Permanent Productivity Shocks Research Articles

Net Foreign Asset Position and Consumption Dynamics in the International Economy

We examine the effect of non-zero, long-run foreign asset positions on consumption dynamics in response to productivity shocks in a two-country, dynamic, general equilibrium model, with different discount factors across countries populated by overlapping generations of households. We then compare the model results to those of a VAR for the United States versus the rest of the G-7. In the data, we find that permanent worldwide productivity shocks lead to net foreign asset and consumption dynamics that are consistent with interpreting the United States as the impatient economy in our model and are not consistent with symmetric models with equal discount factors.

Monetary policy and the stock market in the euro area

In this paper we study the role of the stock market in the transmission mechanism in the euro area and evaluate whether price stability and financial stability are mutually consistent and complementary objectives. Four major conclusions can be drawn from our work. First, stock prices and, more generally, relative asset prices seem to play an important role in the transmission mechanism in the euro area. Second, we do not find any significant, direct impact of stock prices on inflation. These two findings taken together support the view that stock market prices may be important for monetary policy, independently of their direct impact on inflation. Third, permanent productivity shocks are the driving force of the stock market in the long-term and contribute significantly to its cyclical behaviour. Nevertheless, the bulk of cyclical dynamics in the stock market is explained by transitory shocks. Fourth, a monetary policy focused on maintaining price stability in the long-term can contribute also to stock market stability.

Monetary Policy and the Stock Market in the Euro Area

In this paper we study the role of the stock market in the transmission mechanism in the euro area and evaluate whether price stability and financial stability are mutually consistent and complementary objectives. Four major conclusions can be drawn from our work. First, stock prices and, more generally, relative asset prices seem to play an important role in the transmission mechanism in the euro area. Second, we do not find any significant, direct impact of stock prices on inflation. Third, permanent productivity shocks are the driving force of the stock market in the long-run and contribute significantly to its cyclical behaviour. Nevertheless, the bulk of cyclical dynamics in the stock market is explained by transitory shocks. Fourth, a monetary policy focused on maintaining price stability in the long-run can contribute also to stock market stability.

The Behavior of the Current Account in Response to Unobservable and Observable Shocks

The intertemporal approach to the balance of payments states that non-stationary flows in the current account will cointegrate or cotrend, unless there are permanent productivity shocks or long-run policy distortions. This paper examines the dynamics of the current account for a small open economy, using data from Sweden. The results show borderline cointegration for the current account. Recursive estimates disclose that there is no stable tendency towards finding cointegration. Cointegration is found for the first part of the sample, but from 1990 the cointegration test performs badly until speculative attacks force Sweden to give up the peg of the krona in 1992. In terms of the intertemporal approach, policy could be creating the imbalance, solved with the depreciation in 1992, after which the external accounts gradually move back to long-run equilibrium. [F31, F32, F41]

Labor market search and capital accumulation: Some analytical results

Abstract This paper integrates labor market search into an intertemporal utility maximization framework and analytically solves for equilibrium dynamics. The integrated model improves upon a neoclassical model by generating the realistic hump-shaped response of output to a productivity shock and the counterclockwise dynamics of job vacancies and unemployment around the Beveridge curve. In contrast to a standard search model, our model endogenizes agents' reservation wage as the marginal rate of substitution between leisure and consumption, through which agents' intertemporal consumption decision directly affects the labor market behavior. As a result, even a permanent productivity shock generates non-monotonic dynamics in employment.

Capital Allocative Disturbances and Economic Fluctuations

Permanent sector-specific productivity shocks alter the relative marginal products of capital and labor across sectors, such that the existing factor allocations are suboptimal. The subsequent factor reallocations may involve the costly movement and redeployment of capital and labor across sectors. To proxy the magnitude of these disturbances, this paper focuses on capital, rather than labor, allocative disturbances, since firms can make temporary adjustments in employment levels in response to transitory sectoral shocks. Empirical evidence is provided that these costs reduce output from what it otherwise would have been and that this effect persists for up to three quarters. Copyright 1993 by MIT Press.