Real Business Cycle Model Research Articles

The cause of an integral correction mechanism of the real exchange rate

I find that Rabanal and Rubio-Ramirez (2015)’s international real business cycle model can explain an integral correction mechanism of the real exchange rate. An input adjustment cost in their model implies that the real exchange appreciates following a positive domestic productivity shock and reverts to steady state quickly, but presents a long-run cyclical movement. These particular dynamics help explain the PPP puzzle.

Oil consumption, economic growth, and oil futures: The impact of long-run oil supply uncertainty on asset prices

High levels of uncertainty about long-run oil supplies from 2005 to 2012 coincided with significant changes in oil futures markets. Motivated by this fact, this paper provides new evidence on the relations between oil consumption, oil prices, and economic growth, and builds on this evidence to develop a quantitative real business cycle model to study oil price risk. Calibrated model results can match relations between oil prices and economic quantities, and can rationalize behavior in equity and futures markets over this period as a consequence of changing risk premia driven by an increase in long-run oil supply uncertainty.

Financial frictions, interest rate dynamics, and international business cycle synchronization

AbstractA two‐country real business cycle model with national endogenous borrowing constraints and working capital requirements can account for the high level of international co‐movements. The effects of technology shocks are transmitted internationally through the dynamics of the interest rate. Specifically, the borrowing mechanism brings about a wedge between the real interest rate and the expected marginal product of capital, such that interest rates fall following positive technology shocks. A lower interest rate induces more investment by Foreign firms, which in turn contribute to greater synchronization of economic activities across countries. Moreover, terms of trade amplify the effects of technology shocks.

Tapered US carbon emissions during good times: what's old, what's new?

In light of a slow buildup in CO2 emissions since the recovery, this paper revisits the relationship between CO2 emissions and the US economy using a nonlinear autoregressive distributed lag model, in which the determinants are identified through an expanded real business cycle model. We find convincing evidence that CO2 emissions decline more rapidly during recessions than increase during expansions over the long run. Of all determinants considered, long-run asymmetry is fostered once vehicle miles traveled is controlled. This calls for a greater attention to public transportation development and vehicle miles traveled tax for slowing down stock buildup of CO2 emissions during good times.

Climate Generated Disasters and Cataclysm in an Economy

I model the effects of climate change on a real business cycle model economy subjected to climate moderated disasters and the possibility of a worldwide cataclysm that destroys the economy. I find that the rise of greenhouse gas production in the economy leads to more frequent and more destructive disasters that affect the real economy, at the same time leading to lower risk-free rates and higher risk premiums.

Wavelet Multiresolution Analysis of the Liquidity Effect and Monetary Neutrality

This paper employs the maximum overlap discrete wavelet transform to obtain timescale decompositions of monetary aggregates, short-term interest rates and output to investigate two propositions in monetary economics: the liquidity effect and the long-run neutrality of money. Evidence from correlation and Granger causality over five timescales suggests that the liquidity effect is statistically significant in both the US and Sweden’s economies, with a shorter time horizon in the US than in Sweden. There is no evidence of monetary neutrality in both economies; at finest timescales, output Granger causes money in Sweden, whereas it is the other way around in the US. At long time horizons, there is a feedback between money and output in both economies. Key to our findings is that monetary disturbances have significant real effects and these effects last longer than it is assumed in real business cycle models.

Cyclical asset returns in the consumption and investment goods sector

We document the empirical fact that asset prices in the consumption-goods and investment-goods sector behave almost identically in the U.S. economy. In order to derive the cyclical behavior of the equity returns in these two sectors, we consider a two-sector real business cycle model with habit formation, sector-specific growth and adjustment costs of capital. The model is able to replicate the equity premium and the Sharpe values observed empirically, reflects the similarity of the cross-correlation structure between asset returns and aggregate output in the two sectors, and generally succeeds in capturing both the weak predictability of the real risk-free rate and the good predictability of excess returns at the bi-sectoral level.

FISCAL POLICY MULTIPLIERS IN AN RBC MODEL WITH LEARNING

Using the standard real business cycle model with lump-sum taxes, we analyze the impact of fiscal policy when agents form expectations using adaptive learning rather than rational expectations (RE). The output multipliers for government purchases are significantly higher under learning, and fall within empirical bounds reported in the literature, which is in sharp contrast to the implausibly low values under RE. Positive effects of fiscal policy are demonstrated during times of economic stress like the recent Great Recession. Finally, it is shown how learning can lead to consumption and investment dynamics empirically documented during some episodes of “fiscal consolidations.”

The implication of subsistence consumption for economic welfare

Using a subsistence consumption-augmented real business cycle model, we show that, for any given exogenous growth rates or parameter values, high initial subsistence levels increase the welfare cost of business cycles. This happens because subsistence consumption increases consumption volatility. Our finding suggests that eliminating economic fluctuations can be more beneficial to less-developed economies in which subsistence consumption is a high fraction of aggregate consumption. However, fast-growing economies exhibit a lower discrepancy of welfare costs between rich and poor countries, a result that also highlights the importance of growth-enhancing policies.

ENDOGENOUS FIRM ENTRY IN AN ESTIMATED MODEL OF THE U.S. BUSINESS CYCLE

A recent theoretical literature highlights the role of endogenous firm entry as an internal amplification mechanism of business cycle fluctuations. The amplification mechanism works through the competition effect (CE) and the variety effect (VE). This paper tests the significance of this amplification mechanism, quantifies its importance, and disentangles the CE and VE. To this end, we estimate a medium-scale real business cycle model with firm entry for the U.S. economy. The CE and VE are estimated to be statistically significant. Together, they amplify the volatility of output by 8.5% relative to a model in which both effects are switched off. The CE accounts for most amplification, whereas the VE only plays a minor role.

A SYNTHESIS KEYNES-MONETARIST AND REAL BUSINESS CYCLE MODEL TO INFLATION AND UNEMPLOYMENT IN INDONESIA 2000.1-2014.4

This research is addressed for the construction of Synthesis between Keynesian, Monetarist and Real Business Cycle Model to the inflation and unemployment Data is used quarterly data 2000.1 - 2014.4, The result of this research with the Keynesian model is the aggregate demand gap has no significance effect to inflation rate and the unemployment rate. But when model of variable input mount the unemployment, exchange rate, wage and the aggregate demand gap of hence yielding elastic inflation elasticity finding of positive of equal to 2,48 to the unemployment rate, and the inflation elasticity to foreign exchange is inelastic positive significance of equal to 0,88. As for the influence of wages to inflation is significantly negative elastic of equal to – 1,89. Besides, in model is also shown by condition of significance of influence of variable of aggregate demand gap to inflation of equal to 0.31. Meanwhile, Inflation in perspective monetarist viewed as by a monetary phenomenon, where the inflation influenced by money supply of equal to 1.858. Besides, Monetarist also express of relation significance of between GDP summed ugly is money supply is inelastic positive significance of equal to 0.1247. The RBC Model shows that the investment elasticity to output is significance inelastic positive equal to 0.405467, that way also with the influence of the population to GDP is significance negative equal to - 1.259925 . The other side, is founded by of Unemployment elasticity to wage rate is significance positive of equal to 0.413. Meanwhile, with the model of synthesis Keynes-Monetarist and RBC lay open that output (GDP) is influenced by the positive significance of equal to 0.206026 . The synthesis model is also expressed by that governmental fiscal governmental expenditure as a means of shows influence which significant to unemployment equal to 0.149. While component amount of money supply, affecting negativity significance to unemployment of equal to 0.55887.

The price of imported capital and consumption fluctuations in emerging economies

We study the role played by fluctuations in the price of imported capital in determining the behavior of consumption fluctuations in developing countries. For this, we decompose the price of imported capital into common and country-specific components, where the common component is the price of capital in the US. Empirically, we document that, in contrast to small industrialized countries, consumption in developing countries responds more than output to unexpected changes in the price of capital in the US. As such, fluctuations in the price of capital in the US contribute to a high volatility of consumption relative to that of output in developing countries. We then show that a small open-economy real business cycle model driven by fluctuations in the price of imported capital can account for the responses of consumption and output to innovations of the price of capital in the US and for the high relative volatility of consumption observed in developing country. Finally, confronting the model to the data, we further find that fluctuations in the price of capital in the US contribute substantially to fluctuations of consumption in countries that display a low volatility of output and a large relative volatility of consumption.

External Habit in a Production Economy: A Model of Asset Prices and Consumption Volatility Risk

A standard real business-cycle model with external habit and capital adjustment costs matches a long list of asset price and business-cycle moments: equity, firm value, and risk-free rate volatility; the equity premium; excess return predictability; consumption growth predictability; basic moments of consumption, output, and investment; among others. The model also generates endogenous consumption volatility risk. Precautionary savings motives make consumption sensitive to shocks in bad times, leading to countercyclical volatility, even with homoscedastic technology shocks. Habit acts as countercyclical leverage, which amplifies this channel. Habit also implies high risk aversion, which amplifies the stock price response.Received April 21, 2016; editorial decision February 3, 2017 by Editor Stijn Van Nieuwerburgh.

Does the crowding-in effect of public spending on private consumption undermine neoclassical models?

Empirical evidence from vector autoregressions (VARs) showing that public spending shocks crowd in private consumption has been seen as evidence against standard neoclassical models of the business cycle. We show that a standard real business cycle model in which all agents including the government optimize is compatible with the results from the empirical literature. A VAR estimated using artificial data simulated from the model indicates that, under standard assumptions to identify public spending shocks, an increase in public spending is associated with an increase in private consumption and the real wage. The implied impulse responses are qualitatively and quantitatively similar to those in the empirical literature.

Vector Autoregressions and Macroeconomic Modeling: An Error Taxonomy

In this article, we investigate the theoretical behavior of finite lag models fitted to time series that in truth come from an infinite-order data-generating mechanism. We show that the overall error can be broken down into two basic components, an estimation error that stems from the difference between the parameter estimates and their population ensemble counterparts, and an approximation error that stems from the difference between the and the true . The two sources of error are shown to be present in other performance indicators previously employed in the literature to characterize, so-called, truncation effects. Our theoretical analysis indicates that the magnitude of the estimation error exceeds that of the approximation error, but experimental results based upon a prototypical real business cycle model and a practical example indicate that the approximation error approaches its asymptotic position far more slowly than does the estimation error, their relative orders of magnitude notwithstanding. The experimental results suggest that with sample sizes and lag lengths like those commonly employed in practice models are likely to exhibit serious errors of both types when attempting to replicate the dynamics of the true underlying process and that inferences based on models can be very untrustworthy.

Aggregate Volatility and International Dynamics. The Role of Credit Supply

Changes in country-specific aggregate volatility are positively correlated with current account dynamics while negatively correlated with investment, output and credit flows. An International Real Business Cycle model with time-varying aggregate uncertainty, through a precautionary savings channel, can account for the positive correlation but implies counterfactual comovements for the other variables. Adding a credit supply channel with default and lenders exposed to aggregate risk allows the model to match all the facts. Higher volatility contracts credit supply. The current account turns to surplus because savings increase, but also because investment collapses.

Testing market structure assumptions for DSGE modelling in Croatia using the SVAR model with long-run restrictions

Assumptions on market structure are crucial in formulating dynamic stochastic general equilibrium (DSGE) models. The inclusion of the price stickiness assumption in DSGE models has questioned the money neutrality, which is a characteristic of DSGE models with perfect competition, and has thus opened the space for monetary policy analysis. One of the criteria used to determine which DSGE models are better suited to the characteristics of an observed empirical economy is the impact of technology shocks in the structural vector autoregression (SVAR) model with long-run restrictions. In DSGE models, assuming perfect competition with no price rigidity, i.e. real business cycle (RBC) models, changes in productivity that are driven by productivity shocks increase employment. On the other hand, new Keynesian (NK) models that assume imperfect competition and price rigidities, suggest that technological shocks decrease employment, since companies cannot adjust to excess production by reducing prices. In order to assess the impact of productivity shocks, the SVAR model with long-run restrictions is estimated using data on labour productivity, working hours and consumption in Croatia. The estimated impact of labour productivity shocks on working hours is statistically significant and negative, whereas the estimated impact on consumption is statistically significant and positive. The conducted analysis points to the fact that the DSGE model with imperfect competition and price rigidities describes the empirical characteristics of the Croatian economy better than the model with perfect competition.

Macroeconomic effects of fiscal policy in the European Union, with particular reference to transition countries

This study empirically investigates the short- to medium-term effects of fiscal policy on output and other macroeconomic variables in European Union countries between 1995 and 2012, with particular reference to transition countries. It applies Panel Vector Auto Regression with recursive identification of government spending shocks as the most appropriate method for the aim of the study and the sample used. The main results indicate that expansionary spending shocks have a positive, but a relatively low effect on output, with the fiscal multiplier around one in the year of the shock and the following year, and lower thereinafter. There are indications that this result is driven by the recent crisis, as multipliers are considerably lower in the pre-crisis period. Effects of fiscal policy are strongly dependent on country structural characteristics. Fiscal multipliers are higher in new European Union member states, in countries with low public debt and low trade openness. Further, spending shocks are followed by rising debt levels in old member states, which could be related well to the recent European debt crisis. Finally, the analysis of the transmission mechanism of fiscal policy yields results that are consistent with both extended Real Business Cycle models and extended New Keynesian models.

Comparing Solution Methods for DSGE Models with Labor Market Search

I compare the performance of solution methods in solving a standard real business cycle model with labor market search frictions. Under the conventional calibration, the model is solved by the projection method using the Chebyshev polynomials as its basis, and the perturbation methods up to third order in both levels and logs. Evaluated by two accuracy tests, the projection approximation achieves the highest degree of accuracy, closely followed by the third order perturbation in levels. Although different in accuracy, all the approximated solutions produce simulated moments similar in value.

Oil Prices in a Real-Businesscycle Model with Precautionary Demand for Oil

This paper analyzes the interaction between oil prices and macroeconomic outcomes by incorporating oil as an input in production alongside a precautionary motive for holding oil in a real-business-cycle model. The driving forces are factor-specific technology shocks and supply shocks that can be imprecisely forecasted by noisy news shock. These shocks explain most of the U.S. business cycle as well as the empirical distribution of oil prices. Oil shocks are mainly driven by increasing precautionary/smoothing demand, but supply shocks contribute substantially to both the oil-price volatility and the magnitude of oil shocks mainly through their effect on oil reserves.