Creator: Christiano, Lawrence J., Eichenbaum, Martin S., and Evans, Charles, 1958- Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 227 Abstract:
We provide new evidence that models of the monetary transmission mechanism should be consistent with at least the following facts. After a contractionary monetary policy shock, the aggregate price level responds very little, aggregate output falls, interest rates initially rise, real wages decline by a modest amount, and profits fall. We compare the ability of sticky price and limited participation models with frictionless labor markets to account for these facts. The key failing of the sticky price model lies in its counterfactual implications for profits. The limited participation model can account for all the above facts, but only if one is willing to assume a high labor supply elasticity (2 percent) and a high markup (40 percent). The shortcomings of both models reflect the absence of labor market frictions, such as wage contracts or factor hoarding, which dampen movements in the marginal cost of production after a monetary policy shock.
Keyword: Monetary transmission, Credit, Mechanism, and Prices Subject (JEL): E30 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data)
Creator: Huo, Zhen and Ríos-Rull, José-Víctor Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 526 Abstract:
We study financial shocks to households’ ability to borrow in an economy that quantitatively replicates U.S. earnings, financial, and housing wealth distributions and the main macro aggregates. Such shocks generate large recessions via the negative wealth effect associated with the large drop in house prices triggered by the reduced access to credit of a large number of households. The model incorporates additional margins that are crucial for a large recession to occur: that it is difficult to reallocate production from consumption to investment or net exports, and that the reductions in consumption contribute to reductions in measured TFP.
Keyword: Balance sheet recession, Labor market frictions, Asset price, and Goods market frictions Subject (JEL): E20 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy: General (includes Measurement and Data), E44 - Financial Markets and the Macroeconomy, and E32 - Business Fluctuations; Cycles
Creator: Chari, V. V., Kehoe, Patrick J., and McGrattan, Ellen R. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 277 Abstract:
The central puzzle in international business cycles is that fluctuations in real exchange rates are volatile and persistent. We quantity the popular story for real exchange rate fluctuations: they are generated by monetary shocks interacting with sticky goods prices. If prices are held fixed for at least one year, risk aversion is high, and preferences are separable in leisure, then real exchange rates generated by the model are as volatile as in the data and quite persistent, but less so than in the data. The main discrepancy between the model and the data, the consumption—real exchange rate anomaly, is that the model generates a high correlation between real exchange rates and the ratio of consumption across countries, while the data show no clear pattern between these variables.
Creator: Benhabib, Jess, 1948- and Farmer, Roger E. A. Series: Lucas expectations anniversary conference Abstract:
We introduce, into a version of the Real Business Cycle model, mild increasing returns-to-scale. These increasing returns-to-scale occur as a consequence of sector specific externalities, that is externalities where the output of the consumption and investment sectors have external effects on the output of firms within their own sector. Keeping the production technologies for both sectors identical for expositional simplicity, we show that indeterminacy can easily occur for parameter values typically used in the real business cycle literature, and in contrast to some earlier literature on indeterminacies, for externalities mild enough so that labor demand curves are downward sloping.
Keyword: Cycle, Real business cycle, Business fluctuations, Indeterminacy, Sunspots, and Business cycles Subject (JEL): E00 - Macroeconomics and monetary economics - General - General, E32 - Prices, business fluctuations, and cycles - Business fluctuations ; Cycles, and E40 - Money and interest rates - General
Creator: Green, Edward J. and Oh, Soo-Nam Series: Finance, fluctuations, and development Keyword: Credit, Consumption models, Business cycles, Household, Consumer, Microeconomics, and Panel study of income dynamics Subject (JEL): D11 - Consumer Economics: Theory, D01 - Microeconomic Behavior: Underlying Principles, and E32 - Business Fluctuations; Cycles
Creator: Bullard, James and Duffy, John, 1964- Series: Joint committee on business and financial analysis Abstract:
Trend-cycle decomposition has been problematic in equilibrium business cycle research. Many models are fundamentally based on the concept of balanced growth, and so have clear predictions concerning the nature of the multivariate trend that should exist in the data if the model is correct. But the multivariate trend that is removed from the data in this literature is not the same one that is predicted by the model. This is understandable, because unexpected changes in trends are difficult to model under a rational expectations assumption. A learning assumption is more appropriate here. We include learning in a standard equilibrium business cycle model with explicit growth. We ask how the economy might react to the important trend-changing events of the postwar era in industrialized economies, such as the productivity slowdown, increased labor force participation by women, and the "new economy" of the 1990s. This tells us what the model says about the trend that should be taken out of the data before the business cycle analysis begins. Thus we use learning to address the trend-cycle decomposition problem that plagues equilibrium business cycle research. We argue that a model-consistent approach, such as the one we suggest here, is necessary if the goal is to obtain an accurate assessment of an equilibrium business cycle model.
Keyword: Learning, Productivity slowdown, New economy, Equilibrium business cycle theory, and Business cycle fluctuations Subject (JEL): E30 - Prices, business fluctuations, and cycles - General and E20 - Macroeconomics : Consumption, saving, production, employment, and investment - General
Creator: Erceg, Christopher J. and Levin, Andrew T. (Andrew Theo) Series: Joint commitee on business and financial analysis Abstract:
The durable goods sector is much more interest sensitive than the non-durables sector, and these sectoral differences have important implications for monetary policy. In this paper, we perform VAR analysis of quarterly US data and find that a monetary policy innovation has a peak impact on durable expenditures that is roughly five times as large as its impact on non-durable expenditures. We then proceed to formulate and calibrate a two-sector dynamic general equilibrium model that roughly matches the impulse response functions of the data. We derive the social welfare function and show that the optimal monetary policy rule responds to sector-specific inflation rates and output gaps. We show that some commonlyprescribed policy rules perform poorly in terms of social welfare, especially rules that put a higher weight on inflation stabilization than on output gap stabilization. By contrast, it is interesting that certain rules that react only to aggregate variables, including aggregate output gap targeting and rules that respond to a weighted average of price and wage inflation, may yield a welfare level close to the optimum given a typical distribution of shocks.
Keyword: Monetary policy, Consumer, Business cycles, Durable goods, and Social welfare Subject (JEL): E31 - Prices, business fluctuations, and cycles - Price level ; Inflation ; Deflation, E52 - Monetary policy, central banking, and the supply of money and credit - Monetary policy, and E32 - Prices, business fluctuations, and cycles - Business fluctuations ; Cycles