Creator: Bullard, James. and Duffy, John, 1964- Series: Joint committee on business and financial analysis Abstract:
Trend-cycle decomposition has been problematic in equilibrium business cycle research. Many models are fundamentally based on the concept of balanced growth, and so have clear predictions concerning the nature of the multivariate trend that should exist in the data if the model is correct. But the multivariate trend that is removed from the data in this literature is not the same one that is predicted by the model. This is understandable, because unexpected changes in trends are difficult to model under a rational expectations assumption. A learning assumption is more appropriate here. We include learning in a standard equilibrium business cycle model with explicit growth. We ask how the economy might react to the important trend-changing events of the postwar era in industrialized economies, such as the productivity slowdown, increased labor force participation by women, and the "new economy" of the 1990s. This tells us what the model says about the trend that should be taken out of the data before the business cycle analysis begins. Thus we use learning to address the trend-cycle decomposition problem that plagues equilibrium business cycle research. We argue that a model-consistent approach, such as the one we suggest here, is necessary if the goal is to obtain an accurate assessment of an equilibrium business cycle model.
Keyword: New economy, Learning, Business cycle fluctuations, Equilibrium business cycle theory, and Productivity slowdown Subject (JEL): E30 - Prices, business fluctuations, and cycles - General and E20 - Macroeconomics : Consumption, saving, production, employment, and investment - General
Creator: Bullard, James. and Russell, Steven. Series: Finance, fluctuations, and development Abstract:
We examine the conditions under which steady states with low real interest rates—real rates substantially below the output growth rate—exist in an overlapping generations model with production, capital accumulation, a labor-leisure trade-off, technological progress, and agents who live for many periods. The number of periods in an agent's life (n) is left open for much of the analysis and determines the temporal interpretation of a time period. The qualitative properties of the model are largely invariant to different values of n. We find that two low real interest rate steady states exist for empirically plausible values of the parameters of the model. Outside liabilities such as fiat currency or unbacked government debt are valued in one of these steady states.
Keyword: General equilibrium models, Interest rates, and Debts, Public Subject (JEL): D51 - General equilibrium and disequilibrium - Exchange and production economies and E40 - Money and interest rates - General