An important disconnect in the news view of fluctuations is the lack of consistent evidence suggestive of significant macroeconomic effects of news shocks. Findings from estimated DSGE models that in ...theory allow news shocks to matter quantitatively suggest that they do not. This disconnect can be resolved once we augment a DSGE model with a financial channel that provides amplification to news shocks. Our results suggest that news shocks to the future growth prospects of the economy are significant drivers of U.S. fluctuations, explaining as much as 50% and 37% of the variance in hours worked and output, respectively, in cyclical frequencies.
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BFBNIB, CEKLJ, INZLJ, IZUM, KILJ, NMLJ, NUK, PILJ, PNG, SAZU, UL, UM, UPUK, ZRSKP
We study how firms adjust their financial positions around the times when they undertake lumpy adjustments in capital or employment. Using U.S. firm level data, we document systematic patterns of ...cash and debt financing around lumpy adjustment, remarkably similar across capital and employment. Firm-specific fundamentals reflected in Tobin’s Q, profitability and productivity are leading indicators of lumpy adjustment. Cash and debt capacity are actively manipulated, and contribute significantly quantitatively, to increase financial resources in anticipation of the expansion of firm capacity. Lumpy contractions in productive capacity follow years where firms reduce cash balances and hold above average levels of debt. During and after contractions, firms rebuild cash and reduce debt growth significantly in a concerted effort to restore financial resources by adjusting their productive operations.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NLZOH, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UILJ, UL, UM, UPCLJ, UPUK, ZAGLJ, ZRSKP
We estimate a dynamic stochastic general equilibrium (DSGE) model with several frictions and both unanticipated and news shocks, using quarterly U.S. data from 1954 to 2004 and Bayesian methods. We ...find that unanticipated shocks dominate news shocks in accounting for the unconditional variance of output, consumption, and investment growth, interest rate, and the relative price of investment. The unanticipated shock to the marginal efficiency of investment is the dominant shock, accounting for over 45% of the variance in output growth. News shocks account for less than 15% of the variance in output growth. Within the set of news shocks, nontechnology sources of news dominate technology news, with wage markup news shocks accounting for about 60% of the variance share of both hours and inflation. We find that in the estimated DSGE model (i) the presence of endogenous countercyclical price and wage markups due to nominal frictions substantially diminishes the importance of news shocks relative to a model without these frictions, and (ii) while there is little change in the estimated contributions of technology news when we restrict wealth effects on labor supply, the contributions of nontechnology news shocks are relatively more sensitive.
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BFBNIB, FZAB, GIS, IJS, INZLJ, KILJ, NLZOH, NMLJ, NUK, OILJ, PNG, SAZU, SBCE, SBMB, UL, UM, UPUK, ZRSKP
4.
Sectoral TFP news shocks Görtz, Christoph; Tsoukalas, John D.
Economics letters,
07/2018, Volume:
168
Journal Article
Peer reviewed
Open access
We document a strong similarity in the macroeconomic effects of consumption-specific and investment specific TFP news shocks. This co-linearity suggests a diffusion channel of technological ...innovations from the investment to the consumption sector that forecast future changes in aggregate TFP. This finding connects two views of the literature on news shocks: aggregate TFP news and investment specific news.
•New evidence on the macroeconomic effects of consumption-specific and investment specific TFP news shocks.•Sector specific TFP news shocks are strongly co-linear.•Suggests a diffusion of innovations from investment sector into faster TFP growth in the consumption sector and the aggregate economy.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NLZOH, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UL, UM, UPCLJ, UPUK, ZRSKP
We use insights from the literature on currency crises to offer an analytical treatment of the crisis in the market for Greek government bonds. We argue that the crisis itself and its escalating ...nature are very likely to be the result of: (i) steady deterioration of Greek macroeconomic fundamentals over 2001–09 to levels inconsistent with long‐term EMU participation; and (ii) a double shift in markets’ expectations, from a regime of credible commitment to future EMU participation under an implicit EMU/German guarantee of Greek fiscal liabilities, to a regime of non‐credible EMU commitment without fiscal guarantees, respectively occurring in November 2009 and February/March 2010. We argue that the risk of contagion to other periphery EMU countries is significant; and that without extensive structural reforms, the sustainability of the EMU is in question.
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BFBNIB, FZAB, GIS, IJS, IZUM, KILJ, NLZOH, NUK, ODKLJ, OILJ, PILJ, SAZU, SBCE, SBMB, UL, UM, UPUK
We construct a simple model with lumpy investment, cash accumulation, and costly external finance. Based on this model, we propose a new savings specification aimed at examining savings behavior in ...the presence of investment lumpiness and financial constraints. We then test a key prediction of our model, namely that under costly external finance, savings-cash flow sensitivities vary significantly by investment regime. We make use of a panel of firms from transition and developed economies to estimate the new savings regression which controls for investment spikes and periods of inactivity. Our findings confirm the validity of the model's prediction.
A large body of empirical work has established the significance of cash flow in explaining investment dynamics. This finding is further taken as evidence of capital market imperfections. We show, ...using a perfect capital markets model, that time-to-build for capital projects creates an investment-cash-flow sensitivity as found in empirical studies that may not be indicative of capital market frictions. The result is due to mis-specification present in empirical investment-
q equations under time-to-build investment. In addition, time aggregation error can give rise to cash-flow effects independently of the time-to-build effect. Importantly, both errors arise independently of potential measurement error in
q. Evidence from a large panel of U.K. manufacturing firms confirms the validity of the time-to-build investment channel.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UL, UM, UPCLJ, UPUK
What is the role of inventories in UK manufacturing? We present and estimate a model of inventories that considers separately finished goods and input (i.e. the sum of raw materials and ...work-in-process) inventories. Our results suggest that both types of inventories are used for production level and production cost smoothing. We identify a small but significant negative relationship between inventories and the real interest rate, thus providing support for one of the textbook channels of the monetary policy transmission mechanism. Variance decompositions indicate that technology shocks are the dominant driving factor behind cyclical changes in inventories.
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Recent cyclical episodes in the U.S. and G-7 economies are asymmetric: recoveries and expansions tend to be long and gradual and busts tend to be short and sharp. A large body of work views the two ...recent cyclical U.S. episodes, namely, the “new economy” boom in the late 1990s, and the 2000s housing boom-bust as episodes where over-optimistic beliefs have played a significant role. These episodes have revived interest in expectations driven business cycles models. However, previous work in this area has not addressed the important asymmetry feature of business cycles. This paper takes a step towards addressing this limitation of expectations driven business cycle models. We propose a generalization of the Greenwood et al. (1988) model with vintage capital and learning about capital embodied productivity and show it can deliver fluctuations that are asymmetric as in the U.S. data. Learning, calibrated to match the procyclical forecast precision from the Survey of Professional Forecasters, is crucial for the modelʼs ability to generate asymmetries. Forecast errors generated by the model are shown to trigger recessions that mimic in magnitude, duration and depth the typical post WW II U.S. recession.
► A model with learning, calibrated to match data from the survey of professional forecasters. ► The model can generate the growth asymmetry of cycles as observed in U.S. data. ► Forecast errors produce upward and downward swings in investment, output, utilization and hours. ► Noise driven recessions are of similar magnitude, depth and duration to the average U.S. recession.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UL, UM, UPCLJ, UPUK
We consider an (otherwise standard) New Neoclassical Synthesis theoretical framework that allows a role for money. Money in our model has an informational role which facilitates the estimation of the ...unobserved shocks that drive potential output and thus the state of the economy. For this purpose we estimate a small-scale sticky price model using Bayesian techniques. Our findings support the view that money has information value. This is reflected in higher precision in terms of unobserved model concepts such as the natural rate of output. Moreover, our results highlight how modelling money demand can provide insights about structural features of the economy that may be important for the design of interest rate rules. Focusing on money also allows for a step towards resolving the price puzzle. Money demand shocks can confound monetary policy shocks to generate a perverse price response in vector autoregressions (VAR).
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BFBNIB, FZAB, GIS, IJS, INZLJ, IZUM, KILJ, NLZOH, NMLJ, NUK, OILJ, PILJ, PNG, SAZU, SBCE, SBMB, UL, UM, UPUK, ZRSKP
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