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Creator: McGrattan, Ellen R. and Prescott, Edward C. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 694 Abstract:
Prior to the mid-1980s, labor productivity growth was a useful barometer of the U.S. economy’s performance: it was low when the economy was depressed and high when it was booming. Since then, labor productivity has become significantly less procyclical. In the recent downturn of 2008–2009, labor productivity actually rose as GDP plummeted. These facts have motivated the development of new business cycle theories because the conventional view is that they are inconsistent with existing business cycle theory. In this paper, we analyze recent events with existing theory and find that the labor productivity puzzle is much less of a puzzle than previously thought. In light of these findings, we argue that policy agendas arising from new untested theories should be disregarded.
Palabra clave: Labor productivity, Nonneutral technology change, RBC models, Intangible capital, and Labor wedge Tema: E13 - General Aggregative Models: Neoclassical, E32 - Business Fluctuations; Cycles, and E01 - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
Creator: McGrattan, Ellen R. and Prescott, Edward C. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 610 Abstract:
U.S. stock prices have increased much faster than gross domestic product GDP) in the postwar period. Between 1962 and 2000, corporate equity value relative to GDP nearly doubled. In this paper, we determine what standard growth theory says the equity value should be in 1962 and 2000, the two years for which our steady-state assumption is a reasonable one. We find that the actual valuations were close to the theoretical predictions in both years. The reason for the large run-up in equity value relative to GDP is that the average tax rate on dividends fell dramatically between 1962 and 2000. We also find that, given legal constraints that effectively prohibited the holding of stocks as reserves for pension plans, there is no equity premium puzzle in the postwar period. The average returns on debt and equity are as theory predicts.
Tema: E13 - General Aggregative Models: Neoclassical, G12 - Asset Pricing; Trading Volume; Bond Interest Rates, and H30 - Fiscal Policies and Behavior of Economic Agents: General
Creator: Kehoe, Patrick J., Midrigan, Virgiliu, and Pastorino, Elena Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 566 Abstract:
Modern business cycle theory focuses on the study of dynamic stochastic general equilibrium models that generate aggregate fluctuations similar to those experienced by actual economies. We discuss how this theory has evolved from its roots in the early real business cycle models of the late 1970s through the turmoil of the Great Recession four decades later. We document the strikingly different pattern of comovements of macro aggregates during the Great Recession compared to other postwar recessions, especially the 1982 recession. We then show how two versions of the latest generation of real business cycle models can account, respectively, for the aggregate and the cross-regional fluctuations observed in the Great Recession in the United States.
Palabra clave: New Keynesian models, Financial frictions, and External validation Tema: E52 - Monetary Policy, E13 - General Aggregative Models: Neoclassical, E32 - Business Fluctuations; Cycles, and E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
Creator: McGrattan, Ellen R. and Ohanian, Lee E. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 315 Abstract:
There is much debate about the usefulness of the neoclassical growth model for assessing the macroeconomic impact of fiscal shocks. We test the theory using data from World War II, which is by far the largest fiscal shock in the history of the United States. We take observed changes in fiscal policy during the war as inputs into a parameterized, dynamic general equilibrium model and compare the values of all variables in the model to the actual values of these variables in the data. Our main finding is that the theory quantitatively accounts for macroeconomic activity during this big fiscal shock.
Palabra clave: Neoclassical Theory, Fiscal Shocks, and World War II Tema: E13 - General Aggregative Models: Neoclassical and E62 - Fiscal Policy
Creator: Kehoe, Patrick J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 367 Palabra clave: Stockman, Risk, Equilibrium, Shocks, Dynamic economy, and Stochastic comparative statistics Tema: C19 - Econometric and Statistical Methods: Other and E13 - General Aggregative Models: Neoclassical
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 Palabra clave: Equilibrium and Business cycle Tema: E13 - General Aggregative Models: Neoclassical and E32 - Business Fluctuations; Cycles
Creator: Aiyagari, S. Rao Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 518 Abstract:
This paper is about a useful way of taking account of frictions in asset pricing and macroeconomics. I start by noting that complete frictionless markets models have a number of empirical deficiencies. Then I suggest an alternative class of models with incomplete markets and heterogenous agents which can also accommodate a variety of other frictions. These models are quantitatively attractive and computationally feasible and have the potential to overcome many or all of the empirical deficiencies of complete frictionless markets models. The incomplete markets model can also differ significantly from the complete frictionless markets model on some important policy questions.
Palabra clave: Macroeconomics, Incomplete markets, Frictionless market model, Asset pricing, and Friction Tema: G12 - Asset Pricing; Trading Volume; Bond Interest Rates and E13 - General Aggregative Models: Neoclassical
Creator: McGrattan, Ellen R. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 670 Abstract:
Previous studies quantifying the effects of increased taxation during the U.S. Great Depression find that its contribution is small, in accounting for both the downturn in the early 1930s and the slow recovery after 1934. This paper shows that this conclusion rests critically on the assumption that the only taxable capital income is business profits. Effects of capital taxation are much larger when taxes on property, capital stock, excess profits, undistributed profits, and dividends are included in the analysis. When fed into a general equilibrium model, the increased taxes imply significant declines in investment and equity values and nontrivial declines in gross domestic product (GDP) and hours of work. Of particular importance during the Great Depression was the dramatic rise in the effective tax rate on corporate dividends.
Tema: H25 - Business Taxes and Subsidies including sales and value-added (VAT), E13 - General Aggregative Models: Neoclassical, and E32 - Business Fluctuations; Cycles
Creator: Atkeson, Andrew and Kehoe, Patrick J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 606 Abstract:
During the Second Industrial Revolution, 1860–1900, many new technologies, including electricity, were invented. These inventions launched a transition to a new economy, a period of about 70 years of ongoing, rapid technical change. After this revolution began, however, several decades passed before measured productivity growth increased. This delay is paradoxical from the point of view of the standard growth model. Historians hypothesize that this delay was due to the slow diffusion of new technologies among manufacturing plants together with the ongoing learning in plants after the new technologies had been adopted. The slow diffusion is thought to be due to manufacturers’ reluctance to abandon their accumulated expertise with old technologies, which were embodied in the design of existing plants. Motivated by these hypotheses, we build a quantitative model of technology diffusion which we use to study this transition to a new economy. We show that it implies both slow diffusion and a delay in growth similar to that in the data.
Tema: O40 - Economic Growth and Aggregate Productivity: General, O47 - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence, E13 - General Aggregative Models: Neoclassical, O51 - Economywide Country Studies: U.S.; Canada, and L60 - Industry Studies: Manufacturing: General