Research Database

Since the primary role of international financial linkages is to facilitate consumption smoothing in the face of country-specific shocks, the degree of international financial integration should play an important role in the international transmission of business cycles. This paper therefore studies the business cycle implications of restricting international trade in financial assets. The key restriction is that domestic residents must hold all risky claims to domestic output, trading only noncontingent bonds on the international asset markets. We find that restricting asset trade may or may not change the business cycle implications of the model relative to complete markets, depending on the parameterization of the stochastic process for productivity. When there are important differences, these stem largely from differential wealth effects. We also find that restricting asset trade can resolve the chief problem inherent in complete markets models, which is their predictions of too-high consumption correlations and too-low output correlations. When technology follows a random walk process, the restricted asset markets model predicts that cross-country output correlations are positive, and cross-country consumption correlations are smaller than the output correlations, as is typically observed in the data.

We study the existence and robustness of expectationally-driven price volatility in experimental overlapping generation economies. Iin the theoretical model under study there exist “pure sunspot” equilibria which can be “learned” if agents use some adaptive learning rules. Our data show the existence of expectationally-driven cycles, but only after subjects have been exposed to a sequence of real shocks and “learned” a real cycle. In this sense, we show evidence of path-dependent price volatility.

We use a simple model to show why previous empirical studies of budget policy effects are flawed. Due to an identification problem, those studies' findings can be shown to be consistent with policies either mattering or not. We argue that this problem is difficult and not likely to be resolved soon.

A quantitative investigation of investment-specific technological change for the U.S. postwar period is undertaken, analyzing both long-term growth and business cycles within the same framework. The premise is that the introduction of new, more efficient capital goods is an important source of productivity change, and an attempt is made to disentangle its effects from the more traditional Hicks-neutral form of technological progress. The balanced growth path for the model is characterized and calibrated to U.S. National Income and Product Account data. The long- and short-run U.S. data are then interpreted through the eyes of this framework. The analysis suggests that investment-specific change accounts for a large part of U.S. growth and is a significant factor in U.S. business cycle fluctuations.

This paper examines a two-country, monetary general-equilibrium model that includes a financial sector, capital mobility, and shocks to technologies and money-growth rates. Capital mobility allows agents in both countries to participate in rewards from relatively favorable shocks realized in either country. Currency exchange facilitates currency-intermediated international trade of consumption and capital goods. Qualitative and quantitative implications of the model for evolutions of variables are investigated. The quantitative analysis is performed by numerically solving and simulating the model. We focus on international monetary shock transmissions, and effects of monetary innovations on interest rates and nominal and real exchange rates.

This essay explains the use of fiat money, or why intrinsically useless objects are accepted as payment in transactions. People accept a particular object as a means of payment because others do: social conventions matter more than the intrinsic characteristics of the object itself. Not everything can become a fiat money, though. If an object is especially costly to hold, for example, it will not be accepted as a means of payment. This explanation of fiat money is illustrated in a simple theoretical economic model.

This paper shows how standard methods can be used to formulate and estimate a dynamic index model for random fields—stochastic processes indexed by time and cross section where the time-series and cross-section dimensions are comparable in magnitude. We use these to study dynamic comovements of sectoral employment in the U.S. economy. The dynamics of employment in sixty sectors is well explained using only two unobservable factors; those factors are also strongly correlated with GNP growth.