Great Moderation Research Articles

Monetary policy and the role of inventory investment

ABSTRACTIn this article, we develop a dynamic stochastic general equilibrium (DSGE) model with sticky prices and inventory investment to explore the relationship between inventories and monetary policy. We use the traditional inventory literature as a basis to motivate this extension of the benchmark model and propose inventories as a factor of production. Within this setting, we test the empirical findings in the literature that, since the mid-1980s, monetary policy changed its target towards the inventory component of GDP. We explore this idea in our theoretical model and conclude through simulations that this is a plausible complementary explanation for the reduction in output volatility that was observed during the Great Moderation period.

Leaning Against Windy Bank Lending

Using an estimated dynamic stochastic general equilibrium model with banking, this paper first provides evidence that monetary policy reacted to bank loan growth in the US during the Great Moderation. It then shows that the optimized simple interest-rate rule features no response to the growth of bank credit. However, the welfare loss associated to the empirical responsiveness is small. The sources of business cycle fluctuations are crucial in determining whether a “leaning-against-the-wind” policy is optimal or not. In fact, the predominant role of supply shocks in the model gives rise to a trade-off between inflation and financial stabilization.

Path analysis of social support and perceived stigma on depression for people living with HIV/AIDS

Objective To explore the impact of social support and perceived stigma on depression for people living with HIV/AIDS. Methods A total of 114 patients recruited into our study. Date were collected by Self-rating Depression Scale (SDS), Social Supporting Rating Scale (SRSS) and Berger HIV Stigma Scale (BHSS) for patients. Analysis of Moment Structures (AMOS) version 7.0 software was used to conduct the path analysis. Results The total score of patients′ depression, SRSS and BHSS were (52.22±10.28), (29.09±5.98), (109.02±14.59) points, and there was correlation between the three (r=0.425-0.676, P<0.05). Social support revealed direct effects on depression and affected depression indirectly via BHSS. The paths′ total coefficients was -0.47. BHSS as intermediary variable between social support and depression, the paths′ total coefficients was 0.64. Conclusions The level of depression, SRSS and BHSS were not fine for HIV/AIDS. Depression are directly affected by SRSS and BHSS, BHSS has a greater moderating effect on these relationships. Interventions developed on the basis of influencing factors of depression should be applied to improve patients′ depression status. Key words: People living with HIV/AIDS; Depression; Social support; Perceived stigma; Path analysis

GIMME A BREAK! IDENTIFICATION AND ESTIMATION OF THE MACROECONOMIC EFFECTS OF MONETARY POLICY SHOCKS IN THE UNITED STATES

We employ a non-recursive identification scheme to identify the effects of a monetary policy shock in a Structural Vector Autoregressive (SVAR) model for the US post-WWII quarterly data. The identification of the shock is achieved via heteroskedasticity, and different on-impact macroeconomic responses are allowed for (but not imposed) in each volatility regime. We show that the impulse responses obtained with the suggested non-recursive identification scheme are quite similar to those conditional on a recursive VAR estimated with pre-1984 data. In contrast, recursive vs. non-recursive identification schemes return different short-run responses of output and investment during the Great Moderation. Robustness checks dealing with a different definition of investment, an alternative break-point, and federal funds futures rates as an indicator of the monetary policy stance are documented and discussed.

Was There a Great Moderation for Inflation Volatility?

Most accounts of the "Great Moderation"--a decline in macroeconomic volatility in the decades prior to the Great Recession--focus on employment growth and GDP growth. In this note, we demonstrate that the decline in core inflation volatility at a monthly frequency is principally an artifact of data construction.

Macro Risks and the Term Structure of Interest Rates

We use non-Gaussian features in U.S. macroeconomic data to identify aggregate supply and demand shocks while imposing minimal economic assumptions. Recessions in the 1970s and 1980s were driven primarily by supply shocks, later recessions were driven primarily by demand shocks, and the Great Recession exhibited large negative shocks to both demand and supply. We estimate "macro risk factors" that drive "bad" (negatively skewed) and "good" (positively skewed) variation for supply and demand shocks. The Great Moderation is mostly accounted for by a reduction in good variance. In contrast, bad variances for both supply and demand shocks, which account for most recessions, shows no secular decline. We document that macro risks significantly contribute to the variation yields, risk premiums and return variances for nominal bonds. While overall bond risk premiums are counter-cyclical, an increase in demand variance lowers risk premiums.

Did the Bundesbank react to the US dollar exchange rate?

This study explores monetary policy conduct by the German Central Bank just after switching to floating exchange rates and before adopting the European single currency. With the world economy going through the ‘great inflation’ first, and the ‘great moderation’ then, the focus is on the DM/US dollar exchange rate, as a proxy of external constraints. A Taylor-type interest rate rule with a sufficiently high inflation coefficient emerges as an equilibrium relation in a Vector Error Correction model, and operates as a reaction function. The exchange rate enters significantly and the dynamics generated are consistent with the derived rule and the macroeconomic theory. Hence, I argue that the Bundesbank kept an eye on the exchange rate and remained devoted to the long-standing policy of price stability.

Indeterminate forecast accuracy under indeterminacy

This paper studies whether the observed time variation in the forecast accuracy of macro-econometric models can be reconciled with the monetary policy stance that induces (in)determinacy in stylized DSGE models. Using a small-scale New Keynesian monetary framework as laboratory and structural parameters calibrated to the estimates obtained on U.S. data from different macroeconomics regimes, we exploit reduced-form econometric models – such as Vector Autoregressions – to assess their regime-specific forecastability. We show that conducting (pseudo) out-of-sample forecast comparisons in the presence of indeterminacy is a non-trivial exercise, even when sunspot shocks play no role in generating the data. Overall, our simulation experiment suggests that equilibrium indeterminacy need not lead to superior (absolute or relative) forecast accuracy. This finding challenges the view that the deteriorating performance of forecast models over the Great Moderation relative to the Great Inflation was entirely due to changes in the U.S. monetary policy.

The Decline in Asset Return Predictability and Macroeconomic Volatility

We document strong U.S. stock and bond return predictability from several macroeconomic volatility series before 1982, and a significant decline in this predictability during the Great Moderation. These findings are robust to alternative empirical specifications and out-of-sample tests. We explore the predictability decline using a model that incorporates monetary policy and shocks with time-varying volatility. The decline is consistent with changes in both policy and shock dynamics. While an increase in the response to inflation in the interest-rate policy rule decreases volatility, more persistent and less volatile shocks explain the lower predictability.

House prices and capital inflows in Spain during the boom: Evidence from a cointegrated VAR and a structural Bayesian VAR

House prices in Spain escalated rapidly in the run up of the financial crisis. In addition, capital inflows may have influenced the amount of credit available for private use. The aim of this paper is to analyse the relationship between foreign capital flows and house prices in Spain. Based on a cointegrated VAR and a structural Bayesian VAR, it is found that both capital inflows and house price shocks have influenced each other in the run up of the Great Moderation.

The changing transmission mechanism of US monetary policy

We examine the relative importance of the interest rate, exchange rate, and bank-lending channels for the transmission mechanism of monetary policy in the United States over the past fifty years. Our analysis is based on a structural vector autoregressive model that includes bank loans and uses sign restrictions to identify monetary policy shocks. Given these identified policy shocks, we quantify the relative importance of different transmission channels via counterfactual analysis. Our results suggest a nontrivial role for the bank-lending channel at the aggregate level, but its importance has been greatly diminished since the early 1980s. Despite the timing, we find no support for a link between this change in the transmission mechanism and the concurrent reduction in output volatility associated with the Great Moderation. There is, however, some evidence of a link to the reduction in inflation volatility occurring at the same time.

Dissecting US Recoveries

We propose a set of new quantitative measures to characterise more fully the features of economic recoveries. We apply these measures to post-war US expansions and use cluster analysis to determine that there are two different types of recoveries in recent US economic history, with most expansions before 1984 (Great Moderation) looking quite different from those after.

Just-in-Time and the Great Moderation: Longitudinal Evidence from Firms

The volatility of real GDP growth declined substantially from the mid-1980s to 2007. This paper uses a sample of just-in-time (JIT) adopters to directly test one of the main competing explanations for this phenomenon: the implementation of JIT inventory management. Exploiting the panel nature of the data and using difference-in-differences (DID) estimation, I find no support for the hypothesis that JIT plays a role in reducing output-growth volatility. Instead, my analysis suggests that JIT tends to destabilize real output by increasing the variabilities of inventory and sales growth.

It ain’t over till it’s over: A global perspective on the Great Moderation-Great Recession interconnection

ABSTRACTA large-scale Factor-Augmented Vector Autoregressive (FAVAR) model of the global economy is used to investigate the determinants of the Great Moderation and the transition to the Great Recession (1986–2010). Beside the global-economy perspective, the model presents the novel feature of a broad range of included financial variables and risk factor measures. The results point to various mechanisms related to the global monetary policy stance (Great Deviation), financial institutions’ risk-taking behaviour (Great Leveraging) and global imbalances (savings glut), determining aggregate fluctuations. Finally, an out-of-sample forecasting exercise provides evidence against the ‘end of the Great Moderation’ view, showing that the timing, though not the dimension of the Great Recession episode (2008–2010), was predictable on the basis of the same macroeconomic mechanisms at work over the two previous decades.

Dissecting US recoveries

We propose a set of new quantitative measures to characterize more fully the features of economic recoveries. We apply these measures to post-war US expansions and use cluster analysis to determine that there are two different types of recoveries in recent US economic history, with most expansions before 1984 (Great Moderation) looking quite different from those after.

The great moderation in international capital flows: A global phenomenon?

This paper highlights a recent ‘great moderation’ in global capital flows, characterised by smaller volumes and lower volatility of cross-border transactions. However, there are substantial differences across countries and regions which we analyse by comparing the level of international capital flows observed in 2005–06, immediately prior to the onset of the global financial crisis, to the post-crisis period of 2013–14, when global flows arguably settled at a ‘new normal’. We find that since the pre-crisis period, gross capital inflows recovered more for economies with smaller pre-crisis external and internal imbalances, lower per capita income, improving growth expectations, a less severe impact of the global financial crisis and less stringent macroprudential policy. On the asset side, countries with a more accommodative monetary policy, a milder impact of the crisis and oil exporters managed to increase gross capital outflows in the post-crisis period.

Gross domestic product growth, volatility and regime changes nexus: the case of Portugal

This paper provides evidence of the behavior of GDP growth volatility in Portugal over the period from 1961 to 2016 with the main objective of measuring the degree of asymmetry of GDP growth rates volatility across the business cycles and its persistence over time. The methodological setting benefits from the most recent developments that recommend the consideration of structural changes in both the mean and variance and asymmetric reactions of volatility to positive and negative shocks. The results document structural changes and significant reductions of GDP growth rates volatility consistent with the “Great Moderation” phenomenon and reveal that the impact of negative shocks on volatility exceeds that of positive shocks more than 4 times over the sample period. Moreover, these asymmetries follow a rather stable pattern over the sample period, suggesting that the Portuguese economy has not been able to reduce its growth vulnerability to cyclical fluctuations.

The Effect of the Great Moderation on the U.S. Business Cycle in a Time-Varying Multivariate Trend-Cycle Model

In this paper we investigate whether the dynamic properties of the U.S. business cycle have changed in the last fifty years. For this purpose we develop a flexible business cycle indicator that is constructed from a moderate set of macroeconomic time series. The coincident economic indicator is based on a multivariate trend-cycle decomposition model that accounts for time variation in macroeconomic volatility, known as the great moderation. In particular, we consider an unobserved components time series model with a common cycle that is shared across different time series but adjusted for phase shift and amplitude. The extracted cycle can be interpreted as the result of a model-based bandpass filter and is designed to emphasize the business cycle frequencies that are of interest to applied researchers and policymakers. Stochastic volatility processes and mixture distributions for the irregular components and the common cycle disturbances enable us to account for all the heteroskedasticity present in the data. The empirical results are based on a Bayesian analysis and show that time-varying volatility is only present in the a selection of idiosyncratic components while the coefficients driving the dynamic properties of the business cycle indicator have been stable over time in the last fifty years.

Extracting Business Cycles using Semi-Parametric Time-Varying Spectra with Applications to US Macroeconomic Time Series

A growing number of empirical studies provides evidence that dynamic properties of macroeconomic time series have been changing over time. Model-based procedures for the measurement of business cycles should therefore allow model parameters to adapt over time. In this paper the time dependencies of parameters are implied by a time dependent sample spectrum. Explicit model specifications for the parameters are therefore not required. Parameter estimation is carried out in the frequency domain by maximising the spectral likelihood function. The time dependent spectrum is specified as a semi-parametric smoothing spline ANOVA function that can be formulated in state space form. Since the resulting spectral likelihood function is time-varying, model parameter estimates become time-varying as well. This new and simple approach to business cycle extraction includes bootstrap procedures for the computation of confidence intervals and real-time procedures for the forecasting of the spectrum and the business cycle. We illustrate the methodology by presenting a complete business cycle analysis for two U.S. macroeconomic time series. The empirical results are promising and provide significant evidence for the great moderation of the U.S. business cycle.

Job flows, jobless recoveries, and the Great Moderation

This paper explores a link between the decline in employment volatility and the onset of jobless recoveries observed since the mid-1980s using a time series of job flow estimates for manufacturing that covers the entire postwar period. I show that job creation and job destruction rates have fallen and become less cyclical. This has increased the importance of reallocative shocks relative to aggregate shocks in explaining their time-series fluctuations. Despite the increased importance of reallocation, it is a change in the responses of job flows to aggregate shocks, which are now larger and more persistent, that lead to the onset of jobless recoveries. The decline in the cyclicality of temporary layoffs and the rise in the use of employment services cannot account for these altered responses.