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Creator: Chari, V. V., Kehoe, Patrick J., and McGrattan, Ellen R. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 409 Abstract:
Macroeconomists have largely converged on method, model design, reduced-form shocks, and principles of policy advice. Our main disagreements today are about implementing the methodology. Some think New Keynesian models are ready to be used for quarter-to-quarter quantitative policy advice; we do not. Focusing on the state-of-the-art version of these models, we argue that some of its shocks and other features are not structural or consistent with microeconomic evidence. Since an accurate structural model is essential to reliably evaluate the effects of policies, we conclude that New Keynesian models are not yet useful for policy analysis.
Assujettir: E12 - General Aggregative Models: Keynes; Keynesian; Post-Keynesian and E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General
Creator: Chari, V. V., Kehoe, Patrick J., and McGrattan, Ellen R. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 328 Abstract:
We propose a simple method to help researchers develop quantitative models of economic fluctuations. The method rests on the insight that many models are equivalent to a prototype growth model with time-varying wedges which resemble productivity, labor and investment taxes, and government consumption. Wedges corresponding to these variables—efficiency, labor, investment, and government consumption wedges—are measured and then fed back into the model in order to assess the fraction of various fluctuations they account for. Applying this method to U.S. data for the Great Depression and the 1982 recession reveals that the efficiency and labor wedges together account for essentially all of the fluctuations; the investment wedge plays a decidedly tertiary role, and the government consumption wedge, none. Analyses of the entire postwar period and alternative model specifications support these results. Models with frictions manifested primarily as investment wedges are thus not promising for the study of business cycles. (See Additional Material for a response to Christiano and Davis (2006).)
Mot-clé: Capacity utilization, Sticky prices, Sticky wages, Equivalence theorems, Productivity decline, Financial frictions, and Great Depression Assujettir: E12 - General Aggregative Models: Keynes; Keynesian; Post-Keynesian and E10 - General Aggregative Models: General
Creator: Chari, V. V., Kehoe, Patrick J., and McGrattan, Ellen R. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 625 Abstract:
This paper proposes a simple method for guiding researchers in developing quantitative models of economic fluctuations. We show that a large class of models, including models with various frictions, are equivalent to a prototype growth model with time-varying wedges that, at least at face value, look like time-varying productivity, labor taxes, and capital income taxes. We label the time-varying wedges as efficiency wedges, labor wedges, and investment wedges. We use data to measure these wedges and then feed them back into the prototype growth model. We then assess the fraction of fluctuations accounted for by these wedges during the great depressions of the 1930s in the United States, Germany, and Canada. We find that the efficiency and labor wedges in combination account for essentially all of the declines and subsequent recoveries. Investment wedges play, at best, a minor role.
Mot-clé: Financial frictions, Great Depression, Sticky wages, Productivity decline, Equivalence theorems, and Capacity utilization Assujettir: E12 - General Aggregative Models: Keynes; Keynesian; Post-Keynesian and E10 - General Aggregative Models: General
Creator: Kehoe, Patrick J. and Midrigan, Virgiliu Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 661 Abstract:
In the data, a large fraction of price changes are temporary. We provide a simple menu cost model which explicitly includes a motive for temporary price changes. We show that this simple model can account for the main regularities concerning temporary and permanent price changes. We use the model as a benchmark to evaluate existing shortcuts that do not explicitly model temporary price changes. One shortcut is to take the temporary changes out of the data and fit a simple Calvo model to it. If we do so prices change only every 50 weeks and the Calvo model overestimates the real effects of monetary shocks by almost 70%. A second shortcut is to leave the temporary changes in the data. If we do so prices change every 3 weeks and the Calvo model produces only 1/9 of the real effects of money as in our benchmark. We show that a simple Calvo model can generate the same real effects as our benchmark model if we set parameters so that prices change every 17 weeks.
Assujettir: E12 - General Aggregative Models: Keynes; Keynesian; Post-Keynesian, E50 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General, and E58 - Central Banks and Their Policies
Creator: Chari, V. V. and Kehoe, Patrick J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 399 Abstract:
Robert Solow has criticized our 2006 Journal of Economic Perspectives essay describing “Modern Macroeconomics in Practice.” Solow eloquently voices the commonly heard complaint that too much macroeconomic work today starts with a model with a single type of agent. We argue that modern macroeconomics may not end too far from where Solow prefers. He is also critical of how modern macroeconomists use data to construct models. Specifically, he seems to think that calibration is the only way that our models encounter data. To the contrary, we argue that modern macroeconomics uses a wide variety of empirical methods and that this big-tent approach has served macroeconomics well. Solow also questions our claim that modern macroeconomics is firmly grounded in economic theory. We disagree and explain why.
Assujettir: E40 - Money and Interest Rates: General, E20 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy: General (includes Measurement and Data), E12 - General Aggregative Models: Keynes; Keynesian; Post-Keynesian, E21 - Macroeconomics: Consumption; Saving; Wealth, E50 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General, E13 - General Aggregative Models: Neoclassical, E22 - Investment; Capital; Intangible Capital; Capacity, E52 - Monetary Policy, and E32 - Business Fluctuations; Cycles