This book arose from our conviction that the NNS-DSGE approach to the analysis of aggregate market outcomes is fundamentally flawed. The practice of overcoming the SMD result by recurring to a ...fictitious RA leads to insurmountable methodological problems and lies at the root of DSGE models failure to satisfactorily explain real world features, like exchange rate and banking crises, bubbles and herding in financial markets, swings in the sentiment of consumers and entrepreneurs, asymmetries and persistence in aggregate variables, and so on. At odds with this view, our critique rests on the premise that any modern macroeconomy should be modeled instead as a complex system of heterogeneous interacting individuals, acting adaptively and autonomously according to simple and empirically validated rules of thumb. We call our proposed approach Bottom-up Adaptive Macroeconomics (BAM). The reason why we claim that the contents of this book can be inscribed in the realm of macroeconomics is threefold: i) We are looking for a framework that helps us to think coherently about the interrelationships among two or more markets. In what follows, in particular, three markets will be considered: the markets for goods, labor and loanable funds. In this respect, real time matters: what happens in one market depends on what has happened, on what is happening, or on what will happen in other markets. This implies that intertemporal coordination issues cannot be ignored. ii) Eventually, its all about prices and quantities. However, we are mostly interested in aggregate prices and quantities, that is indexes built from the dispersed outcomes of the decentralized transactions of a large population of heterogeneous individuals. Each individual acts purposefully, but she knows anything about the levels of prices and quantities which clear markets in the aggregate. iii) In the hope of being allowed to purport scientific claims, BAM relies on the assumption that individual purposefulbehaviours aggregates into regularities. Macro behaviour, however, can depart radically from what the individual units are trying to accomplish. It is in this sense that aggregate outcomes emerge from individual actions and interactions.
Full text
Available for:
EMUNI, FIS, FZAB, GEOZS, GIS, IJS, IMTLJ, KILJ, KISLJ, MFDPS, NUK, OBVAL, OILJ, PNG, SAZU, SBCE, SBJE, SBMB, SBNM, UKNU, UL, UM, UPUK, VKSCE, ZAGLJ
2.
MEASURING ECONOMIC POLICY UNCERTAINTY BAKER, SCOTT R.; BLOOM, NICHOLAS; DAVIS, STEVEN J.
The Quarterly journal of economics,
11/2016, Volume:
131, Issue:
4
Journal Article
Peer reviewed
Open access
We develop a new index of economic policy uncertainty (EPU) based on newspaper coverage frequency. Several types of evidence—including human readings of 12,000 newspaper articles—indicate that our ...index proxies for movements in policy-related economic uncertainty. Our U.S. index spikes near tight presidential elections, Gulf Wars I and II, the 9/11 attacks, the failure of Lehman Brothers, the 2011 debt ceiling dispute, and other major battles over fiscal policy. Using firm-level data, we find that policy uncertainty is associated with greater stock price volatility and reduced investment and employment in policy-sensitive sectors like defense, health care, finance, and infrastructure construction. At the macro level, innovations in policy uncertainty foreshadow declines in investment, output, and employment in the United States and, in a panel vector autoregressive setting, for 12 major economies. Extending our U.S. index back to 1900, EPU rose dramatically in the 1930s (from late 1931) and has drifted upward since the 1960s.
Full text
Available for:
BFBNIB, INZLJ, IZUM, KILJ, NMLJ, NUK, PILJ, PNG, SAZU, UL, UM, UPUK, ZRSKP
An increase in the household debt to GDP ratio predicts lower GDP growth and higher unemployment in the medium run for an unbalanced panel of 30 countries from 1960 to 2012. Low mortgage spreads are ...associated with an increase in the household debt to GDP ratio and a decline in subsequent GDP growth, highlighting the importance of credit supply shocks. Economic forecasters systematically over-predict GDP growth at the end of household debt booms, suggesting an important role of flawed expectations formation. The negative relation between the change in household debt to GDP and subsequent output growth is stronger for countries with less flexible exchange rate regimes. We also uncover a global household debt cycle that partly predicts the severity of the global growth slowdown after 2007. Countries with a household debt cycle more correlated with the global household debt cycle experience a sharper decline in growth after an increase in domestic household debt.
Full text
Available for:
BFBNIB, INZLJ, IZUM, KILJ, NMLJ, NUK, PILJ, PNG, SAZU, UL, UM, UPUK, ZRSKP
In this essay, we discuss the emerging literature in macroeconomics that combines heterogeneous agent models, nominal rigidities, and aggregate shocks. This literature opens the door to the analysis ...of distributional issues, economic fluctuations, and stabilization policies—all within the same framework. In response to the limitations of the representative agent approach to economic fluctuations, a new framework has emerged that combines key features of heterogeneous agents (HA) and New Keynesian (NK) economies. These HANK models offer a much more accurate representation of household consumption behavior and can generate realistic distributions of income, wealth, and, albeit to a lesser degree, household balance sheets. At the same time, they can accommodate many sources of macroeconomic fluctuations, including those driven by aggregate demand. In sum, they provide a rich theoretical framework for quantitative analysis of the interaction between cross-sectional distributions and aggregate dynamics. In this article, we outline a state-of-the-art version of HANK together with its representative agent counterpart, and convey two broad messages about the role of household heterogeneity for the response of the macroeconomy to aggregate shocks: 1) the similarity between the Representative Agent New Keynesian (RANK) and HANK frameworks depends crucially on the shock being analyzed; and 2) certain important macroeconomic questions concerning economic fluctuations can only be addressed within heterogeneous agent models.
Full text
Available for:
CEKLJ, IZUM, KILJ, NUK, ODKLJ, PILJ, SAZU, UL, UM, UPUK
There is strong evidence of structural changes in macroeconomic time series, and the forecasting performance is often sensitive to the choice of estimation window size. This paper develops a method ...for selecting the window size for forecasting. Our proposed method is to choose the optimal size that minimizes the forecaster’s quadratic loss function, and we prove the asymptotic validity of our approach. Our Monte Carlo experiments show that our method performs well under various types of structural changes. When applied to forecasting US real output growth and inflation, the proposed method tends to improve upon conventional methods, especially for output growth.
Full text
Available for:
GEOZS, IJS, IMTLJ, KILJ, KISLJ, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UL, UM, UPCLJ, UPUK, ZRSKP
Identification in Macroeconomics Nakamura, Emi; Steinsson, Jón
The Journal of economic perspectives,
07/2018, Volume:
32, Issue:
3
Journal Article
Peer reviewed
Open access
This paper discusses empirical approaches macroeconomists use to answer questions like: What does monetary policy do? How large are the effects of fiscal stimulus? What caused the Great Recession? ...Why do some countries grow faster than others? Identification of causal effects plays two roles in this process. In certain cases, progress can be made using the direct approach of identifying plausibly exogenous variation in a policy and using this variation to assess the effect of the policy. However, external validity concerns limit what can be learned in this way. Carefully identified causal effects estimates can also be used as moments in a structural moment matching exercise. We use the term “identified moments” as a short-hand for “estimates of responses to identified structural shocks,” or what applied microeconomists would call “causal effects.” We argue that such identified moments are often powerful diagnostic tools for distinguishing between important classes of models (and thereby learning about the effects of policy). To illustrate these notions we discuss the growing use of cross-sectional evidence in macroeconomics and consider what the best existing evidence is on the effects of monetary policy.
Full text
Available for:
CEKLJ, IZUM, KILJ, NUK, ODKLJ, PILJ, SAZU, UL, UM, UPUK
The stock‐flow consistent (SFC) modelling approach, grounded in the pioneering work of Wynne Godley and James Tobin in the 1970s, has been adopted by a growing number of researchers in ...macroeconomics, especially after the publication of Monetary Economics by Godley and Lavoie, which provided a general framework for the analysis of whole economic systems, and the recognition that macroeconomic models integrating real markets with flow‐of‐funds analysis had been particularly successful in predicting the Great Recession of 2007–2009. We introduce the general features of the SFC approach for a closed economy, showing how the core model has been extended to address issues such as financialization and income distribution. We next discuss the implications of the approach for models of open economies and compare the methodologies adopted in developing SFC empirical models for whole countries. We review the contributions where the SFC approach is being adopted as the macroeconomic closure of microeconomic agent‐based models, and how the SFC approach is at the core of new research in ecological macroeconomics. Finally, we discuss the appropriateness of the name ‘SFC’ for the class of models we survey.
Full text
Available for:
BFBNIB, FZAB, GIS, IJS, IZUM, KILJ, NLZOH, NUK, OILJ, PILJ, SAZU, SBCE, SBMB, UL, UM, UPUK
We construct a new monthly index of Economic Policy Uncertainty for China in 2000–2018 based on Chinese newspapers. Different from the existing index, ours uses information from multiple local ...newspapers, and foreshadows declines in equity price, employment and output. Media censorship does not seem to have qualitative impact to our index. Moreover, we develop a daily uncertainty index and several policy-specific uncertainty indices for public use.
•A new monthly index of Economic Policy Uncertainty for China in 2000–2018 is constructed.•Our index uses information from multiple local newspapers.•Our index foreshadows declines in equity price, employment and output.•Media censorship does not seem to have qualitative impact to our index.•Moreover, we develop a daily index and several policy-specific indices.
Full text
Available for:
GEOZS, IJS, IMTLJ, KILJ, KISLJ, NLZOH, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UILJ, UL, UM, UPCLJ, UPUK, ZAGLJ, ZRSKP
We examine the behavior, determinants, and implications of the equilibrium level of the real federal funds rate, interpreted as the long run or steady state value of the real funds rate. We draw ...three main conclusions. First, the uncertainty around the equilibrium rate is large, and its relationship with trend GDP growth much more tenuous than widely believed. Our narrative and econometric analysis using cross-country data and going back to the 19th century supports a wide range of plausible estimates for the current level of the equilibrium rate, from a little over 0 per cent to the pre-crisis consensus of 2 per cent. Second, a bivariate vector error correction model that looks only to U.S. and world real rates well captures the behavior of U.S. real rates. The model treats real rates as cointegrated unit root processes. As of the end of our sample (2014), the model forecasts the real rate in the U.S. will asymptote to an equilibrium value of a little less than half a percent by 2021. Consistent with our first point, however, confidence intervals around this point estimate are huge. Third, the uncertainty around the equilibrium rate argues for more "inertial" monetary policy than implied by standard versions of the Taylor rule. Our simulations using the Fed staff's FRB/US model show that explicit recognition of this uncertainty results in a later but steeper normalization path for the funds rate compared with the median "dot" in the FOMC's Summary of Economic Projections.
Full text
Available for:
BFBNIB, CEKLJ, DOBA, EMUNI, FIS, FZAB, GEOZS, GIS, IJS, IMTLJ, IZUM, KILJ, KISLJ, MFDPS, NLZOH, NMLJ, NUK, OBVAL, OILJ, PILJ, PNG, SAZU, SBCE, SBJE, SBMB, SBNM, SIK, UILJ, UKNU, UL, UM, UPUK, VKSCE, ZAGLJ
PDF
