The Structural Dynamics of U.S. Output and Inflation: What Explains the Changes?

We examine the dynamics of U.S. output and inflation using a structural time-varying coefficients vector autoregression. There are changes in the volatility of both variables and in the persistence of inflation, but variations are statistically insignificant. Technology shocks explain changes in output volatility; real demand disturbances variations in the persistence and volatility of inflation. We detect important time variations in the transmission of technology shocks to output and demand shocks to inflation and significant changes in the variance of technology and of monetary policy shocks.     

Quantifying tax effects under policy foresight

Studies of tax effects make the conventional information assumption that changes in period-t taxes become known at t. Legislative lags, however, imply that news arrives before tax changes take place. Under policy foreknowledge, the conventional information structure is therefore misspecified. Simulations of a standard neoclassical growth model suggest that foresight of only one quarter can distort substantially the estimates of tax effects obtained under the no-foresight assumption. Also, it is crucial to model capital and labor taxes separately: anticipated changes in these two tax policies have opposite effects on consumption, investment, labor, and output before policy realization.     

The Slow Adjustment of Aggregate Consumption to Permanent Income

This paper investigates the relationship between aggregate consumption and permanent income using a new approach to the estimation of cointegrated systems that builds on Stock and Watson's common stochastic trends representation. The permanent and transitory movements in aggregate income and consumption are estimated directly using the Kalman filter and are allowed to be correlated. This approach avoids any implicit restriction that permanent income be as smooth as consumption. Instead, permanent income appears to be relatively volatile, with consumption adjusting toward it only slowly over time. These results provide a clear rejection of the standard version of the permanent income hypothesis and are suggestive of alternative theories of consumption behavior such as habit formation or precautionary savings.     

Similarities and convergence in G-7 cycles

This paper examines the properties of G-7 cycles using a multicountry Bayesian panel VAR model with time variations, unit specific dynamics and cross-country interdependences. We demonstrate the presence of a significant world cycle and show that country specific indicators play a much smaller role. We detect differences across business cycle phases but, apart from an increase in synchronicity in the late 1990s, find little evidence of major structural changes. We also find no evidence of the existence of a Euro specific cycle or of its emergence in the late 1990s.     

Steady-state equilibrium with state-dependent pricing

State-dependent pricing models are now an operational framework for quantitative business cycle analysis. The analysis in Ball and Romer [1991. Sticky prices as coordination failure. American Economic Review 81 (3), 539-552], however, suggests that such models may be rife with multiple equilibria, for in their static model, price adjustment is always characterized by complementarity, a necessary condition for multiplicity. We study existence and uniqueness of steady-state equilibrium in a discrete-time state-dependent pricing model. We find only weak complementarity and no evidence of multiplicity. However, nonexistence of symmetric steady-state equilibrium with pure strategies arises in the region of the parameter space between flexible and sticky prices.     

Global Economic Divergence and Portfolio Capital Flows to Emerging Markets

This paper studies the role of global and regional variations in economic activity and policy in developed world in driving portfolio capital flows (PCFs) to emerging markets (EMs). Results suggest that PCFs to EMs depend mainly on economic activity at the global level and monetary policy in America and Asia, positively on the former and negatively on the latters. PCFs are procyclical with respect to global activity, but countercyclical to regional activity. In aggregate, regional variations contribute more than global variations. This implies that economic divergence in the developed world can have significant effects on EMs via PCFs.     

Nonseparable Preferences, Fiscal Policy Puzzles, and Inferior Goods

Nonseparable preferences over consumption and leisure can generate an increase in private consumption in response to government spending, as found in the data, in a frictionless business cycle model. However, the conditions on preferences required for these result to obtain hold if and only if the consumption good is inferior. Similarly, positive co-movement of consumption and hours worked occurs if and only if either consumption or leisure is inferior.     

Forming priors for DSGE models (and how it affects the assessment of nominal rigidities)

We discuss prior elicitation for the parameters of dynamic stochastic general equilibrium (DSGE) models, and provide a method for constructing prior distributions for a subset of these parameters from beliefs about steady-state relationships and second moments of the endogenous variables. The empirical application documents how the specification of the prior distribution affects our assessment of the relative importance of price and wage rigidities in a New Keynesian DSGE model.     

Fiscal shocks and real exchange rate dynamics: Some evidence for Latin America

This paper analyses the effects of fiscal shocks in selected Latin American countries using a two-country model for output, labour input, government spending and relative prices. Dynamic simulation techniques are then applied, in particular to shed light on the possible effects of fiscal imbalances on the real exchange rate. Using quarterly data over the period 1980-2006, we find that in a majority of cases fiscal shocks are the main driving force of real exchange rate fluctuations.     

The Feldstein-Horioka puzzle in the presence of structural shifts: The case of Japan versus the USA

This paper tests the Feldstein-Horioka “puzzle” for the two richest countries of the world: Japan and the USA. For this purpose it employs three different cointegration tests that are applied to the Feldstein-Horioka long-run investment-saving equation in conjunction with the Lumsdaine and Papell (1997) unit root test considering two structural shifts. A novel aspect of the paper is that it determines the number of breaks solely from a scrutiny of the data and that in constructing the dummy variables for the breaks it uses the endogenously determined break dates. It shows that allowing for structural shifts eliminates the “puzzle” both for Japan and the USA.     

Re-Examining the Consumption–Wealth Relationship: The Role of Model Uncertainty

This paper discusses the consumption–wealth relationship. We use data on consumption, assets, and labor income and a vector error correction framework. This framework defines a set of models that differ in the number of co-integrating vectors, the form of deterministic components and lag length. Further models can be defined through parametric restrictions and, in particular, interest centers on a weak exogeneity restriction that says that the co-integrating residuals do not affect consumption and income directly. Key results in previous work relate to the roles of permanent and transitory shocks in driving wealth and how consumption responds to these shocks. We investigate the robustness of these results to model uncertainty and argue for the use of Bayesian model averaging. We find that there is a large degree of model uncertainty. Whether this uncertainty has important empirical implications depends on the researcher's attitude toward the theory used to motivate a co-integrating relationship between consumption, assets and income. If we work with models consistent with this theory and impose the weak exogeneity restriction, we find precisely estimated results that show that permanent shocks have only a small role in driving assets and that the predominant transitory shocks have little effect on consumption. These findings are consistent with the previous literature. However, if we work with a broader set of models and let the data speak, we find that the exact magnitude of the role of permanent shocks is hard to estimate precisely. Thus, although some support exists for the view that their role is small, we cannot rule out the possibility that they have a substantive role to play.     

Comparing New Keynesian models of the business cycle: A Bayesian approach

The baseline New Keynesian model cannot replicate the observed persistence in inflation, output, and real wages for sensible parameter values. As a result, several extensions have been suggested to improve its fit to the data. We use a Bayesian approach to estimate and compare the baseline sticky price model of Calvo's [1983. Staggered prices in a utility maximizing framework. Journal of Monetary Economics 12, 383-398.] and three extensions. Our empirical results are as follows. First, we find that adding price indexation improves the fit of Calvo's [1983. Staggered prices in a utility maximizing framework. Journal of Monetary Economics 12, 383-398.] model. Second, models with both staggered price and wage setting dominate models with only price rigidities. Third, introducing wage indexation does not significantly improve the fit. Fourth, all model estimates suggest a high degree of price stickiness. Fifth, the estimates of labor supply elasticity are higher in models with both staggered price and wage contracts. Finally, the estimated inflation parameters of the Taylor rule are stable across models.     

Corporate tax,capital structure,and the accessibility of bank loans: Evidence from China

In this paper, we investigate whether listed firms in China adjust their capital structure in response to an increase in the corporate tax rate. Although theories of capital structure suggest that corporate tax is an important determinant of capital structure, how exogenous changes of the tax rate affect firms’ leverage decisions has not been fully explored. We examine a unique circumstance in which the Chinese government increased the corporate tax rate of firms that had previously received local government tax rebates. The evidence indicates that these firms increased their leverage when the corporate tax rate increased. Further investigation suggests that the adjustment of leverage was mostly driven by firms with a high level of access to bank loans.     

Financial Frictions,Financial Shocks,and Aggregate Volatility

The Great Moderation was accompanied by an increase in financial volatility. We explore the sources of these divergent patterns in volatilities by estimating a model with time‐varying financial rigidities subject to structural breaks in the size of shocks, the monetary policy rule coefficients, and the average size of the financial rigidity. Institutional changes are key in accounting for the Great Moderation and in shaping the transmission mechanism of financial shocks. The increase in financial volatilities is accounted for by larger financial shocks, but the vulnerability of the economy to these shocks is significantly alleviated by the estimated changes in institutions.     

The expectations theory works for monetary policy shocks

In practice, the expectations theory of the term structure is employed extensively in monetary policy analysis despite its empirical failure. This paper performs a conditional test of the theory that is directly relevant to monetary theory and policy. It finds that the theory holds quite well conditional on identified monetary policy shocks, but fails conditional on aggregate supply shocks that prompt an immediate jump in prices. It also finds that policy responses to movements in the term structure play an important role in uncovering evidence for the theory as predicted by McCallum [1994. Monetary policy and the term structure of interest rates. NBER Working Paper Series, no. 4938].