Economic Response Research Articles

Extra! Extra! Some positive technology shocks are expansionary!

I propose a new measure of technological change for the U.S. and use it to identify the economy's responses to a technology shock. The results suggest that GDP, TFP, and inputs increase following a positive technology shock.

Modeling the Liquidity Effect: The Limited Participation Model

A tractable limited participation model is developed in order to demonstrate the liquidity effect on interest rates and output. It is also shown that this model can replicate two features of the U.S. economy's response to a positive money shock: an increase in output and a muted response to nominal prices.

Technology Shocks and Monetary Policy: Revisiting the Fed's Performance

Would the U.S. economy's dynamic response to permanent technology shocks have been different from the actual responses if monetary authorities' systematic response to these shocks had been optimal? To answer this question, we characterize the dynamic effects of permanent technology shocks and the way in which U.S. monetary authorities reacted to these shocks over the sample 1955(1)–2002(4) using a structural VAR. A sticky price–sticky wage model is developed and estimated to reproduce these responses. We then formally compare these responses with the outcome of the optimal monetary policy.

Shirking in a monetary business cycle model

Abstract This paper investigates whether a limited participation model with imperfectly observed effort can reproduce the economy's responses to a monetary policy shock without appealing to high labour supply elasticities or high markups. The results demonstrate that the presence of imperfectly observed effort, in combination with the limited participation assumption, allows the model to account for the presence of involuntary unemployment, nominal wage rigidity, and the observed responses to monetary policy shocks.

Monetary Transmission Mechanisms in Belarus

We explore monetary policy transmission by estimating VAR impulse response functions to illustrate the Belarusian economy's response to unexpected changes in policy and exogenous variables. We find a significant exchange rate pass-through to prices, and interest rate policy following, rather than leading, financial market developments. Our estimated monetary policy reaction function shows the central bank striking a balance between real exchange rate stability and containing inflation. We discuss dollarization, administrative interventions, and other features complicating monetary policy transmission, review specific constraints and vulnerabilities, and conclude with observations on possible measures that could raise the effectiveness of monetary policy in Belarus.

The Mechanics of Devaluations and the Output Response in a DSGE Model: How Relevant is the Balance Sheet Effect?

The relative importance of different mechanisms through which devaluations affect output are analyzed using a dynamic stochastic general equilibrium model for a small open economy with imperfect competition and nominal rigidities. Devaluations are defined as an increase in the central bank's nominal exchange rate target, which induces a decrease in the nominal interest rate. Three main mechanisms through which devaluations affect output are considered: The traditional expansionary expenditure-switching effect, the balance sheet effect which allows the possibility of contractionary effects when firms' debt are dollar-denominated, and a monetary channel associated with an interest rule that targets the nominal exchange rate. The model is calibrated and simulated under alternative scenarios of exchange rate regimes and shocks. Devaluations are found to be expansionary despite the contractionary balance sheet effect. In response to adverse external shocks the economy's output response improves with a devaluation the less flexible the exchange rate regime is.

05/00583 Shares, gaps and the economy's response to oil disruptions

Comparative dynamic analysis is conducted on a growth model with variable price levels and wage rates. A perturbation technique is used to compare the economy's time paths near a balanced growth path in response to alternate policy regimes. Various dynamic policy multipliers are calculated in response to some of the alternate policy regimes such as the balanced-budget fiscal regime, the constant price regime, the full-employment regime, etc., to examine their dynamic implications on the economy's behavior. Temporary deviations in the fiscal variables are found to leave no permanent effects under all but one of the regimes examined.

Reexamining the Monetarist Critique of Interest Rate Rules

Monetarist economists argued long ago that central bank interest rate rules exacerbate macroeconomic fluctuations, essentially by not allowing the interest rate to respond promptly to shifts in the supply and demand for loans. To support this critique, they pointed to the procyclicality of the money stock. Yet, when there are real shocks and a real business cycle, modern macroeconomic models imply that some procyclicality of money is desirable, to stabilize the price level. A simple interest rate rule illustrates that the monetarist critique can be valid within this model, since the rule exacerbates the response of real activity to real shocks. Other interest rate rules instead limit the macro economy's response to real shocks. But, while these interest rate rules have diverse effects on real activity, there is an important common implication: By smoothing the nominal interest rate in the short run, the rules all lead to increases in the longer-run variability in inflation and nominal interest rates.

Shares, gaps and the economy's response to oil disruptions

Most previous studies have focused on whether oil price shocks cause economic recessions but fewer studies have investigated whether the impact of an oil price shock can be different under alternative economic conditions. Using an international data set of industrialized economies, this paper explores whether an economy relying more on oil or operating closer to full employment may be more vulnerable to an oil disruption. Although the results for oil dependence are ambiguous, the analysis does find a significant relationship between the impacts of an oil shock and how closely the economy is operating to its full-employment level prior to the disruption.

A Short-Term Model of the Fed'S Portfolio Choice

What would happen if the Federal Reserve were to change the assets in its portfolio? Suppose that instead of using open-market operations in Treasury securities to increase the monetary base, the Fed were to engage in open-market operations in private securities or to use discount loans via a mechanism that allowed banks to borrow as much as they would like at a fixed discount rate. The analysis in this paper shows the impact on the economy in a static general-equilibrium model. This model follows Santomero (1983), adapted to evaluate a change in the Fed's portfolio and how that affects the economy's general equilibrium at a point in time. The nature of the exercise done here is completely static in nature and does not evaluate the economy's response to a disappearance of government debt, analysis of which would require a more complete model that's dynamic in nature and incorporates real effects. The present model focuses on the more narrow issue of the direction of portfolio changes with no real-side economic effects. But the model is general equilibrium in nature and thus performs a reasonable comparative-static exercise. In what follows, the author first describes the model in Section I. Next, the author models a situation in which the Fed changes its portfolio in such a way as to keep the interest rate on deposits from changing (Section II). Section III generates results under a special set of assumptions that lock most interest rates together. Section IV attempts to generalize the results to a situation in which the monetary base is unchanged. Section V summarizes the results.

Has Monetary Policy Become More Effective?

We investigate the implications of changes in the structure of the U.S. economy for monetary policy effectiveness. Estimating a vector autoregression over the pre- and post-1980 periods, we provide evidence of a reduced effect of monetary policy shocks in the latter period. We estimate a structural model that replicates well the economy's response in both periods, and perform counterfactual experiments to determine the source of the change in the monetary transmission mechanism and in the economy's volatility. We find that by responding more strongly to inflation expectations, monetary policy has stabilized the economy more effectively in the post-1980 period.

The Dynamic Effects of Firm-Level Borrowing Constraints

In this paper, I develop a detailed dynamic model of firm behavior in order to see whether financial constraints and endogenous exit are important propagation mechanisms.To do this, I construct an economy where firms face financial constraints, fixed costs, and persistent idiosyncratic shocks. Using numerical methods, I analyzehowa large collection of these firmsresponds to aggregate productivity shocks. A common result is that financial constraints tend to dampen the economy's initial response to aggregate productivity shocks but equity accumulation and exit dynamics amplify the longer-term response. The relative sizes of these two effects, however, are sensitive to firms' environments.

The persistence of government expenditure shocks and the effect of monopolistic competition on the fiscal multiplier

In this paper, we demonstrate that the influence of monopolistic competition in the product market on an economy's impact response to fiscal shocks depends on the persistence of these shocks. While short-lived increases in lump-sum financed government expenditure have a stronger effect on labor supply if prices are above marginal costs, the response of employment decreases in the markup if shocks are highly persistent. However, we also show that, while the impact response of labor supply to temporary government expenditure shocks may be reduced by monopolistic competition, the fiscal multiplier is always higher if firms have market power.

Housing wealth and the economy's adjustment to unanticipated shocks

This paper explores the effect of housing capital losses on the economy's response to an unanticipated negative shock. The analysis is based on an overlapping-generations model where income is exogenous and mortgage funds come from outside the economy. Because of housing capital losses, the economy exhibits a volatile response to a negative income shock, with transitional rents, house prices, and consumption levels lying below the values achieved in the new steady state. The volatility of the response is shown to depend on the distribution of housing ownership.

Oil price volatility and the macroeconomy

Recent theoretical work suggests that oil price shocks may have an adverse impact on the macroeconomy, not only because they increase the level of oil prices, but also because they raise oil price volatility. This paper provides empirical support for this proposition by showing that oil price volatility, measured by monthly standard deviations of daily oil prices, helps to forecast aggregate output movements in the U.S. Moreover, part of the asymmetric relationship between oil price changes and output growth found in previous studies can be explained by the economy's response to oil price volatility.

The macroeconomic effects of government debt in a stochastic growth model

This paper studies how government liabilities affect macroeconomic aggregates in a standard general equilibrium growth model. There are two principal results: (i) Though it is often thought that fiscal deficits crowd out investment, this paper shows that deficit-financed cuts in distortionary income taxation may stimulate investment even if agents expect future taxes on capital income to be higher. This result is dependent on the values of two key parameters: the elasticity of labor supply and the degree of persistence in the government debt process. (ii) The economy's response to an increase in government expenditure depends on how it is financed. Distortionary tax finance may lead to a decline in output, consumption, and investment. In contrast, deficit finance may increase output and consumption.

Comment on The Effects of Real and Monetary Shocks in a Business Cycle Model with Some Sticky Prices

The authors begin with the observation that the prices of some goods appear to be more flexible than others. Prices of airline tickets and commodities change daily. The price of haircuts and magazines remain fixed for long periods of time. Whereas Keynesian models generally assume that all prices are sticky and classical models generally assume that all prices are fixed, reality is somewhere in between. The authors set out to see how such differences affect the evolution of macroeconomic aggregates. In these comments I want to first briefly describe their model, highlighting the main assumptions and their consequences. I will then discuss how well their model captures the sectoral consequences of monetary policy, and conclude with some comments on what might be missing from their framework. I begin with the model. To capture the effects of sectoral differences in nominal rigidity, they construct dynamic macroeconomic model with two goods-producing sectors and one representative consumer who owns the capital stock and supplies labor. In one sector goods prices are sticky. In the other they are perfectly flexible. They make five crucial modeling choices. The first concerns the nature of the nominal rigidity. They assume that firms in the sticky-price sector set their nominal prices each period prior to the realization of monetary shocks. This assumption, which only serves to delay adjustment for one period, has two important consequences. First, expected inflation is necessarily high following a monetary expansion, since firms in the sticky-price seetor will be raising their prices in the next period. This puts a lot of upward pressure on short-term interest rates. In fact, in their simulations the nominal interest rate rises in response to a monetary expansion, even though the real interest rate falls. The second consequence of the assumption that prices are preset for only one period is that it eliminates an important source of persistence in the economy's response to monetary shocks. Prices become perfectly flexible the period after the shock. Much research over the past fifteen years has focused how the interaction between the pricing decisions of various agents increases price inertia and propagates the effect of monetary shocks. Alternative assumptions on the nature of the nominal rigidity such as staggered price adjustment (Taylor 1980, Blanchard 1983) or costly price adjustment (Rotemberg 1982, Caplin and Leahy 1991) have been shown to slow the adjustment of prices. The inertia that these alternative assump-

Modèles d'équilibre général dynamiques en concurrence imparfaite

This paper discusses the consequences of introducing imperfectly competitive product markets in an otherwise standard neoclassical growth model. We pay particular attention to the consequences of imperfect competition for the explanation of fluctuations in aggregate economic activity. Market structures considered include monopolistic competition, the "customer market" model of Phelps and Winter, and the implicit collusion model of Rotemberg and Saloner. Empirical evidence relevant to the numerical calibration of imperfectly competitive models is reviewed. The paper then analyzes the effects of imperfect competition upon the economy's response to several kinds of real shocks, including technology shocks, shocks to the level of government purchases, and shocks that change individual producers' degree of market power. It also discusses the role of imperfect competition in allowing for fluctuations due solely to self-fulfilling expectations.

Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity

We construct a dynamic general equilibrium model in which the typical industry colludes by threatening to punish deviations from an implicitly agreed upon pricing path. We argue that models of this type explain better than do competitive models the way in which the economy responds to aggregate demand shocks. When we calibrate a linearized version of the model using methods similar to those of Kydland and Prescott (1982), we obtain predictions concerning the economy's response to changes in military spending which are close to the response we estimate with postwar US data.

Political Economy's Response to Positivism

Political Economy's Response to Positivism