Creator: Doan, Thomas., Litterman, Robert B., and Sims, Christopher A. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Dept.) Number: 243 Abstract:
This paper develops a forecasting procedure based on a Bayesian method for estimating vector autoregressions. The procedure is applied to ten macroeconomic variables and is shown to improve out-of-sample forecasts relative to univariate equations. Although cross-variables responses are damped by the prior, considerable interaction among the variables is shown to be captured by the estimates. We provide unconditional forecasts as of 1982:12 and 1963:3* We also describe how a model such as this can be used to make conditional projections and to analyse policy alternatives. As an example, we analyze a Congressional Budget Office forecast made in 1982:12. While no automatic causal interpretations arise from models like ours, they provide a detailed characterization of the dynamic statistical interdependence of a set of economic variables, which may help in evaluating causal hypotheses, without containing any such hypotheses themselves.
Stichwort: Macroeconomics, Bayesian methods, and Forecasting Fach: E27 - Macroeconomics : Consumption, saving, production, employment, and investment - Forecasting and simulation and C11 - Econometric and statistical methods : General - Bayesian analysis
Creator: Boot, Arnoud W. A. (Willem Alexander), 1960-, Greenbaum, Stuart I., and Thakor, Anjan V. Series: Economic growth and development Abstract:
The paper proposes a theory of ambiguous financial contracts. Leaving contractual contingencies unspecified may be optimal, even when stipulating them is costless. We show that an ambiguous contract has two advantages. First, it permits the guarantor to sacrifice reputational capital in order to preserve financial capital as well as information reusability in states where such tradeoff is optimal. Second, it fosters the development of reputation. This theory is then used to explain ambiguity in mutual fund contracts, bank loan commitments, bank holding company relationships, the investment banker's "highly confident" letter, non-recourse debt contracts in project financing, and other financial contracts.
Fach: G20 - Financial Institutions and Services: General and K12 - Contract Law
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: Rotemberg, Julio. Series: Lucas expectations anniversary conference Abstract:
I show that a simple sticky price model based on Rotemberg (1982) is consistent with a variety of facts concerning the correlation of prices, hours and output. In particular, I show that it is consistent with a negative correlation between the detrended levels of output and prices when the Beveridge-Nelson method is used to detrend both the price and output data. Such a correlation, i.e.,a negative correlation between the predictable movements in output and the predictable movements in prices is present (and very strong) in U.S. data. Consistent with the model, this correlation is stronger than correlations between prices and hours of work. I also study the size of the predictable price movements that are associated with predictable output movements as well as the degree to which there are predictable movements in monetary aggregates associated with predictable movements in output. These facts are used to shed light on the degree to which the Federal Reserve has pursued a policy designed to stabilize expected inflation.
Stichwort: Monetary policy, Output, Inflation, Federal Reserve, and Prices Fach: E31 - Prices, business fluctuations, and cycles - Price level ; Inflation ; Deflation, E24 - Macroeconomics : Consumption, saving, production, employment, and investment - Employment ; Unemployment ; Wages ; Intergenerational income distribution ; Aggregate human capital, E23 - Macroeconomics : Consumption, saving, production, employment, and investment - Production, and E50 - Monetary policy, central banking, and the supply of money and credit - General
Creator: Chari, V. V., Christiano, Lawrence J., and Eichenbaum, Martin S. Series: Finance, fluctuations, and development Abstract:
Different monetary aggregates covary very differently with short term nominal interest rates. Broad monetary aggregates like Ml and the monetary base covary positively with current and future values of short term interest rates. In contrast, the nonborrowed reserves of banks covary negatively with current and future interest rates. Observations like this 'sign switch' lie at the core of recent debates about the effects of monetary policy actions on short term interest rates. This paper develops a general equilibrium monetary business cycle model which is consistent with these facts. Our basic explanation of the 'sign switch' is that movements in nonborrowed reserves are dominated by exogenous shocks to monetary policy, while movements in the base and Ml are dominated by endogenous responses to non-policy shocks.
Stichwort: Monetary policy, Interest, Money, Shocks, Inside money, and Interest rates Fach: E43 - Money and interest rates - Determination of interest rates ; Term structure of interest rates and E51 - Monetary policy, central banking, and the supply of money and credit - Money supply ; Credit ; Money multipliers
Creator: Weinberg, John A. Series: Foundations of policy toward electronic money Abstract:
As a network, a payment system is likely to exhibit network externalities and perhaps some public good characteristics. Such properties may be more pronounced in an electronic payment system, because of its greater reliance on communication infrastructures with high fixed and low variable costs, for instance. This paper presents the basic economics of network externalities and reviews some basic principles regarding public goods. It then asks what these phenomena imply about the role of the Federal Reserve in emerging payment systems. The general conclusion is that there is reason to be skeptical that network externalities and public goods will be significant sources of market failure in electronic payment systems. These phenomena, by themselves, give rise to no particular, essential central bank role in these markets.
Stichwort: Network industries, Public goods, Electronic payment systems, Network externalities, Network services, Communication systems, Central banks, Payment systems, and Network markets Fach: E58 - Monetary policy, central banking, and the supply of money and credit - Central banks and their policies and E42 - Money and interest rates - Monetary systems ; Standards ; Regimes ; Government and the monetary system ; Payment systems