Creator: Christiano, Lawrence J. and Eichenbaum, Martin S. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 478 Description:
This technical appendix supports "Liquidity Effects, Monetary Policy, and the Business Cycle" in Journal of Money, Credit and Banking (November 1995, Vol. 27, No. 4, Pt. 1, pp. 1113-1136), https://doi.org/10.2307/2077793.
Keyword: Appendix, Computations, MATLAB, Monetary policy, Business cycles, Liquidity, and Mathematical computations Subject (JEL): E32 - Business Fluctuations; Cycles, Y10 - Data: Tables and Charts, and E52 - Monetary Policy
Creator: Jaimovich, Nir and Siu, Henry E. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 387 Abstract:
We investigate the consequences of demographic change for business cycle analysis. We find that changes in the age composition of the labor force account for a significant fraction of the variation in business cycle volatility observed in the U.S. and other G7 economies. During the postwar period, these countries experienced dramatic demographic change, although details regarding extent and timing differ from place to place. Using panel-data methods, we exploit this variation to show that the age composition of the workforce has a large and statistically significant effect on cyclical volatility. We conclude by relating these findings to the recent decline in U.S. business cycle volatility. Using both simple accounting exercises and a quantitative general equilibrium model, we find that demographic change accounts for a significant part of this moderation.
Subject (JEL): E32 - Business Fluctuations; Cycles and J11 - Demographic Trends, Macroeconomic Effects, and Forecasts
Creator: Chari, V. V., Kehoe, Patrick J., and McGrattan, Ellen R. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 364 Abstract:
The central finding of the recent structural vector autoregression (SVAR) literature with a differenced specification of hours is that technology shocks lead to a fall in hours. Researchers have used this finding to argue that real business cycle models are unpromising. We subject this SVAR specification to a natural economic test and show that when applied to data from a multiple-shock business cycle model, the procedure incorrectly concludes that the model could not have generated the data as long as demand shocks play a nontrivial role. We also test another popular specification, which uses the level of hours, and show that with nontrivial demand shocks, it cannot distinguish between real business cycle models and sticky price models. The crux of the problem for both SVAR specifications is that available data require a VAR with a small number of lags and such a VAR is a poor approximation to the model’s VAR.
Keyword: Vector autoregressions, Real business cycle, Impulse response, and Technology shocks Subject (JEL): E32 - Business Fluctuations; Cycles, C51 - Model Construction and Estimation, E20 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy: General (includes Measurement and Data), E13 - General Aggregative Models: Neoclassical, E30 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data), E37 - Prices, Business Fluctuations, and Cycles: Forecasting and Simulation: Models and Applications, and C32 - Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
Creator: Kehoe, Patrick J., Midrigan, Virgiliu, and Pastorino, Elena Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 566 Abstract:
Modern business cycle theory focuses on the study of dynamic stochastic general equilibrium models that generate aggregate fluctuations similar to those experienced by actual economies. We discuss how this theory has evolved from its roots in the early real business cycle models of the late 1970s through the turmoil of the Great Recession four decades later. We document the strikingly different pattern of comovements of macro aggregates during the Great Recession compared to other postwar recessions, especially the 1982 recession. We then show how two versions of the latest generation of real business cycle models can account, respectively, for the aggregate and the cross-regional fluctuations observed in the Great Recession in the United States.
Keyword: New Keynesian models, Financial frictions, and External validation Subject (JEL): E32 - Business Fluctuations; Cycles, E13 - General Aggregative Models: Neoclassical, E52 - Monetary Policy, and E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
Creator: Greenwood, Jeremy, 1953- and Huffman, Gregory W. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 138 Abstract:
A tax distorted real business cycle model is parameterized, calibrated, and solved numerically in an attempt to measure the size of Harberger Triangles relative to Okun Gaps. In particular, the model constructed is used to study, quantitatively, the impact of various distortional government tax and subsidy schemes. It is shown that the government can use tax policy to stabilize cyclical fluctuations, and this is done for the economy being studied. The benefits of implementing such a stabilization policy are calculated and compared with the size of the welfare gains realized from reducing various tax distortions.
Creator: McGrattan, Ellen R., Rogerson, Richard Donald, and Wright, Randall D. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 191 Abstract:
We estimate a dynamic general equilibrium model of the U.S. economy that includes an explicit household production sector and stochastic fiscal variables. We use our estimates to investigate two issues. First, we analyze how well the model accounts for aggregate fluctuations. We find that household production has a significant impact and reject a nested specification in which changes in the home production technology do not matter for market variables. Second, we study the effects of some simple fiscal policy experiments and show that the model generates different predictions for the effects of tax changes than similar models without home production.
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.
Keyword: Business cycle, Skilled workers, Risk, and Consumption Subject (JEL): E32 - Prices, business fluctuations, and cycles - Business fluctuations ; Cycles and E21 - Macroeconomics : Consumption, saving, production, employment, and investment - Consumption ; Saving ; Wealth
Creator: Gu, Chao and Wright, Randall D. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 689 Abstract:
We study models of credit with limited commitment, which implies endogenous borrowing constraints. We show that there are multiple stationary equilibria, as well as nonstationary equilibria, including some that display deterministic cyclic and chaotic dynamics. There are also stochastic (sunspot) equilibria, in which credit conditions change randomly over time, even though fundamentals are deterministic and stationary. We show this can occur when the terms of trade are determined by Walrasian pricing or by Nash bargaining. The results illustrate how it is possible to generate equilibria with credit cycles (crunches, freezes, crises) in theory, and as recently observed in actual economies.
Keyword: Credit and Cycles Subject (JEL): E51 - Money Supply; Credit; Money Multipliers and E32 - Business Fluctuations; Cycles
Creator: Azariadis, Costas, Bullard, James, and Ohanian, Lee E. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 255 Abstract:
Autoregressions of quarterly or annual aggregate time series provide evidence of trend-reverting output growth and of short-term dynamic adjustment that appears to be governed by complex eigenvalues. This finding is at odds with the predictions of reasonably parameterized, convex one-sector growth models, most of which have positive real characteristic roots. We study a class of one-sector economies, overlapping generations with finite life spans of L greater than or equal to 3, in which aggregate saving depends nontrivially on the distribution of wealth among cohorts. If consumption goods are weak gross substitutes near the steady state price vector, we prove that the unique equilibrium of a life cycle exchange economy converges to the unique steady state via damped oscillations. We also conjecture that this form of trend reversion extends to production economies with a relatively flat factor-price frontier, and we test this conjecture in several plausible parameterizations of 55-period life cycle economies.
Keyword: Economies, Eigenvalues, Life cycle, and Cyclical fluctuations Subject (JEL): E30 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data)
Creator: Huffman, Gregory W. Series: Finance, fluctuations, and development Abstract:
In this paper a dynamic model is constructed in which labor and capital taxes are determined endogenously through majority voting. The wealth distribution of the economy is shown to influence the voting behavior, and hence the equilibrium levels of the tax rates, which in turn affect the future distribution of wealth. It is shown that the economy exhibits a unique dynamic behavior. Because of the endogenously determined taxes, the asset prices, wealth distribution, and the tax rates can display persistent fluctuations, and even limit cycles, in reaction to exogenous disturbances, or even due to initial conditions. It is also shown that "tax smoothing" does not necessarily appear to naturally arise in such a model, as the economy can display extreme fluctuations in the endogenously determined tax rates.
Keyword: Wealth distribution, Voting behavior, Asset prices, Policy formulation, Dynamic general equilibrium model, and Tax rates Subject (JEL): H25 - Taxation, subsidies and revenue - Business taxes and subsidies, D31 - Distribution - Personal income, wealth, and their distributions, H20 - Taxation, subsidies and revenue - General, and H24 - Taxation, subsidies and revenue - Personal income and other nonbusiness taxes and subsidies