Research Database

Business cycles appear to be large, persistent, and asymmetric relative to the shocks hitting the economy. This observation suggests the existence of an asymmetric amplification and propagation mechanism, which transforms the shocks into the observed movements in aggregate output. This article demonstrates, in a small open economy, how credit constraints can be such a mechanism. The article also shows, however, that the quantitative significance of the amplification which credit constraints can provide is sensitive to the quantitative specification of the underlying economy (especially factor shares).

One critical aspect of economic development is that productivity growth and a rising standard of living are realized through more roundabout methods of production and increasing specialization of intermediate inputs and producer services. We use an extended version of the Judd-Grossman-Helpman model of dynamic monopolistic competition to show that an economy that inherits a small range of specialized inputs can be trapped into a lower stage of development. The limited availability of specialized inputs forces the final goods producers to use a labor intensive technology, which in turns implies a small inducement to introduce new intermediate products. The start-up costs, which make the intermediate goods producers subject to dynamic increasing returns, and pecuniary externalities that result from the factor substitution in the final goods sector, play essential roles in the model.

Applied macroeconomists interested in identifying the sources of business cycle fluctuations typically have no more than 40 or 50 years of data at a quarterly frequency. With sample sizes that small, identification may not be possible even with correctly specified representations of the data. In this article, I investigate whether small samples are indeed a problem for some commonly used statistical representations. I compare three—a vector autoregressive moving average (VARMA), an unrestricted state space, and a restricted state space—that are all consistent with the same prototype business cycle model. The statistical representations that I consider differ in the amount of a priori theory that is imposed, but all are correctly specified. I find that the identifying assumptions of VARMAs and unrestricted state space representations are too minimal: the range of estimates for statistics of interest for business cycle researchers is so large as to be uninformative.

This paper discusses at an undergraduate level how forecast rationality can be tested. It explains that forecasters should correctly use any relevant information they knew in making their predictions. It shows that forecast rationality can be tested by determining whether the forecasters' prediction errors are predictable. After addressing what data and methods can be used for testing rationality, the paper presents tests of the price-forecast rationality of individual professional forecasters. Unlike results of previous studies, the test results show that those forecasters' price predictions appear to be rational.

This article analyzes some of the potential effects of increased international financial integration within a simple two-country model. In the model, the article considers a switch in the menu of internationally traded financial securities from bonds to complete contingent claims and examines the impact of this switch on the stochastic properties, including the cross-country correlations, of standard macroeconomic aggregates like output, consumption, and labor effort, as well as the trade balance.

This paper analyses how the wage and employment decisions of females are affected by past workforce participation and hours supplied. Our estimation methods exploit the fact that, when markets are complete, the Lagrange multiplier for an agent’s lifetime budget constraint always enters multiplicatively with the prices of (contingent claims to) consumption and leisure. Depending on the properties of the equilibrium price process, it is thus possible to predict the behavior of a wealthy agent by observing that of a poorer person living in a more prosperous world. This provides the key to estimating, nonparametrically, the expectations that enter the calculus of equilibrium decisionmaking, and ultimately the structural parameters which characterize preferences.

There are two major differences between Japan and the United States in the way saving is calculated in their national accounts. First, depreciation in Japanese national accounts is based on historical costs, which leads to an understatement of true depreciation and hence an overstatement of net saving. Second, government capital formation is not included in U.S. saving. This article adjusts the official Japanese saving numbers by evaluating depreciation at replacement costs and excluding government capital formation from saving. Doing so significantly reduces the apparent gap between the national saving rates of the two countries. Since 1970 Japan's national saving rate has been declining to the stationary U.S. rate. This trend, however, has been reversed in recent years. In contrast, Japan's wealth-to-income ratio (excluding land), after declining in the late 1950s, has been rising toward the U.S. ratio and has reached the U.S. level in 1987.

We use a regime-switching model of real GNP growth to examine the duration dependence of business cycles. The model extends Hamilton (1989) and Durland and McCurdy (1994) and is estimated using both the postwar NIPA data and the secular data constructed by Balke-Gordon. We find that an expansion is more likely to end at a young age, that a contraction is more likely to end at an old age, that output growth slows over the course of an expansion, that a decline in output is mild at the beginning of a contraction, and that long expansions are followed by long contractions. This evidence taken together provides no support for the clustering of the whole-cycle around seven-to-ten year durations.

Three key features of the employment process in the U.S. economy are that job creation is procyclical, job destruction is countercyclical, and job creation is less volatile than job destruction. These features are also found at the sectoral (goods and services) level. The paper develops, calibrates, and simulates a two sector general equilibrium model including both aggregate and sectoral shocks. The behavior of the model economy mimics the job creation and destruction facts. Sectoral shocks play a significant role in determining the aggregate level of nonemployment.

This essay argues that monetary theories should not contain an undefined object labeled money. Among existing theories that do not satisfy that dictum are models which assume that real balances are arguments of utility or production functions and models which assume cash-in-advance constraints. A main weakness of theories that do not satisfy the dictum is that they cannot address questions about which objects constitute money. Theories that do satisfy the dictum are those which specify assets by their physical properties and which permit the assets’ role in exchange to be endogenous. The essay briefly describes one such theory, a random matching model with assets that differ according to whether they throw off real dividends.