Creator: Backus, David and Kehoe, Patrick J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 359 Abstract:
We show that some classes of sterilized interventions have no effect on equilibrium prices or quantities. The proof does not depend on complete markets, infinitely-lived agents, Ricardian equivalence, monetary neutrality, or the law of one price. Moreover, regressions of exchange rates or interest differentials on variables measuring the currency composition of the debt may contain no information, in our theoretical economy, about the effectiveness of such interventions. Another class of interventions requires simultaneous changes in monetary and fiscal policy; their effects depend, generally, on the influence of tax distortions, government spending, and money supplies on economic behavior. We suggest that in applying the portfolio balance approach to the study of intervention, lack 01 explicit modeling of these features is a serious flaw.
Keyword: Debts, external and Foreign exchange law and legislation Subject (JEL): F31 - Foreign Exchange, H30 - Fiscal Policies and Behavior of Economic Agents: General, and F41 - Open Economy Macroeconomics
Creator: Backus, David and Kehoe, Patrick J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 348 Abstract:
We derive the empirical implications of a popular class of international macroeconomic models. The real economy is a stochastic exchange model with complete markets. A standard result is that cross-country risk sharing implies perfect correlation between consumption paths across countries. With mild restrictions on the endowment process ii also implies a positive correlation between net exports and output in every country. We introduce money using cash-in-advance constraints and show that the implications for real variables carry over into the monetary economy. These dichotomy and neutrality propositions generalize those in the literature to stochastic environments with heterogeneous agents, and do not require the cash-in-advance constraint to bind in every state. They imply that any correlation between the nominal exchange rate and the balance of trade can be made consistent with the theory.
Keyword: Cash-in-advance, Government finance, Risk-sharing, Monetary policy, and Exchange rates Subject (JEL): F30 - International Finance: General, D46 - Value Theory, and E32 - Business Fluctuations; Cycles
Creator: Backus, David and Kehoe, Patrick J. Series: Conference on economics and politics Abstract:
We document properties of business cycles in ten countries over the last hundred years, contrasting the behavior of real quantities with that of the price level and the stock of money. Although the magnitude of output fluctuations has varied across countries and periods, relations among variables have been remarkably uniform. Consumption has generally been about as variable as output, and investment substantially more variable, and both have been strongly procydical. The trade balance has generally been countercyclical. The exception to this regularity is government purchases, which exhibit no systematic cyclical tendency. With respect to the size of output fluctuations, standard deviations are largest between the two world wars. In some countries (notably Australia and Canada) they are substantially larger prior to World War I than after World War II, but in others (notably Japan and the United Kingdom) there is little difference between these periods. Properties of price levels, in contrast, exhibit striking differences between periods. Inflation rates are more persistent after World War II than before, and price level fluctuations are typically procyclical before World War II, countercyclical afterward. We find no general tendency toward increased persistence in money growth rates, but find that fluctuations in money are less highly correlated with output in the postwar period.
Subject (JEL): E32 - Business Fluctuations; Cycles and E31 - Price Level; Inflation; Deflation
Creator: Chari, V. V., Christiano, Lawrence J., and Kehoe, Patrick J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 520 Keyword: Business cycles, Policy analysis, Exogenous growth model, Monetary policy, Optimal taxation, Friedman rule, and Fiscal policy Subject (JEL): E52 - Monetary Policy and E32 - Business Fluctuations; Cycles