistics from the U.S. data. Then in a computational experiment, we introduce bonus pay for teachers which rises with average achievement. We find that for the recently observed level of average bonus pay (6.59% of average base salary), variance of achievement is 2.46% higher and mean achievement is 1.79% lower than the benchmark. Variance of achievement reaches its peak when average bonus pay is 14.06% and then it starts falling. Also, mean achievement always falls as average bonus pay rises.     

中美股市杠杆效应与波动溢出效应——基于GARCH模型的实证分析

本文基于极大似然函数值准则和赤池信息准则,从众多非对称GARCH模型中选择最优模型来研究中美股市杠杆效应和波动溢出效应。结果表明:沪市和深市都表现出显著的杠杆效应,与美国股市相比沪市和深市杠杆效应较弱;沪市和深市之间存在显著的双向波动溢出效应,且沪市对深市的波动溢出效应更显著;美国股市与中国股市之间不存在显著的波动溢出效应。     

The PC Industry: New Economy or Early Life-Cycle?

The paper studies the co-evolution of industrial turbulence and financial volatility in the early phase of the life-cycle of an old high-tech industry and a new high-tech industry: the U.S. auto industry from 1899–1929 and the U.S. PC industry from 1974–2000. In both industries, the first three decades were characterized by industrial turbulence: radical technological change, high entry and exit rates, and rapidly falling prices. However, unlike in the auto industry, in the PC industry technological change and new entry did not lead to strong instability of market shares—at the core of the monopoly-destroying effect of Schumpeterian creative destruction—until the 1990s, when the lead of the incumbents from the pre-existing mainframe and minicomputer industries was undermined. In both industries, stock prices were the most volatile and idiosyncratic during those years in which technological change disrupted market shares the most (Autos: 1918–1928; PCs: 1990–2000). Journal of Economic Literature Classification Numbers: L11, 030, G12.     

The cyclical behavior of job creation and job destruction: A sectoral model

Summary Three key features of the employment process in the U.S. economy are that job creation is procyclical, job destruction is countercyclical, and job creation is less volatile than job destruction. These features are also found at the sectoral (goods and services) level. The paper develops, calibrates and simulates a two-sector general equilibrium model that includes both aggregate and sectoral shocks. The behavior of the model economy mimics the job creation and destruction facts. A non-negligible amount of unemployment arises due to the presence of aggregate and sectoral shocks.We thank Jeffrey Campbell, Richard Rogerson and two referees for helpful comments. We are grateful to M.J.D. Powell for providing us with his GETMIN FORTRAN subroutine.     

TAIL FORECASTING WITH MULTIVARIATE BAYESIAN ADDITIVE REGRESSION TREES

We develop multivariate time-series models using Bayesian additive regression trees that posit nonlinearities among macroeconomic variables, their lags, and possibly their lagged errors. The error variances can be stable, feature stochastic volatility, or follow a nonparametric specification. We evaluate density and tail forecast performance for a set of U.S. macroeconomic and financial indicators. Our results suggest that the proposed models improve forecast accuracy both overall and in the tails. Another finding is that when allowing for nonlinearities in the conditional mean, heteroskedasticity becomes less important. A scenario analysis reveals nonlinear relations between predictive distributions and financial conditions.     

Fiscal financing and the efficacy of fiscal policy in Korea: An empirical assessment with comparison to the U.S. evidence

This paper aims to assess the empirical implications of fiscal financing in Korea and study how they differ from those of the U.S. We estimate two versions of the dynamic stochastic general equilibrium (DSGE) model—a small open economy (SOE) model for Korea and its closed economy counterpart for the U.S.—in which the former nests the latter as a special case. The fiscal policy specification posits that government spending, lump-sum transfers, and distortionary taxation on labor income, capital income and consumption expenditures respond to the level of government debt and the state of economic activity. Analysis of the data from 2000 to 2015 shows that distortionary capital taxes play a critical role in stabilizing government debt in the U.S., whereas non-distorting fiscal instruments are the primary means of fiscal adjustment in Korea. Regarding the magnitude of debt-financed fiscal stimuli, the substantial trade openness of Korea is significant in that it produces relatively smaller government spending and transfer multipliers compared to the U.S.