Natural Rate Model Research Articles

Study on the Natural Ventilation Characteristics of a Solar Greenhouse in a High-Altitude Area

The ventilation rate of a greenhouse is one of the major factors to consider when assessing its ventilation performance. Compared with plain areas, high-altitude areas have lower air pressure, thinner air, and stronger solar radiation, which in turn affect the magnitude of the local greenhouse ventilation rate. This paper is based on the use of online monitoring and computational fluid dynamics (CFD) techniques for modeling and model validation. The average relative error (ARE), mean absolute error (MAE), root-mean-square error (RMSE), and determination coefficient (R2) of the temperature were 4.88%, 1.396 °C, 1.428 °C, and 0.9982, respectively. The ARE, MAE, RMSE, and R2 of the velocity were 9.525%, 0.035 m/s, 0.049 m/s, and 0.9869, respectively. Then, the distributions of the wind pressure, Reynolds number (Re), thermal pressure, air density, air speed, and temperature in greenhouses in high-altitude and plain areas were researched to obtain the relevant factors affecting the ventilation rates of greenhouses in high-altitude areas. In addition, correlation analyses were conducted for five variables affecting the ventilation rate: the inlet velocity, the temperature difference between the inside and outside of the greenhouse, the air density difference between the inside and outside of the greenhouse, total indoor radiation, and the internal heat source of the crop, and the coefficients of their correlations with the greenhouse ventilation rate were 1.0, −0.83, −0.72, −0.72, and 0.68, respectively. A natural ventilation rate model for plateau areas was developed, with the ARE, RMSE, and R2 between the sample values and fitted values determined to be 4.55%, 0.543 m3/s, and 0.9997, respectively. The model was validated by predicting the greenhouse ventilation rate in winter (3 January 2022), and the ARE, RMSE, and R2 of the sample values and predicted values were 9.726%, 8.435 m3/s, and 0.9901, respectively. This study provides a theoretical basis for further research on greenhouse ventilation characteristics in high-altitude areas.

The observational equivalence of natural and unnatural rates of interest

The results of the study presented in this paper demonstrate that a structural model of the natural interest rate, which is consistent with the standard assumptions of the natural rate theory, admits an interpretable, observationally equivalent representation in which a redefined, ’unnatural’ equilibrium rate is different from the natural rate in the original model. The alternative representation was obtained by an invertible transformation implemented in the minimal state-space form of the natural-rate model. The identification theory for state-space models is used in the paper to prove the observational equivalence of these two representations. In the alternative representation, the equilibrium interest rate fails to meet the assumption of the natural rate theory, because it depends on past demand shocks. The alternative model, being observationally equivalent, has different implications for the conduct of monetary policy. The problem of observational equivalence arises in relation to natural-rate models because of the inherent unobservability of the natural interest rate; a potential solution to this problem could be the augmentation of the information set which is used to identify and estimate the natural rate.

A Positive Theory of Monetary Policy in a Natural Rate Model

A Positive Theory of Monetary Policy in a Natural Rate Model

Friedman and Phelps on the Phillips curve viewed from a half century's perspective

In the late 1960s the stable negatively sloped Phillips curve was overturned by the Friedman–Phelps natural rate model. Their Phillips curve was vertical in the long run at the natural unemployment rate, and their short-run curve shifted up whenever unemployment was pushed below the natural rate. This paper criticizes the underlying assumption of the Friedman–Phelps approach that the labor market continuously clears and that changes in unemployment down or up occur only in response to ‘fooling’ of workers, firms, or both. A preferable and resolutely Keynesian approach explains quantity rationing by inertia in price and wage setting. The positive correlation of inflation and unemployment in the 1970s and again in the 1990s is explained by joining the negatively sloped Phillips curve with a positively sloped dynamic demand curve. For any given growth of nominal GDP, higher inflation implies slower real GDP growth and higher unemployment. This ‘triangle’ model based on demand, supply, and inertia worked well to explain why inflation and unemployment were both positively and negatively correlated between the 1960s and 1990s, but in the past decade the slope of the short-run Phillips curve has flattened as inflation exhibited a muted response to high unemployment in 2009–2013 and low unemployment in 2016–2018.

The European unemployment problem: its cause and cure

The stubbornly high unemployment experienced by European countries since the mid-1970s have led to a major reconsideration of the natural rate paradigm. Traditional theories which describe movements of unemployment as fluctuations around a moving natural rate have been challenged by hysteresis theories. The question arises how one can discriminate between these competing theories. To this end, we estimate a time-varying parameter model of the unemployment rate for the US, UK, Germany, and France. The parameters of the model were estimated jointly by maximum likelihood estimation using the Kalman filter algorithm. When the moving natural rate model is tested against the alternative of a unit root process, the unit root hypothesis is resoundingly rejected. Among the determinants of the natural rate institutions that alter labour market incentives for workers appear to have been more important than institutions that affect labour demand.

Analysis of exchange rate fluctuations and external debt: Empirical evidence from Pakistan

The primary purpose of this study is to examine the relationship, with respect to the Pakistani economy, between exchange rates and external debt by utilizing quarterly data from the 1983:Q1 to 2008:Q4 period. Short-run and long-run nominal and real effective exchange rates and their respective equilibrium rates have been assembled. The long run equilibrium exchange rate has been determined by employing the natural real exchange rate (NATREX) model suggested by Stein et al. (1990). We applied the Johanson (1988) cointegration test to examine the long run cointegration relationships among exchange rates and the relevant exogenous variables in the Natrex model. After computing the deviation of exchange rate from its long run, the autoregressive distributive lag model (ARDL) was applied to examine the role of external debt in the fluctuation of exchange rate. The results suggest that there is a long-run cointegration relationship among the relevant variables in the Natrex model and there is a long run cointegration relationship between the exchange rate and external debt variables. We also checked the stability of the functions and performed diagnostic tests. Most of the tests suggested that the functions adopted for the analysis are appropriate and stable over time. Moreover, the obtained results are robust and in according to the predictions of the model. Key words: Exchange rate, external debt, autoregressive distributive lag model (ARDL), methodology.

Hysteresis in unemployment: Fact or fiction?

A stylized fact of European unemployment dynamics is one of extreme persistence and possible unit root behavior. This has led to a major reconsideration of the natural rate paradigm. We apply the Kalman filter to estimate the natural rate of unemployment for Germany and France. When the moving natural rate model is tested against the alternative of a unit root process, the unit root hypothesis is resoundingly rejected.

A two-country NATREX model for the euro/dollar

This paper develops a NATREX (NATural Real EXchange rate) model for two large economies, the Eurozone and the United States, which are fully specified and allowed to interact. The theoretical framework, grounded on dynamic disequilibrium modelling approach in continuous time, provides the basis for empirical estimation. The model is estimated in its structural form as a simultaneous nonlinear differential equations system for the 1975–2003 period. The estimated parameters are then used to derive the simulated Euro/USD NATREX series in- and out-of-sample that offers the benchmark against which the misalignements of the actual real exchange rate are measured.

Edmund Phelps and Modern Macroeconomics

Edmund Phelps, winner of the 2006 Nobel Prize in Economics, has been a central figure in the development of macroeconomics since his 1961 article ‘The Golden Rule of Accumulation’ on optimal economic growth. His 1967–68 critique of the stability of the Phillips curve trade-off, together with Friedman (1968), led to the expectations-augmented Phillips curve and the natural rate hypothesis. His work on the choice-theoretic microeconomic foundations of wage, price, and employment dynamics under imperfect information, changed how economists do macroeconomics. Phelps subsequently developed natural rate models in a non-monetary, structuralist direction distinct from Friedman's monetarism and from New Classical economics, analyzing the natural rate of unemployment as a function of the real structure of the economy: real sectoral demands, factor supplies, technology, taxes, subsidies, tariffs, and real interest and exchange rates.

Natural Equilibrium Real Exchange Rate in Korea

This paper defines an equilibrium time path of the real effective exchange rate of the Korean won. Once we know the equilibrium real exchange rate of the Korean won, we can calculate the degree of its misalignment. An estimate of the NATREX (NATural Real EXchange rate) model shows that the real exchange of the Korean won has a strong long run relationship with key economic fundamentals, such as total factor productivity, the input factor of raw material import, terms of trade, the world real interest rate and the population dependency ratio. Results also indicate that the Korean won shows cyclical movements of overvaluation and undervaluation in turn, rather than a systematic misalignment in one direction. Specifically, the Korean won was overvalued by 3.2% in 2006:Q1. Considering the cyclical pattern of misalignment, systematic intervention in the foreign exchange market does not seem to be desirable, except for unusual cases.

: (Natural Equilibrium Real Exchange Rate in Korea)

Korean Abstract: 본 연구는 한국 원화 장기 균형실질환율을 추정하고, 실제의 실질환율이 그 균형수준을 잘 반영하는지 아니면 얼마나 균형으로부터 이탈되어 있는지를 추정한다. 관측 불가능한 균형실질환율을 추정하기 위해 자연실질환율(NATural Real EXchange rate: NATREX) 모형을 이용한다. 거시균형접근에 동학요소를 추가한 NATREX 모형을 이용해 분석한 결과, 원화의 실질환율은 총요소생산성, 수입원자재 투입요소, 교역조건, 국제장기금리, 인구부양비율 등과 장기 균형관계에 있는 것으로 나타났다. 또 한국 원화는 고평가와 저평가를 주기적으로 반복한 것으로 보인다. 특히 2006년 I분기의 경우 고평가 정도가 2000=100지수 기준 2.6포인트(균형환율에 대한 백분율로는 3.2%)를 보이며 점차 장기 균형으로 수렴해가는 추세를 보인다. 외부충격시 NATREX 모형의 장기 균형시스템은 2~3분기 안에 다시 균형을 회복하며, 균형이탈 역시 한 방향으로의 지속적인 추세를 보이지 않는다. 따라서 균형이탈 패턴을 감안하면, 무역정책으로서의 장기지속적인 환율개입정책은 장기적으로 크게 바람직하지 않을 수 있음을 시사한다. English Abstract: This paper defines an equilibrium time path of the real effective exchange rate of the Korean won. Once we know the equilibrium real exchange rate of the Korean won, we can calculate the degree of its misalignment. An estimate of the NATREX (NATural Real EXchange rate) model shows that the real exchange of the Korean won has a strong long run relationship with key economic fundamentals, such as total factor productivity, the input factor of raw material import, terms of trade, the world real interest rate and the population dependency ratio. Results also indicate that the Korean won shows cyclical movements of overvaluation and undervaluation in turn, rather than a systematic misalignment in one direction. Specifically, the Korean won was overvalued by 3.2% in 2006:Q1. Considering the cyclical pattern of misalignment, systematic intervention in the foreign exchange market does not seem to be desirable, except for unusual cases.

JOHN MAYNARD KEYNES MEETS MILTON FRIEDMAN AND EDMOND PHELPS: THE RANGE VERSUS THE NATURAL RATE IN AUSTRALIA, 1965:4 TO 2003:3

In this paper we compare the estimates of the range model in Lye and McDonald (2005a) with estimates of a natural rate model. We find that the range model is superior to the natural rate model according to econometric criteria and economic plausibility. Our estimates of the range model suggest that a significantly lower rate of unemployment is obtainable at the current time by aggregate demand policy, indeed a rate of 3.1 per cent for 2003:3 compared with about 6.5 per cent for the natural rate model. Thus we conclude that basing macroeconomic policy on the natural rate model would underrate the possibilities for economic welfare in Australia.

The conquest of US inflation: Learning and robustness to model uncertainty

Previous studies have interpreted the rise and fall of US inflation after World War II in terms of the Fed's changing views about the natural rate hypothesis but have left an important question unanswered. Why was the Fed so slow to implement the low-inflation policy recommended by a natural rate model even after economists had developed statistical evidence strongly in its favor? Our answer features model uncertainty. Each period a central bank sets the systematic part of the inflation rate in light of updated probabilities that it assigns to three competing models of the Phillips curve. Cautious behavior induced by model uncertainty can explain why the central bank presided over the inflation of the 1970s even after the data had convinced it to place much the highest probability on the natural rate model.

The Conquest of U.S. Inflation: Learning and Robustness to Model Uncertainty

Previous studies have interpreted the rise and fall of U.S. inflation after World War II in terms of the Fed's changing views about the natural rate hypothesis but have left an important question unanswered. Why was the Fed so slow to implement the low-inflation policy recommended by a natural rate model even after economists had developed statistical evidence strongly in its favor? Our answer features model uncertainty. Each period a central bank sets the systematic part of the inflation rate in light of updated probabilities that it assigns to three competing models of the Phillips curve. Cautious behavior induced by model uncertainty can explain why the central bank presided over the inflation of the 1970s even after the data had convinced it to place much the highest probability on the natural rate model.

Education and the natural rate of unemployment

We show how changes in the educational composition of the labour force affect both the level and the behaviour over time of aggregate unemployment series. We also demonstrate that if it had not been for such changes, the US unemployment series would look 'European' since the within-group unemployment series all have that same appearance. We derive a natural-rate model of unemployment for two education groups, providing microfoundations for inter-group differences in wages and unemployment, and evaluate its plausibility in light of microeconomic evidence.

The Demise of the High Inflation Trade-Off Interpretation A Reply to Chapple

Two pieces of historical evidence have forced a re-evaluation of the textbook story about Phillips’ contribution to stabilisation policy. The first is the realisation that there existed, prior to Lucas (1976), a ‘Phillips Critique ’; the second is that Friedman used what is now called “Phillips ’ Adaptive Inflationary Expectations Formula” to undermine the high inflation Phillips Curve. In a subsequent paper, I shall argue that Phillips constructed his econometric policy evaluation critique in three stages. The first stage (1950–62) involved work on the curve that bears his name; the second (1967–8) and third (1972) were of more general applicability. The first stage took zero or trivial inflation plus exogenous import prices as part of the ‘structure’ of his model; a regime shift to a non-trivial inflation outcome changed the ‘structure’ of his model. In particular, an inflation-devaluation spiral (caused by quite small inflation differentials) would, via rising (and now endogenous) import prices, set offa “wage-price spiral” thus displacing Phillips curve observations off to the right in a stagflationary direction. In the present paper, I shall demonstrates that Chapple has unwittingly surrendered his position about the stable trade-off in Phillips’ work: when inflation generates the expectation of a continuation of inflation this, in Phillips’ model, increases inflation still further, thus destroying the notion of a “stable” tradeoff. But the instability caused by inflation in Phillips’ model is far removed from the cosy equilibrium forces of the conventional natural-rate model. Thus Chapple’s defence of the textbook story tell us more about the reliance on textbooks as the transmitter of ‘authoritative analysis’ than it does about Phillips’ subtle and insightful stabilisation proposals.

Recent developments in international finance: A guide to research

Abstract This is a critical evaluation of the state of the art in International Finance. Several points of reference are selected: The Mundell–Fleming–Branson (MFP) paradigm, the monetary model with purchasing power parity (PPP) as a long run anchor, the representative agent approach and the natural real exchange rate (NATREX) model. Their strengths and weaknesses are identified from both a theoretical and empirical point of view. We conclude with a suggestion of what is a fruitful explanation of medium to longer run movements in the real exchange rate and the current account.

Does the expectations trap render the Natural-Rate Model invalid in the disinflationary zone?

This paper questions the validity of the Natural-Rate Expectations Augmented Phillips curve (N-REAP) model by examining the concept of an ‘expectations trap’. If a Phillips curve becomes horizontal at higher levels of unemployment—as it did in the curves derived from a century of data by Phillips and Lipsey—then policy-induced increases in unemployment can reduce neither inflation nor inflationary expectations. The expectations trap, therefore, tends to render the policy conclusions derived from the N-REAP model either invalid or intolerably slow in the disinflation region.

Are Prices Countercyclical? Evidence from East Asian Countries

The cyclicality of prices has been indebate recently. One of the key stylizedfacts that has served as a cornerstone fortraditional business cycle models is theprocyclical behavior of prices. Recentresearch has questioned the empirical basisfor this stylized fact. Using quarterly U.S.data, Kydland and Prescott (1990) reportthat cyclical components of U.S. prices and output are correlated negatively in the post–Korean War period. They cite this result as evidence against the conven-tional understanding that prices are pro-cyclical. Cooley and Ohanian (1991) confirmthe negative correlation in the post-WWIIperiod and also find that if the sample isextended into the nineteenth century, thedata are not at all suggestive of procyclicalprices, with the important exception of theinter-war period. They interpret their find-ings of countercyclical prices as beinginconsistent with the predictions of demand-driven models and instead supportive ofreal business-cycle models. The work of other researchers, such as Backus and Kehoe (1992) and Smith(1992), complements these studies byexamining cross-country evidence. Forexample, Smith finds that, for ten coun-tries, fluctuations in the price level generally are procyclical from the latenineteenth century until WWII, with theexception of a period around WWI. Price-level movements are countercyclical in thepost-Depression period, however, with the possible exception of a period in the1950s or 1960s. These facts suggest thatprocyclical price movement is not a stable feature across many business cycles. Chadha and Prasad (1993, 1994) showthe importance of making a clear distinc-tion between inflation and the cyclicalcomponent of the price level in reportsand interpretations of stylized facts re-garding business cycles. They find that, inpostwar quarterly data for the UnitedStates, as well as for the rest of the G-7countries, the cyclical components of theprice-level and output series are negativelycorrelated. The inflation rate, however, isgenerally correlated positively with variousmeasures of the cyclical component ofoutput, suggesting that demand-drivenmodels of the business cycle are not neces-sarily falsified by the countercyclicalbehavior of the price level.Similarly, Hall (1995) argues that theconclusions on the sources of the businesscycle of Cooley and Ohanian, and Kydlandand Prescott are flawed. He shows that anegative correlation between detrendedoutput and detrended prices is predictedby the natural-rate nominal-demand shockmodel, under reasonable assumptions. Inother words, he shows that the natural-rate model suggests that procyclical pricesimply a positive correlation between thechange in inflation and detrended output.Judd and Trehan (1995) argue that the useof cross-correlation coefficients as indica-tors for evaluating the empirical relevanceof demand-oriented versus supply-orientedmacroeconomic theories is problematic inprinciple. Using two econometric models,they show that correlation coefficients for prices and output could easily be nega-tive even if demand shocks were theprimary source of cyclical fluctuations and prices were procyclical. Gavin andKydland (1995) show that alternativemoney supply rules can change the

Agriculture and the Business Cycle in a Natural Rate Model

Many studies generate the impression that agriculture in the United States behaves procyclically with respect to monetary policy. In this paper, a macroeconomic model is presented in which agriculture can be either pro-, counter-, or acyclical. It includes two internationally traded goods, a non-internationally traded good, nominal wage rigidities, and a money market. These features allow exploration of the hypothesis that a positive aggregate demand disturbance that causes an expansion in real U.S. economic activity might simultaneously cause a decline in the real value of agricultural output.