Research Database

We compare the statistical properties of prices of U.S. treasury bills to those generated by a theoretical dynamic exchange economy with complete markets. We show that the model can account for neither the sign nor the magnitude of average risk premiums in forward prices and holding-period returns. The economy is also incapable of generating enough variation in risk premiums to account for rejections of the expectations hypothesis with treasury bill data. These conclusions add to the growing list of empirical deficiencies of the representative agent model of asset pricing.

No, and maybe not.

We develop a Q model of investment with multiple capital goods that delivers a one-to-one relation between the growth rate of the capital aggregate and the stock market-based Q. We estimate the growth-Q relation using a panel of over six hundred Japanese manufacturing firms taking into account the endogeneity of Q. Identification is achieved by combining the theoretical structure of the Q model and an assumed serial correlation structure of the technology shock that comprises the error term in the growth-Q relation. The Q variable is significantly related to firm growth. Much, but not all, of the apparent explanatory power of cash flow disappears if its endogeneity is corrected for. The estimated Q coefficient is not implausibly small if the growth rate of the capital aggregate contains measurement error.

The paper first locates quarters in the early 1970s at which the covariance matrices of the innovation vectors have shifted for the real GNPs of the USA, West Germany and Japan treated as univariate series. The paper then exhibits differences in the impulse response time profiles of the two models estimated from the data primarily before and after the break as a concise summary of the changes in dynamic interactions of the three real GNPs.

The motive to hold inventories purely in the hope of profiting from a price increase is called the speculative motive. This motive has received considerable attention in the literature. However, existing studies do not have a clear implication for how large it is quantitatively. This paper incorporates the speculative motive for holding inventories into an otherwise standard real business cycle model and finds that empirically plausible parameterizations of the model result in an average inventory stock to output ratio that is virtually zero. For this reason, we conclude that the quantitative magnitude of the speculative role for holding inventories in this model is quite small. This suggests the possibility that the study of aggregate economic phenomena can safely abstract from inventory speculation.

This paper presents a unified approach to nonlinear and nonstationary time-series analysis for a fairly wide class of linear time variable parameter (TVP) or nonlinear systems. The method theory exploits recursive filtering and fixed interval smoothing algorithms to derive TVP linear model approximations to the nonlinear or nonstationary stochastic system, on the basis of data obtained from the system during planned experiments or passive monitoring exercises. This TVP model includes the State Dependent type of Model (SDM) as a special case, and two particular SDM forms, due to Priestly and Young, are discussed in detail. The paper concludes with three practical examples: the first based on the modelling of data from a simulated nonlinear growth equation; the second concerned with the adaptive forecasting and smoothing of the Box-Jenkins Airline Passenger data; and the third providing a critical appraisal of state dependent modelling applied to the famous Sunspot time-series.

Two mechanisms are considered through which money can play a role in a real business cycle model. One is in the form of aggregate price surprises when there is heterogeneity across individuals or groups of individuals (“islands”). These shocks affect the accuracy of information about real compensation that can be extracted from observed wage rates. Another, perhaps complementary, mechanism is that the amount of desired liquidity services varies over the cycle due to a trade-off between real money and leisure. This mechanism leads to price fluctuations even when the nominal money stock does not fluctuate. As is the case for the U.S. economy over the postwar period, the price level is then countercyclical. A key finding is that with neither mechanism do nominal shocks account for more than a small amount of variability in real output and in hours worked. Indeed, output variability may very well be lower the larger the variance of price surprises is.

In a stochastic equilibrium model some stochastic processes are usually exogenously given, while others are either chosen optimally by agents or emerge from market equilibrium conditions. When we simulate such a model, often we aim at studying the relations among variables in the model as we vary parameters of policy and of behavior of economic agents. We are no more certain (indeed often less certain) of what is reasonable or interesting behavior for the exogenous variables (some of which may be unobservable) than of the variables chosen by agents or fixed in markets. It turns out that if we are flexible about which variables’ behavior we take as given in the model solution computation, freeing ourselves from the convention that the variables exogenous to the model economy must be taken as given in the simulation computations, great computational savings may result.

This paper describes and evaluates P-Star (P*), a new method to forecast inflation trends which was introduced by the Federal Reserve Board of Governors in the summer of 1989. The paper examines how well P* would have done, compared with eight other forecasting methods, had all of these methods been used to forecast inflation in the 1970s and 1980s. P* turns out to be not an exceptionally good or bad way to forecast inflation.

It is argued that economists ought to recognize that modeling in different styles will be appropriate for different purposes or different stages in the development of an area of economics. As an example, the paper displays simulations of a stochastic general equilibrium model which shed light on the interpretation of widely discussed small macroeconomic vector autoregressive models connecting monetary variables to output and prices.