Creator: Geweke, John Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 532 Abstract:
This paper integrates and extends some recent computational advances in Bayesian inference with the objective of more fully realizing the Bayesian promise of coherent inference and model comparison in economics. It combines Markov chain Monte Carlo and independence Monte Carlo with importance sampling to provide an efficient and generic method for updating posterior distributions. It exploits the multiplicative decomposition of marginalized likelihood into predictive factors, to compute posterior odds ratios efficiently and with minimal further investment in software. It argues for the use of predictive odds ratios in model comparison in economics. Finally, it suggests procedures for public reporting that will enable remote clients to conveniently modify priors, form posterior expectations of their own functions of interest, and update the posterior distribution with new observations. A series of examples explores the practicality and efficiency of these methods.
This paper was prepared for the inaugural Colin Clark Lecture, Australasian Meetings of the Econometric Society, July 1994.
Keyword: Computation, Model comparison, Bayesian inference, and Econometric modeling Subject (JEL): C53 - Forecasting Models; Simulation Methods and C11 - Bayesian Analysis: General
Creator: Cole, Harold Linh, 1957- and Kehoe, Patrick J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 534 Keyword: Loans and Debt Subject (JEL): F34 - International Lending and Debt Problems and E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
Creator: Cooley, Thomas F., Hansen, Gary D. (Gary Duane), and Prescott, Edward C. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 535 Keyword: Equilibrium and Business cycle Subject (JEL): E13 - General Aggregative Models: Neoclassical and E32 - Business Fluctuations; Cycles
Creator: Aiyagari, S. Rao and Peled, Dan Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 503 Abstract:
It is often argued that with a positively skewed income distribution (median less than mean) a majority voting over proportional tax rates would result in higher tax rates than those that maximize average welfare, and will accordingly reduce aggregate savings. We reexamine this view in a capital accumulation model, in which distorting redistributive taxes provide insurance against idiosyncratic shocks, and income distributions evolve endogenously. We find small differences of either sign between the tax rates set by a majority voting and a utilitarian government, for reasonable parametric specifications. We show how these differences reflect a greater responsiveness of a utilitarian government to the average need for the insurance provided by the tax-redistribution scheme. These conclusions remain true despite the fact that the model simulations produce positively skewed distributions of total income across agents.
Keyword: Votes, Taxes, and Income distribution Subject (JEL): E62 - Fiscal Policy and D72 - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
Creator: Backus, David and Kehoe, Patrick J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 323 Abstract:
We examine deviations from trend of net exports and other components of GNP for the United States and attempt to build models consistent with their behavior. The most striking fact is that net exports have consistently been countercyclical. We show, first, that dynamic pure-exchange models can only produce a negative correlation between net exports and GNP if the variance of consumption exceeds that of output. In (he United Slates it does not, so this class of models cannot explain observed comovements between output and trade. We then examine government spending and nontraded goods as potential remedies, but show that their behavior is either inconsistent with the data or can be made consistent with any pattern of comovements. The most promising model introduces production and capital formation. Fluctuations are driven by country-specific productivity shocks, in which high productivity domestically leads to high domestic investment and a deficit in the balance of trade. This theory also receives support from the large negative covariance between net exports and investment in American data.
Keyword: Investment, Risk sharing, Non-traded goods, Government deficits, Competitive equilibrium, and Productivity Subject (JEL): F21 - International Investment; Long-term Capital Movements, F30 - International Finance: General, and E32 - Business Fluctuations; Cycles
Creator: Boyd, John H. and Smith, Bruce D. (Bruce David), 1954-2002 Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 522 Abstract:
We consider a two country growth model with international capital markets. These markets fund capital investment in both countries, and operate subject to a costly state verification (CSV) problem. Investors in each country require some external finance, but also provide internal finance, which mitigates the CSV problem. When two identical (except for their initial capital stocks) economies are closed, they necessarily converge monotonically to the same steady state output level. Unrestricted international financial trade precludes otherwise identical economies from converging, and poor countries are necessarily net lenders to rich countries. Oscillation in real activity and international capital flows can occur.
Keyword: CSV, Open economy, International lending, Costly state verification, Capital investment, Closed economy, Credit rationing, International capital markets, and Credit Subject (JEL): F34 - International Lending and Debt Problems and O16 - Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
Creator: Altug, Sumru Series: Working paper (Federal Reserve Bank of Minneapolis. Research Dept.) Number: 343 Description:
"These notes were... initially circulated as Federal Reserve Bank of Minneapolis Working Paper 343, 1987."
Keyword: Money stock, Bubble, Phillip Cagan, Price bubbles, Currency reform, Real cash balances, Hyperinflation, and Price fluctuations Subject (JEL): E51 - Money Supply; Credit; Money Multipliers and E31 - Price Level; Inflation; Deflation
Creator: Kehoe, Timothy J. and Prescott, Edward C. Series: Staff Report (Federal Reserve Bank of Minneapolis. Research Dept.) Number: 418 Abstract:
Three of the arguments made by Temin (2008) in his review of Great Depressions of the Twentieth Century are demonstrably wrong: that the treatment of the data in the volume is cursory; that the definition of great depressions is too general and, in particular, groups slow growth experiences in Latin America in the 1980s with far more severe great depressions in Europe in the 1930s; and that the book is an advertisement for the real business cycle methodology. Without these three arguments — which are the results of obvious conceptual and arithmetical errors, including copying the wrong column of data from a source — his review says little more than that he does not think it appropriate to apply our dynamic general equilibrium methodology to the study of great depressions, and he does not like the conclusion that we draw: that a successful model of a great depression needs to be able to account for the effects of government policy on productivity.
In 2008, Peter Temin wrote a review of the book that appeared in the Journal of Economic Literature. This staff report and accompanying data file are in response to the review.
Citation for review: Temin, Peter. 2008. "Real Business Cycle Views of the Great Depression and Recent Events: A Review of Timothy J. Kehoe and Edward C. Prescott's Great Depressions of the Twentieth Century." Journal of Economic Literature, 46 (3): 669-84. DOI: https://doi.org/10.1257/jel.46.3.669