The monetary transmission mechanism: Evidence from the industries of five OECD countries

This paper studies the monetary transmission mechanism using disaggregated industry data from five industrialized countries. Our goal is to document the cross-industry heterogeneity of monetary policy effects and relate it to industry characteristics suggested by monetary transmission theories. Sizable and significant cross-industry differences in the effects of monetary policy are found. Such differences swamp the hardly detectable cross-country variability. Sectoral output responses to monetary policy shocks are systematically related to the industry output durability, financing requirements, borrowing capacity and firm size. These findings are consistent with a quantitatively non-negligible role of financial frictions in the monetary transmission.     

On the permanent effect of an aggregate demand shock: Evidence from the G-7 countries

This paper extends the work of Cover, Enders and Hueng (2006) to examine the idea that an aggregate demand shock may have permanent effect on the output level by indirectly shifting the aggregate supply curve. We utilize the bivariate SVAR modeling and adopt an identification scheme, which allows for the possibility that a shift in the aggregate demand curve may induce the long-run aggregate supply curve to shift. We have shown that aggregate supply shocks are positively affected by the demand shocks in each of the G-7 countries. It is found that a one-time positive aggregate demand shock increases the output level permanently in these industrialized economies. We have also shown that our decomposition strategy can help resolve anomalies in the responses of inflation to a positive aggregate supply shock observed in a simple Blanchard-Quah decomposition.     

Monetary policy in open economies

The recent literature on monetary policy in open economies has produced a strong presumption in favor of activistic policy and flexible exchange rates. We argue that this result may owe much to the combination of two commonly made assumptions: That nominal goods prices are rigid. And that the monetary authorities have a lot of information about the economy. When the source of nominal rigidity is found in wages and monetary policy is conducted according to less information demanding rules (such as a standard interest rate rule) policies that stabilize the money supply or the nominal exchange rate may perform better.     

Macroeconomic fluctuations: Demand or supply, permanent or temporary?

We use generalized method of moments to estimate a rational expectations aggregate demand/aggregate supply macroeconomic model for five European economies and the United States. Our aim is to examine whether supply or demand shocks have predominated in these economies during the post-war era, and whether shocks of either type have been primarily temporary or permanent in nature. We find that permanent or temporary demand shocks have been the dominant source of variance in output growth in all six countries, but there is a less consistent pattern for inflation. Permanent supply shocks had the dominant influence on autocorrelations.     

International financial remoteness and macroeconomic volatility

This paper shows that proximity to major international financial centers seems to reduce business cycle volatility. In particular, we show that countries that are farther from major locations of international financial activity systematically experience more volatile growth rates in both output and consumption, even after accounting for political institutions, trade, and other controls. Our results are relatively robust in the sense that more financially remote countries are more volatile, though the results are not always statistically significant. The comparative strength of this finding is in contrast to the more ambiguous evidence found in the literature.     

Why does private consumption rise after a government spending shock?

Abstract.  Some recent empirical evidence suggests that private consumption is crowded-in by government spending. This outcome violates neoclassical macroeconomic theory, according to which the negative wealth effect brought about by a rise in public expenditure should decrease consumption. In this paper, we develop a simple real business cycle model where preferences depend on private and public spending, and households are habit forming. The model is estimated by the maximum-likelihood method using U.S. data. Estimation results indicate a strong Edgeworth complementarity between private and public spending. This feature enables the model to generate a positive response of consumption following a government spending shock. In addition, the impulse-response functions generated by the estimated model are generally consistent with those obtained from a benchmark vector autoregression.     

Unions, monetary shocks and the labour market cycle

This paper provides a new growth model by considering strategic behaviour in the supply of labour. Workers form a labour union with the aim of manipulating wages for their own benefit. We analyse the implications on labour market dynamics at business cycle frequencies of getting away from the price-taking assumption. A calibrated monetary version of the union model does quite a reasonable job in replicating the dynamic features of labour market variables observed in post-war U.S. data.     

Macroeconomic policy lessons of labor market frictions

The paper explores the consequences of macroeconomic policy for labor market outcomes in the presence of frictions. It shows how policy may be useful in over-riding frictions, as well as how it might generate adverse outcomes. A partial-equilibrium, empirically grounded model is used to simulate policy effects.The key results are that policy has effects on the stochastic behavior of key variables - measures that reduce unemployment also reduce its persistence and increase the volatility of vacancies. Hiring subsidies and unemployment benefits have substantial effects on labor market outcomes, while employment subsidies or wage tax reductions are not very effective policy instruments.     

Government size and macroeconomic stability: A comment

We show that in a standard, technology shock-driven one-sector real business cycle model, the stabilization effects of government fiscal policy depend crucially on how labor hours enter the household's period utility function and the associated labor-market behavior. In particular, as Galí [European Economic Review 38 (1994), 117-132] has shown, when the household utility is logarithmic in both consumption and leisure, income taxes are destabilizing and government purchases are stabilizing. However, the results are reversed when preferences are instead convex in hours worked. That is, income taxes are now stabilizing and public spending is destabilizing. Furthermore, under both preference specifications, the magnitude of cyclical fluctuations in output remains unchanged when the income tax rate and the share of government purchases in GDP are equal (including laissez-faire).     

Imperfect competition and indeterminacy of aggregate output

This paper shows imperfect competition can lead to indeterminacy in aggregate output in a standard DSGE model with imperfect competition. Indeterminacy arises in the model from the composition of aggregate output. In sharp contrast to the indeterminacy literature pioneered by Benhabib and Farmer [J. Benhabib, R. Farmer, Indeterminacy and increasing returns, J. Econ. Theory 63 (1) (1994) 19-41] and Gali [J. Gali, Monopolistic competition, business cycles, and the composition of aggregate demand, J. Econ. Theory 63 (1) (1994) 73-96], indeterminacy in our model is global; hence it is more robust to structural parameters. In addition, sunspots in our model can be autocorrelated. The paper provides a justification for exogenous variations in desired markups, which play an important role as a source of cost-push shocks in the monetary policy literature. Our model outperforms a standard RBC model driven by technology shocks in several dimensions, including the volatility of labor market and the hump-shaped output dynamics.     

Poole in the New Keynesian model

We study the properties of alternative central bank targeting procedures within the standard New Keynesian model. We find that Poole's famous insights concerning the output stabilization properties of money and interest rate targeting obtain when intertemporal substitution is low. And that output volatility rankings do not induce similar welfare rankings. Unlike the popular presumption, money targeting always fares better for money demand shocks. For fiscal shocks, money targeting does better for low and worse for high degree of intertemporal substitution. The opposite pattern obtains for supply shocks.     

Externality in labor supply and government spending

Standard business cycle models face difficulties generating (i) government spending multipliers exceeding unity and (ii) stabilizing effects of government size. Using a simple model with externality in labor supply, we show that a sufficient degree of complementarity between aggregate and private labor supplies is key to reproducing these stylized facts.     

Equilibrium in a durable goods market with lumpy adjustment

Durable goods are an important component of the business cycle. Equilibrium models of durable goods markets are made difficult by the lumpy nature of individual purchases. We show that a straightforward approximation of the distribution of durable goods holdings gives rise to a tractable equilibrium model. We analyze the case of competition as well as that of a monopoly producer.