Creator: Smith, Bruce D. (Bruce David), 1954-2002 Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 232 Abstract:
A model of a "real" business cycle is produced in which labor market participants possess private information. A class of economies is considered in which interesting cycles cannot arise without private information. A methodology adapted from Kydland and Prescott (1982) is then employed to show that models based on private information can empirically confront salient features of postwar U.S. business cycles. Moreover, this can be done in a way which is consistent with existing microeconomic evidence on wages and labor supply. Finally, it is shown that the important features of the model related to private information are fairly general.
Stichwort: Assymetric information, Labor markets, Labor contracts, and Unemployment Fach: D82 - Asymmetric and Private Information; Mechanism Design and E32 - Business Fluctuations; Cycles
Creator: Bergoeing, Raphael, Kehoe, Patrick J., Kehoe, Timothy Jerome, 1953-, and Soto, Raimundo Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 292 Abstract:
Chile and Mexico experienced severe economic crises in the early 1980s. This paper analyzes four possible explanations for why Chile recovered much faster than did Mexico. Comparing data from the two countries allows us to rule out a monetarist explanation, an explanation based on falls in real wages and real exchange rates, and a debt overhang explanation. Using growth accounting, a calibrated growth model, and economic theory, we conclude that the crucial difference between the two countries was the earlier policy reforms in Chile that generated faster productivity growth. The most crucial of these reforms were in banking and bankruptcy procedures.
Stichwort: Depression, Growth accounting, Mexico, Chile, and Total factor productivity Fach: E32 - Business Fluctuations; Cycles, O40 - Economic Growth and Aggregate Productivity: General, and N16 - Economic History: Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations: Latin America; Caribbean
Creator: Eggertsson, Gauti B., Mehrotra, Neil R., and Robbins, Jacob A. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 742 Abstract:
This paper formalizes and quantifies the secular stagnation hypothesis, defined as a persistently low or negative natural rate of interest leading to a chronically binding zero lower bound (ZLB). Output-inflation dynamics and policy prescriptions are fundamentally different from those in the standard New Keynesian framework. Using a 56-period quantitative life cycle model, a standard calibration to US data delivers a natural rate ranging from -1.5% to -2%, implying an elevated risk of ZLB episodes for the foreseeable future. We decompose the contribution of demographic and technological factors to the decline in interest rates since 1970 and quantify changes required to restore higher rates.
Stichwort: Secular stagnation, Zero lower bound, and Monetary policy Fach: E32 - Business Fluctuations; Cycles, E31 - Price Level; Inflation; Deflation, and E52 - Monetary Policy
Creator: Smith, Bruce D. (Bruce David), 1954-2002 Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 230 Abstract:
An overlapping generations model is developed that contains labor markets in which adverse selection problems arise. As a response to these problems, quantity rationing of labor occurs. In addition, the model is capable of generating (a) random employment and prices despite the absence of underlying uncertainty in equilibrium; (b) a statistical (nondegenerate) Phillips curve; (c) procyclical movements in productivity; (d) correlations between aggregate demand and unemployment (and output); (e) an absence of correlation between unemployment (employment) and real wages. In addition, the Phillips curve obtained typically has the "correct" slope. Finally, the model reconciles the theoretical importance and observed unimportance of intertemporal substitution effects, and explains why price level stability may be a poor policy objective.
Stichwort: Philips curve, Prices, Labor, Productivity, Money, and Unemployment Fach: E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity, E12 - General Aggregative Models: Keynes; Keynesian; Post-Keynesian, and E32 - Business Fluctuations; Cycles
Creator: McGrattan, Ellen R. and Prescott, Edward C. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 494 Abstract:
During the downturn of 2008–2009, output and hours fell significantly while labor productivity rose. These facts have led many to conclude that there is a significant deviation between observations and current macrotheories that assume business cycles are driven, at least in part, by fluctuations in total factor productivities of firms. We show that once investment in intangible capital is included in the analysis, there is no inconsistency. Measured labor productivity rises if the fall in output is underestimated; this occurs when there are large unmeasured intangible investments. Microevidence suggests that these investments are large and cyclically important.
Stichwort: Business cycles, Productivity, and Intangible capital Fach: E32 - Business Fluctuations; Cycles and E13 - General Aggregative Models: Neoclassical
Creator: Gavazza, Alessandro, Mongey, Simon J., and Violante, Giovanni L. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 553 Abstract:
We develop an equilibrium model of firm dynamics with random search in the labor market where hiring firms exert recruiting effort by spending resources to fill vacancies faster. Consistent with microevidence, fast-growing firms invest more in recruiting activities and achieve higher job-filling rates. These hiring decisions of firms aggregate into an index of economy-wide recruiting intensity. We study how aggregate shocks transmit to recruiting intensity, and whether this channel can account for the dynamics of aggregate matching efficiency during the Great Recession. Productivity and financial shocks lead to sizable pro-cyclical fluctuations in matching efficiency through recruiting effort. Quantitatively, the main mechanism is that firms attain their employment targets by adjusting their recruiting effort in response to movements in labor market slackness.
Stichwort: Recruiting intensity, Firm dynamics, Aggregate matching efficiency, Vacancies, Unemployment, and Macroeconomic shocks Fach: E32 - Business Fluctuations; Cycles, J64 - Unemployment: Models, Duration, Incidence, and Job Search, G01 - Financial Crises, D25 - Intertemporal Firm Choice: Investment, Capacity, and Financing, J23 - Labor Demand, J63 - Labor Turnover; Vacancies; Layoffs, E44 - Financial Markets and the Macroeconomy, and E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
Creator: Chari, V. V., Kehoe, Patrick J., and McGrattan, Ellen R. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 364 Abstract:
The central finding of the recent structural vector autoregression (SVAR) literature with a differenced specification of hours is that technology shocks lead to a fall in hours. Researchers have used this finding to argue that real business cycle models are unpromising. We subject this SVAR specification to a natural economic test and show that when applied to data from a multiple-shock business cycle model, the procedure incorrectly concludes that the model could not have generated the data as long as demand shocks play a nontrivial role. We also test another popular specification, which uses the level of hours, and show that with nontrivial demand shocks, it cannot distinguish between real business cycle models and sticky price models. The crux of the problem for both SVAR specifications is that available data require a VAR with a small number of lags and such a VAR is a poor approximation to the model’s VAR.
Stichwort: Vector autoregressions, Real business cycle, Impulse response, and Technology shocks Fach: E32 - Business Fluctuations; Cycles, C51 - Model Construction and Estimation, E20 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy: General (includes Measurement and Data), E13 - General Aggregative Models: Neoclassical, E30 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data), E37 - Prices, Business Fluctuations, and Cycles: Forecasting and Simulation: Models and Applications, and C32 - Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
Creator: Liu, Zheng, Waggoner, Daniel F., and Zha, Tao Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 653 Abstract:
The possibility of regime shifts in monetary policy can have important effects on rational agents’ expectation formation and equilibrium dynamics. In a DSGE model where the monetary policy rule switches between a dovish regime that accommodates inflation and a hawkish regime that stabilizes inflation, the expectation effect is asymmetric across regimes. Such an asymmetric effect makes it difficult, but still possible, to generate substantial reductions in the volatilities of inflation and output as the monetary policy switches from the dovish regime to the hawkish regime.
Stichwort: Structural breaks, Monetary policy regime, Expectations formation, Lucas critique, and Macroeconomic volatility Fach: E32 - Business Fluctuations; Cycles, E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems, and E52 - Monetary Policy
Creator: Neumeyer, Pablo Andrés and Perri, Fabrizio Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 335 Abstract:
We find that in a sample of emerging economies business cycles are more volatile than in developed ones, real interest rates are countercyclical and lead the cycle, consumption is more volatile than output and net exports are strongly countercyclical. We present a model of a small open economy, where the real interest rate is decomposed in an international rate and a country risk component. Country risk is affected by fundamental shocks but, through the presence of working capital, also amplifies the effects of those shocks. The model generates business cycles consistent with Argentine data. Eliminating country risk lowers Argentine output volatility by 27% while stabilizing international rates lowers it by less than 3%.
Stichwort: International business cycles, Country risk, Sudden stops, Working capital, and Financial crises Fach: E32 - Business Fluctuations; Cycles, F41 - Open Economy Macroeconomics, and F32 - Current Account Adjustment; Short-term Capital Movements