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Creator: Cole, Harold Linh, 1957- and Ohanian, Lee E. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 566 Abstract:
Constant returns to scale is a central construct of neoclassical theory. Previous studies argued that one must adopt a specification of the production function with substantial unobserved service variation to reconcile constant returns with the data. Some economists have argued that this finding has not resolved the size of returns to scale, since factor service variation is unobserved, and there is no generally accepted theory to guide specification of this alternative framework. In this paper we show that the stochastic version of the neoclassical growth model delivers an orthogonality condition which can be used to estimate returns to scale. Rather than the standard finding of increasing returns, we show that standard theory and conventional measures of output and inputs yield estimates of constant returns to scale at the aggregate level. Our estimates also suggest that factor service variation is not an important determinant of output fluctuations.
Creator: Cole, Harold Linh, 1957- and Ohanian, Lee E. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 579 Abstract:
In the postwar period velocity has risen so sharply in the U.S. that the ratio of money to nominal output has fallen by a factor of three. We analyze the implications of shrinking money for the real effects of a monetary shock in two classes of equilibrium monetary business cycle models: limited participation (liquidity) models and predetermined (sticky) price models. We show that the liquidity model predicts that a rise in velocity leads to a substantial reduction in the real effects of a monetary shock. In sharp contrast, we show that the real effects of a monetary shock in the sticky price model are largely invariant to changes in velocity. We provide evidence that suggests that the real effects of monetary shocks have fallen over the postwar period.
Creator: Krusell, Per, Ohanian, Lee E., Ríos-Rull, José-Víctor, and Violante, Giovanni L. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 239 Abstract:
The notion of skilled-biased technological change is often held responsible for the recent behavior of the U.S. skill premium, or the ratio between the wages of skilled and unskilled labor. This paper develops a framework for understanding this notion in terms of observable variables and uses the framework to evaluate the fraction of the skill premium's variation that is caused by changes in observables. A version of the neoclassical growth model is used in which the key feature of aggregate technology is capital-skill complementarity: the elasticity of substitution is higher between capital equipment and unskilled labor than between capital equipment and skilled labor. With this feature, changes in observables can account for nearly all the variation in the skill premium over the last 30 years. This finding suggests that increased wage inequality results from economic growth driven by new, efficient technologies embodied in capital equipment.
Mot-clé: Technological change, Wage inequality, and Capital-skill complementarity
Creator: Berkowitz, Jeremy, Diebold, Francis X., 1959-, and Ohanian, Lee E. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 243 Abstract:
We propose a constructive, multivariate framework for assessing agreement between (generally misspecified) dynamic equilibrium models and data, a framework which enables a complete second-order comparison of the dynamic properties of models and data. We use bootstrap algorithms to evaluate the significance of deviations between models and data, and we use goodness-of-fit criteria to produce estimators that optimize economically relevant loss functions. We provide a detailed illustrative application to modeling the U.S. cattle cycle.
Assujettir: C14 - Semiparametric and Nonparametric Methods: General, C22 - Single Equation Models; Single Variables: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes, and C52 - Model Evaluation, Validation, and Selection
Creator: Kilian, Lutz and Ohanian, Lee E. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 244 Abstract:
Unit root tests against trend break alternatives are based on the premise that the dating of the trend breaks coincides with major economic events with permanent effects on economic activity, such as wars and depressions. Standard economic theory, however, suggests that these events have large transitory, rather than permanent, effects on economic activity. Conventional unit root tests against trend break alternatives based on linear ARIMA models do not capture these transitory effects and can result in severely distorted inference. We quantify the size distortions for a simple model in which the effects of wars and depressions can reasonably be interpreted as transitory. Monte Carlo simulations show that in moderate samples, the widely used Zivot-Andrews (1992) test mistakes transitory dynamics for trend breaks with high probability. We conclude that these tests should be used only if there are no plausible economic explanations for apparent trend breaks in the data.
Mot-clé: Transitory Shocks, Unit Roots, and Trend-Breaks Assujettir: C15 - Statistical Simulation Methods: General, E32 - Business Fluctuations; Cycles, and C22 - Single Equation Models; Single Variables: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
Creator: Cole, Harold Linh, 1957- and Ohanian, Lee E. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 246 Abstract:
Many economists have worried about changes in the demand for money, since money demand shocks can affect output variability and have implications for monetary policy. This paper studies the theoretical implications of changes in money demand for the nonneutrality of money in the limited participation (liquidity) model and the predetermined (sticky) price model. In the liquidity model, we find that an important connection exists between the nonneutrality of money and the relative money demands of households and firms. This model predicts that the real effect of a money shock rose by 100 percent between 1952 and 1980, and subsequently declined 65 percent. In contrast, we find that the nonneutrality of money in the sticky price model is invariant to changes in money demands or other monetary factors. Several researchers have concluded from VAR analyses that the effects of money shock over time are roughly stable. This view is consistent with the predictions of the sticky price model, but is harder to reconcile with the specific pattern of time variation predicted by the liquidity model.
Mot-clé: Liquidity, Sticky prices, Money shocks, and Velocity Assujettir: E32 - Business Fluctuations; Cycles, E52 - Monetary Policy, and E41 - Demand for Money
Creator: Ohanian, Lee E. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 248 Abstract:
This paper reviews The Defining Moment, edited by Michael D. Bordo, Claudia Goldin, and Eugene N. White. The volume studies how the Great Depression changed government policies, including changes in monetary policy, fiscal policy, banking policy, agricultural policy, social insurance, and international economic policy. I argue that a theory of policy evolution is required to answer how the Great Depression affected these policies. In the absence of this theory, the contributors provide insight into the question by showing how policies changed sharply in the 1930s with little or no historical precedent or by showing how policies were tied to political or other considerations unique to the period. While this volume doesn’t always provide answers to the questions posed, it does raise a fundamental issue in the analysis of government policy: Why during some crisis periods are bad policies adopted, whereas during other periods, they are not?
Assujettir: N12 - Economic History: Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations: U.S.; Canada: 1913-
Creator: Azariadis, Costas, Bullard, James, and Ohanian, Lee E. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 255 Abstract:
Autoregressions of quarterly or annual aggregate time series provide evidence of trend-reverting output growth and of short-term dynamic adjustment that appears to be governed by complex eigenvalues. This finding is at odds with the predictions of reasonably parameterized, convex one-sector growth models, most of which have positive real characteristic roots. We study a class of one-sector economies, overlapping generations with finite life spans of L greater than or equal to 3, in which aggregate saving depends nontrivially on the distribution of wealth among cohorts. If consumption goods are weak gross substitutes near the steady state price vector, we prove that the unique equilibrium of a life cycle exchange economy converges to the unique steady state via damped oscillations. We also conjecture that this form of trend reversion extends to production economies with a relatively flat factor-price frontier, and we test this conjecture in several plausible parameterizations of 55-period life cycle economies.
Mot-clé: Economies, Eigenvalues, Life cycle, and Cyclical fluctuations Assujettir: E30 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data)
Creator: Cole, Harold Linh, 1957- and Ohanian, Lee E. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 270 Abstract:
This paper quantitatively evaluates the hypothesis that deflation can account for much of the Great Depression (1929–33). We examine two popular explanations of the Depression: (1) The “high wage” story, according to which deflation, combined with imperfectly flexible wages, raised real wages and reduced employment and output. (2) The “bank failure” story, according to which deflationary money shocks contributed to bank failures and to a reduction in the efficiency of financial intermediation, which in turn reduced lending and output. We evaluate these stories using general equilibrium business cycle models, and find that wage shocks and banking shocks account for a small fraction of the Great Depression. We also find that some other predictions of the theories are at variance with the data.