This paper estimates a simple New Keynesian model of the U.S. economy, allowing for indeterminacy, over the period following the 2001 slump, an episode for which the adequacy of monetary policy is ...intensely debated. We find that only when measuring inflation with core PCE does monetary policy appear to have been sufficiently active to rule out indeterminacy. We then relax the assumption that inflation in the model is measured by a single indicator and re-formulate the artificial economy as a factor model where the theory’s concept of inflation is the common factor to the empirical inflation series. CPI and PCE provide better indicators of the latent concept while core PCE is less informative. Finally, we estimate an extended economy that distinguishes between core and headline inflation rates. This model comfortably rules out indeterminacy and confirms the view that the Federal Reserve put more weight on core PCE inflation when setting the policy rate during this period.
This paper examines a market interlacing industry configuration in general equilibrium with multi-product firms. In contrast to previous studies which utilize market segmentation, firms produce ...multiple products even in the complete absence of the love of variety. Product scopes are procyclical and entry and exit of firms generates an endogenous amplification mechanism. When simulated by shocks derived from the efficiency and labor wedges, the model replicates the changes in dynamics between the pre- and post 1983 periods, and explains the hours-productivity puzzle.
This paper quantitatively investigates the Depression of the 1890s and the 1907 recession in the United States. Business Cycle Accounting decomposes economic fluctuations into their contributing ...factors. The results suggest that both the 1890s and the 1907 recessions were primarily caused by factors that affect the efficiency wedge, i.e. slumps in the economy’s factor productivity. Distortions to the labor wedge played a less important role. Models with financial market frictions that translate into the efficiency wedge are the most promising candidates for explaining the recessionary episodes.
SUNSPOTS AND CREDIT FRICTIONS Harrison, Sharon G.; Weder, Mark
Macroeconomic dynamics,
07/2013, Letnik:
17, Številka:
5
Journal Article
Recenzirano
Odprti dostop
We examine a general equilibrium model with collateral constraints and increasing returns to scale in production. The utility function is nonseparable, with no income effect on the consumer's choice ...of leisure. Unlike this model without a collateral constraint, we find that indeterminacy of equilibria is possible. Hence, business cycles can be driven by self-fulfilling expectations. This is the case for more realistic parameterizations than in previous, similar models without these features.
The paper re-examines whether the Federal Reserve’s monetary policy was a source of instability during the Great Inflation by estimating a sticky-price model with positive trend inflation, commodity ...price shocks and sluggish real wages. Our estimation provides empirical evidence for substantial wage rigidity and finds that the Federal Reserve responded aggressively to inflation but negligibly to the output gap. In the presence of non-trivial real imperfections and well-identified commodity price-shocks, U.S. data prefers a determinate version of the New Keynesian model: monetary policy-induced indeterminacy and sunspots were not causes of macroeconomic instability during the pre-Volcker era. However, had the Federal Reserve in the Seventies followed the policy rule of the Volcker-Greenspan-Bernanke period, inflation volatility would have been lower by one third.
Recent empirical evidence suggests that product creation is procyclical and it occurs largely within existing firms. Motivated by these findings, the current paper investigates the role of intra-firm ...product scope choice in a general equilibrium economy with oligopolistic producers. It shows that the multi-product nature of firms makes the economy susceptible to sunspot equilibria. The model is estimated via Bayesian methods. Artificial business cycles closely resemble empirically observed fluctuations with sunspots explaining a significant portion of U.S. business cycles.
•We set up a general equilibrium economy with multi-product oligopolistic producers.•Procyclical product creation makes the economy susceptible to sunspot equilibria.•The indeterminate model is estimated via Bayesian methods.•Artificial cycles closely resemble empirically observed fluctuations.•Sunspots cause a significant portion of U.S. business cycles.
This paper examines whether people's animal spirits were drivers of U.S. business cycle fluctuations. In the context of an estimated macroeconomy with endogenous financial market frictions, allowing ...for “psychological” or nonfundamental expectational shocks improves the fit of the model and, at the posterior mode, these shocks account for well over one‐third of output fluctuations. Exogenous financial frictions are considerably less important. U.S. data favor the indeterminacy model over versions of the economy in which animal spirits cannot play a role.
High degrees of relative risk aversion induces indeterminacy in cash-in-advance economies. In a small open economy context, this paper finds that endogenous money growth rules can pre-empt such ...sunspot equilibria in an open economy context. The most promising candidates are policies that actively target past inflation movements or aggregate demand as well as the expected price level.
This paper provides a quantitative assessment of a general equilibrium economy with non-Walrasian labour markets. Indeterminacy in the economy does not require production externalities or increasing ...returns but it rests on replacing the labour supply curve by a no-shirking condition on the efficiency-wage labour markets. The model is estimated on U.S. data via full information Bayesian methods. The shirking model is capable of matching several stylized facts of the aggregate economy and the labour market. Data favour a version of the artificial economy that is characterized by determinacy.
PDF
