Creator: Kocherlakota, Narayana Rao, 1963- Series: Lucas expectations anniversary conference Abstract:
There were three important changes in the United States economy during the 1980s. First, from 1982-90, the decade featured the longest consecutive stretch of positive quarterly output growth in United States history. Second, wage inequality expanded greatly as the wages of highly skilled workers grew markedly faster than the wages of less skilled workers (Katz and Murphy (1992)). Finally, consumption inequality also expanded as the consumption of highly skilled workers grew faster than that of less skilled workers (Attanasio and Davis (1994)). This paper argues that these three aspects of the United States economic experience can be interpreted as being part of an efficient response to a macroeconomic shock given the existence of a particular technological impediment to full insurance. I examine the properties of efficient allocations of risk in an economic environment in which the outside enforcement of risksharing arrangements is infinitely costly. In these allocations, relative productivity movements have effects on both the current and future distribution of consumption across individuals. If preferences over consumption and leisure are nonhomothetic, these changes in the allocation of consumption will generate persistent cycles in aggregate output that do not occur in efficient allocations when enforcement is costless.
Stichwort: Business cycle, Skilled workers, Risk, and Consumption Fach: E32 - Prices, business fluctuations, and cycles - Business fluctuations ; Cycles and E21 - Macroeconomics : Consumption, saving, production, employment, and investment - Consumption ; Saving ; Wealth
Creator: Edge, Rochelle Mary, 1971- and Rudd, Jeremy Bay, 1970- Series: Joint commitee on business and financial analysis Abstract:
We add a nominal tax system to a sticky-price monetary business cycle model. When nominal interest income is taxed, the coefficient on inflation in a Taylor-type monetary policy rule must be significantly larger than one in order for the model economy to have a determinate rational expectations equilibrium. When depreciation is treated as a charge against taxable income, an even larger weight on inflation is required in the Taylor rule in order to obtain a determinate and stable equilibrium. These results have obvious implications for assessing the historical conduct of monetary policy.
Stichwort: Monetary policy, Business cycle, Cycle, Interest, Inflation, Policy, Prices, Monetary, Rational expectation, and Tax Fach: E43 - Money and interest rates - Determination of interest rates ; Term structure of interest rates, E31 - Prices, business fluctuations, and cycles - Price level ; Inflation ; Deflation, E12 - General aggregative models - Keynes ; Keynesian ; Post-Keynesian, and E32 - Prices, business fluctuations, and cycles - Business fluctuations ; Cycles
Creator: Erceg, Christopher J. and Levin, Andrew T. (Andrew Theo) Series: Joint commitee on business and financial analysis Abstract:
The durable goods sector is much more interest sensitive than the non-durables sector, and these sectoral differences have important implications for monetary policy. In this paper, we perform VAR analysis of quarterly US data and find that a monetary policy innovation has a peak impact on durable expenditures that is roughly five times as large as its impact on non-durable expenditures. We then proceed to formulate and calibrate a two-sector dynamic general equilibrium model that roughly matches the impulse response functions of the data. We derive the social welfare function and show that the optimal monetary policy rule responds to sector-specific inflation rates and output gaps. We show that some commonlyprescribed policy rules perform poorly in terms of social welfare, especially rules that put a higher weight on inflation stabilization than on output gap stabilization. By contrast, it is interesting that certain rules that react only to aggregate variables, including aggregate output gap targeting and rules that respond to a weighted average of price and wage inflation, may yield a welfare level close to the optimum given a typical distribution of shocks.
Stichwort: Monetary policy, Consumer, Business cycles, Durable goods, and Social welfare Fach: E31 - Prices, business fluctuations, and cycles - Price level ; Inflation ; Deflation, E52 - Monetary policy, central banking, and the supply of money and credit - Monetary policy, and E32 - Prices, business fluctuations, and cycles - Business fluctuations ; Cycles
Creator: Beaudry, Paul. and Portier, Franck. Series: Great depressions of the twentieth century Abstract:
In this paper we make the following three claims. (1), in contradiction with the conventional view according to which the French depression was very different to that observed in the US, we argue that there are more similarities than differences between the French and U.S. experiences and therefore a common explanation should be sought. (2), poor growth in technological opportunities appear neither necessary nor sufficient to account for the French depression. (3), changes in institutional and market regulation appear necessary to account for the overall changes observed over the period. Moreover, we show that the size of these institutional changes may by themselves be enough to quantatively explain the French depression. However, at this time, we have no theory to explain the size or the timing of these changes.
Stichwort: France, Market regulation, Stagnation, and Depression Fach: N14 - Macroeconomics and monetary economics ; Growth and fluctuations - Europe : 1913- and E32 - Prices, business fluctuations, and cycles - Business fluctuations ; Cycles
Creator: Chari, V. V., Kehoe, Patrick J., and McGrattan, Ellen R. Series: Joint committee on business and financial analysis 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 on 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 wedge plays at best a minor role.
Stichwort: Business cycle, Cycle, Economic fluctuations, Fluctuation, and Growth Fach: O41 - One, Two, and Multisector Growth Models, O47 - Economic growth and aggregate productivity - Measurement of economic growth ; Aggregate productivity ; Cross-country output convergence, and E32 - Prices, business fluctuations, and cycles - Business fluctuations ; Cycles
Creator: Azariadis, Costas. and Smith, Bruce D. (Bruce David), 1954-2002 Series: Finance, fluctuations, and development Abstract:
We study a variant of the one-sector neoclassical growth model of Diamond in which capital investment must be credit financed, and an adverse selection problem appears in loan markets. The result is that the unfettered operation of credit markets leads to a one-dimensional indeterminacy of equilibrium. Many equilibria display economic fluctuations which do not vanish asymptotically; such equilibria are characterized by transitions between a Walrasian regime in which the adverse selection problem does not matter, and a regime of credit rationing in which it does. Moreover, for some configurations of parameters, all equilibria display such transitions for two reasons. One, the banking system imposes ceilings on credit when the economy expands and floors when it contracts because the quality of public information about the applicant pool of potential borrowers is negatively correlated with the demand for credit. Two, depositors believe that returns on bank deposits will be low (or high): these beliefs lead them to transfer savings out of (into) the banking system and into less (more) productive uses. The associated disintermediation (or its opposite) causes banks to contract (expand) credit. The result is a set of equilibrium interest rates on loans that validate depositors' original beliefs. We investigate the existence of perfect foresight equilibria displaying periodic (possibly asymmetric) cycles that consist of m periods of expansion followed by n periods of contraction, and propose an algorithm that detects all such cycles.
Stichwort: Interest rates, Equilibrium, Credit markets, and Business cycles Fach: E51 - Monetary policy, central banking, and the supply of money and credit - Money supply ; Credit ; Money multipliers, E44 - Money and interest rates - Financial markets and the macroeconomy, O41 - One, Two, and Multisector Growth Models, and E32 - Prices, business fluctuations, and cycles - Business fluctuations ; Cycles