Research Database

Most models of aggregate economic activity, like the standard neoclassical growth model, ignore the fact that equipment and structures are maintained and repaired. Once physical capital is purchased in these models, there are typically no more decisions made regarding its use. The theme of this article is that there is evidence to suggest that incorporating expenditures on the maintenance and repair of physical capital into models of aggregate economic activity will change the quantitative answers to some key questions that have been addressed with these models. This evidence is primarily from a little-used economywide survey in Canada. The survey shows that the activity of maintaining and repairing equipment and structures is an activity that is generally both large relative to investment and a substitute for investment to some extent—and to a large extent during some episodes.

This study examines the behavior of money, inflation, and output under fiat and commodity standards to better understand how changes in monetary policy affect economic activity. Using long-term historical data for 15 countries, the study finds that the growth rates of various monetary aggregates are more highly correlated with inflation and with each other under fiat standards than under commodity standards. Money growth, inflation, and output growth are also higher under fiat standards. In contrast, the study does not find that money growth is more highly correlated with output growth under one type of standard than under the other.

Recent monetary history has been characterized by monetary authorities that appear to shift periodically between distinct policy regimes associated with higher or lower average rates of money creation. As policy regimes are not directly observable and as the rate of monetary expansion varies for reasons other than regime changes, the general public must form beliefs over current monetary policy based on historical realizations of money growth rates. Depending on the parameters governing the behaviour of monetary policy, beliefs (and therefore inflation forecasts) may evolve very slowly in the wake of actual regime changes, thereby exacerbating the costs of a disinflation policy. The quantitative importance of slowly adjusting beliefs is evaluated in the context of a computable general equilibrium model.

We provide a simple explanation for the observation that the variance of job destruction is greater than the variance of job creation: job creation is costlier at the margin than job destruction. As Caballero [2] has argued, asymmetric employment adjustment costs at the establishment level need not imply asymmetric volatility of aggregate job flows. We construct an equilibrium model in which (S,s)-type employment policies respond endogenously to aggregate shocks. The microeconomic asymmetries in the model can dampen the response of total job creation to an aggregate shock and cause it to be less volatile than total job destruction. This is so even though aggregate shocks are symmetrically distributed.

This paper examines several grounds for doubting the value of much of the special attention recently devoted to unit root econometrics. Unit root hypotheses are less well connected to economic theory than is often suggested or assumed; distribution theory for tests of other hypotheses in models containing unit roots are less often affected by the presence of unit roots than has been widely recognized; and the Bayesian inferential theory for dynamic models is largely unaffected by the presence of unit roots. The paper displays an example to show that when Bayesian probability statements and classical marginal significance levels diverge as they do for unit root models, the marginal significance levels are misleading. The paper shows how to carry out Bayesian inference when discrete weight is given to the unit root null hypothesis in a univariate model.

In this paper, we develop a model of money and reserve-holding banks. We allow for private liabilities to circulate as media of exchange in a random-matching framework. Some individuals, which we identify as banks, are endowed with a technology to issue private notes and to keep reserves with a clearinghouse. Bank liabilities are redeemed according to a stochastic process that depends on the endogenous trades. We find conditions under which note redemptions act as a force that is sufficient to stabilize note issue by the banking sector.

The state vector in the innovation representation is asymptotically the most efficient instrumental variable estimator for the observation matrix C. The paper compares small sample properties of IV estimators for C, the dynamic matrix A and other matrices with the system theoretic estimators described in Aoki (1987) by a small scale Monte Carlo simulations. The IV estimators appear to be about the same as the system theoretic ones as far as their small sample properties are concerned. The covariance matrix of the state vector calculated from the IV point of view are also compared with the solutions of the Riccati equations. The simulation results show that they have quite similar sample means and standard deviations. This method of calculating the state vector covariance matrices may be computationally faster than solving the Riccati equation by the Schur decomposition algorithm.

This paper takes up Bayesian inference in a general trend stationary model for macroeconomic time series with independent Student-t disturbances. The model is linear in the data, but nonlinear in parameters. An informative but nonconjugate family of prior distributions for the parameters is introduced, indexed by a single parameter which can be readily elicited. The main technical contribution is the construction of posterior moments, densities, and odds ratios using a six-step Gibbs sampler. Mappings from the index parameter of the family of prior distribution to posterior moments, densities, and odds ratios are developed for several of the Nelson-Plosser time series. These mappings show that the posterior distribution is not even approximately Gaussian, and indicate the sensitivity of the posterior odds ratio in favor of difference stationarity to the choice of the prior distribution.

For at least the next two years, the U.S. economy will grow more slowly than it has on average since World War II. This is the forecast of a Bayesian vector autoregression model developed and used by researchers at the Minneapolis Federal Reserve Bank. The model's previous forecast—of a very weak start to the 1991–92 recovery—was remarkably accurate. Both forecasts are supported by evidence on long-term problems among consumers, in the commercial real estate industry, and at all levels of government. These problems will most likely constrain economic growth for years, although short spurts of strength could appear anytime, due to unpredictable special factors.

Often, researchers wish to analyze nonlinear dynamic discrete-time stochastic models. This paper provides a toolkit for solving such models easily, building on log-linearizing the necessary equations characterizing the equilibrium and solving for the recursive equilibrium law of motion with the method of undetermined coefficients. The innovation here is to demonstrate that log-linearizing the nonlinear equations can usually be done without the need for explicit differentiation, to extend the method of undetermined coefficients to models with more endogenous state variables than expectational equations, to provide a general solution and to provide frequency-domain techniques to calculate the second order properties of the model in its HP-filtered version without resorting to simulations. Since the method is an Euler-equation based approach rather than an approach based on solving a social planners problem, models with externalities or distortionary taxation do not pose additional problems. MATLAB programs to carry out the calculations in this paper are made available. This paper should be useful for researchers and Ph.D. students alike.

We analyze a real business cycle model in which the government optimally chooses public investment and nonmilitary current expenditures, to maximize the welfare of the representative private agent. We characterize the optimal response of endogenous spending to shocks to technology and to military expenditures. Comovements between the components of government spending and other macroeconomic aggregates predicted by the model are compared with the corresponding comovements in the U.S. data. The model captures the qualitative features of the relative volatilities of the components of government spending quite well, but predicts too high correlations between the components of government spending and output.

This paper describes and analyzes the 1990–92 economic forecasts of a Bayesian vector autoregression model developed by researchers at the Minneapolis Fed. The model's 1990 forecast was pretty bad—too optimistic about both inflation and economic growth, especially growth in consumption and housing. An analysis of the model's errors, however, turns up no reason to think the model is unsound. Based on data available on November 30, 1990, the model predicts weak economic conditions for the next two years: a likely recession in 1991 and moderate inflation and weak overall growth in 1991–92. The paper includes a technical appendix that describes how to statistically compare the accuracy of two sets of forecasts.

The goal of this article is to summarize the main trends in the earnings and employment distribution in the United States using data drawn from the March Current Population Surveys covering the period between 1961 and 2002. We show that inequality started to increase for men in 1974, and for women in 1981, and for both genders inequality continued to increase throughout 2002. During the same period the wage premium of college graduates over non-college workers increased substantially and the ratio of college educated workers to non-college workers also increased. These facts support the popular skill-biased technical change (SBTC) hypothesis. However, other facts raise some doubts about the SBTC hypothesis. First, the college wage premium is mainly due to workers with a postgraduate degree, but their increase in the labor force started much earlier than the spectacular rise in their wages. Also there has been no marked change in recent decades in the occupational distribution of workers. However, the earning premium of professional over blue collar workers followed the same trend as the college earning premium. And finally, the most dramatic changes in the labor market took place among women.

Previous investigations of whether the volatility of the U.S. economy diminished after World War II have been inconclusive because of questionable prewar macroeconomic aggregates. We examine, more broadly, the hypothesis of the stabilization of the postwar economy by focusing on the duration of business cycles, rather than their amplitude; in the process, we avoid the debate about the quality of prewar aggregates. Using distribution-free statistics, we find clear evidence of postwar duration stabilization in terms of a shift toward longer expansions and shorter contractions. Moreover, we find no shift in whole-cycle durations, which suggests a reallocation of the business cycle away from contraction and toward expansion.

Many traditional macroeconomic models do not have determinate predictions for the path of inflation: even for a given specification of money supplies, many paths of inflation are consistent with equilibrium. According to the fiscal theory of the price level, fiscal policy can be used to select which of these many paths actually occur. This article explains the fiscal theory of the price level and discusses its empirical and policy implications. The article argues that the theory is equivalent to giving the government an ability to choose among equilibria.

This study tests experimentally whether the ability of subjects to play a noncooperative game’s mixed-strategy equilibrium (to make their play unpredictable) is affected by how much information subjects have about the structure of the game. Subjects played the mixed-strategy equilibrium when they had all the information about other players’ payoffs and actions, but not otherwise. Previous research has shown that players of a game can play a mixed-strategy equilibrium if they observe the actions of all players and use sophisticated Bayesian learning to infer the likely payoffs to other players. The result of this study suggests that the subjects in our experiments did not use sophisticated Bayesian learning. The result also suggests that economists should be careful about assuming in their models that people can easily infer everyone else’s payoffs.

This paper studies a general equilibrium model with multiple stages of production and asynchronized price setting that provides a new explanation for the observed persistent real effects of monetary shocks. The key feature of the model is a vertical chain-of-production structure. In this model, the effects of monetary shocks on price adjustment are gradually dampened via the interactions of firms through their input-output relations and the timing of their price decisions. The model predicts that prices adjust by a smaller amount and less rapidly at later stages than at earlier stages, which is supported by empirical evidence. More importantly, an increase in the total number of stages in the model leads to not only uniformly larger and longer-lasting real effects but also flatter paths of aggregate output response. With sufficiently many stages, the price level adjustment becomes arbitrarily close to zero and the aggregate output tends to carry the full burden of adjustment. Thus, the chain-of-production mechanism goes a long way in propagating the shocks.

Previous business cycle models have made the assumption that all the variation in the labor input is either due to changes in hours per worker or changes in number of workers, but not both. In this paper, both vary. We think this a better model for estimating the contribution of Solow technology shocks to aggregate fluctuations. We find that about 70 percent of U.S. postwar cyclical fluctuations are induced by variations in the Solow technology parameter.