Volume 11, Issue 1

DSGE models are currently estimated with a two-step approach: the data is first transformed and then DSGE structural parameters are estimated. Two-step procedures have problems, ranging from component misspecification to incorrect assumptions about the correlation between cyclical and non-cyclical components. In this paper, I present a one-step method, where DSGE structural parameters are jointly estimated with filtering parameters. First, I illustrate the properties of the one-step procedures using simulated data. Then, I show that different data transformations imply different structural estimates and that two-step approaches lack a statistical-based criterion to select amongst them. The one-step approach allows to choose the most likely specification of the non-cyclical component for individual series and/or to construct robust estimates by Bayesian averaging. The role of the investment specific shock as source of GDP volatility is reconsidered.

This paper presents a model of development in which skilled labor is an input in technology adoption. The model combines Nelson and Phelps (1966) type technology dynamics with a growth model in which intermediate goods are used to produce a final good. The intermediate good producers hire skilled labor to increase their productivity by adopting techniques from an exogenously evolving stock of world knowledge. I solve for the stationary equilibrium and derive analytic expressions for steady state income level and wage premium. In a quantitative exercise, I calibrate the model and compare its predictions with data. The model successfully accounts for cross-country income differences and within-country wage premia on skilled labor. These results strengthen the idea that different types of human capital perform separate tasks and should not be aggregated into a single stock of human capital in development accounting exercises. The availability of skilled labor is potentially much more important for development than such aggregative exercises have so far suggested.

This paper studies the issue of optimal monetary policy and social insurance in a small open economy model with sticky prices and segmented asset markets. We evaluate whether optimal monetary policy should stabilize inflation to correct distortions associated with price stickiness or if it should provide social insurance (i.e., stabilize consumption) to correct distortions related to segmented asset markets. For an empirically plausible parametrization of these frictions, the optimal monetary policy should focus on stabilizing the inflation rate. This result suggests that providing social insurance with monetary instruments could be highly distortionary in an economy with nominal rigidities.

I demonstrate that econometric estimations of nominal interest rate rules may tell little, if anything, about an economy's determinacy properties. In particular, correct inference about the interest-rate response to inflation provides no information about determinacy. Instead, it could reveal whether optimal monetary policymaking is performed under discretion or commitment.

This paper examines the cyclical properties of employment rates in a search and matching model that features heterogeneous workers and jobs. I capture heterogeneity by postulating two skill levels: high and low. All low-skill workers can produce in only low-skill jobs, whereas some high-skill workers can produce in both high-and low-skill jobs. My analysis highlights the importance of a vertical type of transitory skill mismatch, in which workers accept jobs below their skill level to escape unemployment and upgrade by on-the-job search, in explaining why employment is typically lower and more procyclical at lower skill levels. The model is also consistent with other important features of the labor market, such as a procyclical rate of job-to-job transitions and evidence on cyclical changes in the composition of job quality. In recessions outflows from unemployment shift the distribution of high-skill workers toward low-skill jobs, while expansions allow them to upgrade to high-skill jobs through job-to-job transitions.

This paper introduces both endogenous capital accumulation and deposit-in-advance requirements for investment in the banking model of Goodfriend and McCallum (2007). Impulse response functions from technology and monetary shocks show some attenuation effect due to the procyclical behavior of the marginal finance cost. In addition, an adverse financial shock produces sizeable declines in output, inflation and interest rates. In the long-run analysis, we finnd the following effects of banking intermediation: (i) the stock of capital increases to take advantage of its collateral services, and (ii) consumption and labor fall in response to the finance cost attached to purchases of goods. Using the baseline calibrated model, we show how a 10 percent increase in banking efficiency would result in a permanent welfare gain equivalent to 0.3 percent of output.

Factor supply increases (depresses) output for many of the same reasons that the government spending multiplier might be less (greater) than one. Data from three 2008-9 recession episodes—the labor supply shifts associated with the seasonal cycle, the 2009 federal minimum wage hike, and the collapse of residential construction spending—clearly show that markets absorb an increased supply of factors of production by increasing output. The findings contradict the “paradox of toil” and suggest that government purchases and marginal tax rates reduce private consumption, even during the recession.

This paper studies the quantitative properties of a general equilibrium model where a continuum of heterogeneous entrepreneurs are subject to aggregate as well as idiosyncratic risks under the presence of a borrowing constraint. The calibrated model matches the highly skewed wealth and income distributions of entrepreneurs. We provide an accurate solution to the model despite significant nonlinearities that are absent in the economy with uninsurable labor income risk. The model is capable of generating the average private equity premium of roughly 3% and a low risk-free rate. The model also produces procyclicality of the risk-free rate and countercyclicality of the private equity premium. The countercyclicality of the equity premium is largely driven by tightening (loosening) of financing constraints during recessions (booms).

Using state level personal income, we document the substantial heterogeneity in the magnitude and timing of the Great Moderation. Low income states experienced remarkable moderation, but some richer states experienced significant increases in volatility. We evaluate the findings from a development perspective, and discuss how differences in income per capita and the structure of production can determine the heterogeneity in income volatility across states.

Economists and demographers have long argued that fertility differs by income (differential fertility), and that social security creates incentives for people to rear fewer children. Does the effect of social security on fertility differ by income? Does social security further affect the dynamics of the earnings distribution through its differential effects on fertility? We answer these questions in a three-period OLG model with heterogeneous agents and endogenous fertility. We find that given its redistributional property, social security reduces fertility of the poor proportionally more than it reduces fertility of the rich. Assuming that earning ability is transmitted from parents to children, the differential effects of social security on fertility can have a significant impact on the dynamics of the earnings distribution: a relatively lower fertility rate among the poor can lead to a new earnings distribution with a smaller portion of poor people and a higher average earnings level. With reasonable parameter values, our numerical exercise shows that the effects of social security on differential fertility and the dynamics of the earnings distribution are quantitatively important.

Macro-level estimates of the productivity of public capital are typically larger than micro-level estimates. The evidence also shows sizable cross-country differences in the quality of public capital. A general equilibrium growth model is introduced to explain both facts. The productivity of firms specializing in differentiated intermediate inputs depends on public capital whose provision is subject to bureaucratic corruption. Higher corruption lowers the quality of public capital and discourages specialization as well as development. Persistent difference in this quality results from multiple equilibrium levels of corruption. Simple calculations show that (i) relatively small micro-level productivity effects of public capital generate large macro-level effects, and (ii) quality differences in public capital can potentially explain a large fraction of the income gap between rich and poor nations.

Using household panel data, we present evidence on the relationship between house price growth and household indebtedness among homeowners in the United States for the period 1999 to 2007. We posit an underlying mechanism whereby rising housing wealth allows households to increase their collateralised borrowing. Over the period, we find that roughly one-fifth of the growth in indebtedness among U.S. households can be explained by rising house prices. This housing wealth–indebtedness link is stronger among the minority of households that were initially “collateral constrained.”

This paper sheds new light on the estimation of the long-run elasticity of the demand for business capital---for a measure of capital that includes both equipment and structures---to changes in its user cost using a quarterly panel of two-digit manufacturing industries from South Africa from 1970 to 2000. Highly significant estimates of the user cost elasticity that are in the vicinity of the -1.0 benchmark implied by a Cobb-Douglas production function are obtained using a variety of specifications, including panel cointegration techniques that correct for small sample bias. Unlike most previous studies, meaningful elasticity estimates are also obtained using stationary panel specifications. The robustness of these estimates may be due, in part, to the possibility that the capital demand curve is better identified in a small open economy where shocks to capital supply are more likely to be exogenous. The economic embargo imposed on South Africa from 1985 to early 1994 temporarily forced its economy to become more closed and therefore provides a unique opportunity to assess the importance of identification in the estimation of the user cost elasticity. User cost elasticity estimates using embargo and non-embargo period data are consistent with a substantial bias from endogeneity.

We develop a representative agent model of a production economy in order to explain the joint dynamics of house prices and equity returns. In a model generating costly business cycle fluctuations, we find that restrictions on housing supply have important implications for asset pricing. Together with habit formation in the composite of consumption and leisure, building restrictions provide an explanation for the high volatility of house prices and contribute to the resolution of asset pricing puzzles.

The endorsement of expansionary fiscal packages has often been based on the idea that large multipliers can counteract rising and persistent unemployment. We explore the effectiveness of fiscal stimuli in a model with matching frictions and endogenous participation. Results show that hiring subsidies, contrary to increase in government spending, deliver large multipliers, even with distortionary taxation. Those policies increase the incentives to post vacancies, hence employment. Furthermore, by reducing marginal costs they also reduce inflation and increase private consumption.

Using a standard incomplete-markets model, we compute the welfare of two socioeconomic systems: laissez-faire and egalitarianism. The egalitarian system (in which after-tax wages are compressed) provides insurance against income risks but at the cost of inefficiency: it undermines productive workers' incentives to work. When the stochastic process of idiosyncratic productivity shocks are calibrated to match the earnings inequality, the egalitarian society yields a much higher welfare as the insurance benefit dominates the efficiency loss. However, when the idiosyncratic productivity shocks are calibrated to capture the ex-post heterogeneity of earnings only, households are better off under laissez-faire if the labor supply is elastic enough. Transition between the two regimes is computed. When the wage compression is removed from the egalitarian steady state, the inequality emerges quickly and reaches its laissez-faire steady state in 20 years.

This paper studies the welfare costs of price rigidities in a closed economy without labor mobility. First, in a one-sector model, I find a significant welfare cost of price rigidities under a standard Taylor rule, especially when labor is immobile. In the one-sector model, strict CPI inflation targeting is able to eliminate the welfare cost of price rigidities, with or without labor mobility. Then, I develop a vertically integrated two-sector model with nominal and real rigidities where there is a natural distinction between the rates of inflation in the final and intermediate goods sectors. In the two-sector model, the real rigidities are introduced by assuming that labor is immobile across sectors and firms. In the model, labor immobility plays an allocative role and causes large fluctuations in hours of work. This, in turn, magnifies the welfare costs of nominal rigidities. I find that the welfare costs range from 1.62 percent to 2.33 percent of consumption per period for different degree of price rigidities under an estimated Taylor rule over the Volcker and Greenspan years. Taking the household welfare under optimal (Ramsey) monetary policy as a benchmark, I show that an optimal modified Taylor rule with two measures of inflation is able to bring welfare closer to the benchmark value and reduces the welfare costs substantially, even if labor mobility is restricted.

This paper studies the role of capital investment in a search and matching model. I develop an endogenous job separation matching model in which a firm's capital investment decision is endogenously determined. The incorporation of capital investment provides an additional channel for firms to respond to productivity shocks, significantly magnifying labor market fluctuations. The numerical results demonstrate that the incorporation of capital investment improves the ability of the standard search and matching model to generate cyclical fluctuations of unemployment and vacancies in response to productivity shocks. Moreover, my model can generate the pro-cyclicality of vacancies, which the standard endogenous separation models often fail to generate.

In a New Keynesian model with a cost channel of monetary transmission, discretionary inflation targeting may become susceptible to a multiplicity of equilibria and results in a larger stabilization bias than in the standard model. Both observations can be attributed to a reduction in the effectiveness of the traditional demand channel of monetary transmission. Based on this insight, we evaluate the desirability of an alternative monetary policy regime, price-level targeting. We find that the latter is almost immune to equilibrium indeterminacy and remains successful in stabilizing output and inflation. Due to the weak demand channel, the ability of the central bank to manage private sector expectations takes center stage. This is accomplished by price-level targeting through the introduction of history dependence, but not by inflation targeting.

Unexpected changes in the federal funds rate are shown to have significant effects on risk premia in the money market. The spread between interbank lending rates and U.S. Treasury bills tends to narrow when the FOMC decides to cut interest rates by more than the expectation implied by federal funds futures. However, rate cuts taking place at unscheduled FOMC meetings can increase risk premia during periods of financial distress, consistent with the view that central bank actions under such circumstances are perceived as signals that policy makers have private information of further unfavorable developments in financial markets.

This paper studies the link between productivity and technological change in both the real and financial sectors and its effect on growth. The financial system affects technological change in the real sector by providing the funds that firms in the real sector need to implement more advanced technologies. In turn, the widespread use of advanced technologies in the real sector facilitates technological innovation in the financial sector, reducing financial intermediation costs. Thus, technological change in both sectors is mutually reinforcing and may generate multiple balanced growth paths with different financial intermediation costs, interest spreads and technological gaps.

Costly state verification models predict that the sensitivity of borrowing costs to financial leverage is positively related to the level of state verification costs (financial frictions). This paper constructs a measure of financial frictions that is consistent with this prediction of theory. Using bond deals from 47 countries, financial frictions are captured as the sensitivity of bond spreads to the issuing firms’ financial leverage. This dynamic measure of financial frictions provides new insights into three characteristics of financial frictions. 1) In contrast to the inferences drawn from widely-used measures, financial frictions display a large degree of variability, and have decreased over time. 2) The effect of financial frictions on private credit supply has decreased both in significance and magnitude over time. 3) Bankruptcy reforms, in general, have not been effective in improving creditor/borrower rights.

Financial crises are often associated with an endogenous credit reversal followed by a fall in asset prices and serious disruptions in the financial sector. To account for this sequence of events, this paper constructs a model where excessive risk-taking by investors leads to a bubble in asset prices, and where the supply of credit to these investors is endogenous. We show that the interplay between excessive risk-taking and the endogeneity of credit may give rise to multiple equilibria associated with different levels of lending, asset prices, and output. Stochastic equilibria lead, with positive probability, to an inefficient liquidity dry-up, a market crash, and widespread failures by borrowers. The possibility of multiple equilibria and self-fulfilling crises is shown to be related to the severity of the risk-shifting problem in the economy.

There is scant empirical support in the literature for the Fisher effect in the long run, though it is often assumed in theoretical models. We argue that a break in the cointegrating relation introduces a spurious unit root that leads to a rejection of cointegration. We applied new break tests and tested for nonlinearity in the cointegrating relation with post World War II data for 15 countries. Our empirical results support cointegration, after accounting for breaks, and a linear Fisher relation in the long run. This is in contrast to several recent studies that found no support for linear cointegration.

Empirical studies of the “shoe-leather” costs of inflation are typically computed using M1 as a measure of money. Yet, official data on M1 includes all currency issued, regardless of the country of residence of the holder. Using monetary data adjusted for U.S. dollars abroad, we show that the failure to control for currency held by non residents may lead to significantly overestimating the shoe-leather costs for the domestic economy. In particular, our estimates of shoe-leather costs are minimized for a positive but moderate value of the inflation rate, thereby justifying a deviation from the Friedman rule in favour of the Fed’s current policy.

Increasing evidence supports that international trade enhances innovation and productivity growth through an increase in competition. This paper develops a two-country endogenous growth model, with firm specific R&D and a continuum of oligopolistic sectors under Cournot competition to provide a theoretical support to this claim. Since countries are assumed to produce the same set of varieties, trade openness makes markets more competitive, reducing prices and increasing quantities. Since firms undertake cost reducing innovations, the increase in production pushes firms to innovate more. Compared to other oligopolistic competition models, we find a larger pro-competitive effect of trade on innovation under this framework, and this effect is increasing the larger the elasticity of substitution between products.

This paper studies the dynamic relationship between inflation and output growth in neoclassical growth models with endogenous cash constraints. We show this dynamic relationship is negative if the degree of cash constraints on investment is smaller than the degree of cash constraints on consumption but is positive if otherwise.

Opponents of explicit inflation targeting (including ex-Chairman Greenspan) have argued that a commitment to a numerical inflation target is likely to reduce monetary policy flexibility, and hence increase output volatility. Our paper demonstrates that this claim may fail to account for the anchoring effect of explicit targets on expectations and wages—found in the data by a number of empirical studies. We do so in a novel, dynamic game theoretic framework with asynchronous moves that endogenizes the frequency of the private sector’s actions. We derive the conditions under which an explicit long-term inflation target makes the behaviour of private agents rationally inattentive and anchored. This is through enhancing monetary policy credibility, which leads private agents to reconsider expectations and wages less frequently to minimize the cost of processing information and/or wage negotiations. Such anchoring makes the policymaker’s interest rate instrument more effective in stabilization, giving it greater leverage over the real rate. This implies that an explicit inflation target may improve the variability tradeoff, i.e. shift the policy frontier inwards. It can therefore make both inflation and output less variable in equilibrium, unlike what inflation targeting sceptics argue. We show that our results are consistent with existing empirical evidence, and discuss them in light of the global financial crisis. The policy implication is that the Federal Reserve, the Swiss National Bank, the Bank of Japan, and the European Central Bank should be more explicitly committed to a long-run inflation target.

This paper uses disaggregated data on real insurance premiums, including life and non-life insurance premiums, to examine the interrelationship between insurance markets’ activities and economic growth for 10 selected OECD countries during the up-to-date 1979-2006 period. We take recently developed panel unit-root tests, heterogeneous panel cointegration tests, and panel causality techniques and conclude that there is fairly strong evidence favoring the hypothesis of a long-run equilibrium relationship between real GDP and insurance markets’ activities after allowing for the heterogeneous country effect. The results of the long-run panel regression parameter indicate a significantly positive relationship between real GDP and the activities within the insurance market, while a development from the non-life insurance market has a greater impact on real GDP than the activities in the life insurance market do. By implementing the dynamic panel-based error correction model, we determine that insurance markets’ development and economic growth present both the long-run and short-run bidirectional causalities.

Twenty-eight months after the onset of the global financial crisis of August 2008, the evidence on post-crisis GDP growth emerging from a sample of 51 advanced and emerging countries is flattering for inflation targeting countries relative to their peers. The positive effect of IT is not explained away by plausible pre-crisis determinants of post-crisis performance, such as growth in private credit, ratios of short-term debt to GDP, reserves to short-term debt and reserves to GDP, capital account restrictions, total capital inflows, trade openness, current account balance and exchange rate flexibility, or post-crisis drivers such as the growth performance of trading partners and changes in terms of trade. We find that inflation targeting countries lowered nominal and real interest rates more sharply than other countries; were less likely to face deflation scares; and had sharp real depreciations without a relative deterioration in their risk assessment by markets. While the task of establishing causal relationships from cross-sectional macroeconomics series is daunting, our reading of this evidence is consistent with the resilience of IT countries being related to their ability to loosen their monetary policy when most needed, thereby avoiding deflation scares and the zero lower bound on interest rates.

This paper studies the importance of intertemporal substitution in consumption for the cyclical co-movement of consumption, net worth and income. We can largely explain the empirical hump-shaped consumption response to a transitory wealth increase by allowing for time-varying returns in an otherwise standard Permanent Income Hypothesis (PIH) model. At the net worth peak, households bring consumption forward in anticipation of low returns on saving. The PIH model fully explains the empirical response when households initially expect the net worth shock to be permanent, but gradually learn that it is in fact transitory.

The micro-data on prices indicate that prices, on average, remain unchanged for several months. However, central banks (e.g. European Central Bank) use models for monetary policy analysis that ignore this fact on the grounds that they can explain the persistence of inflation well. In this paper, I evaluate the consequences of implementing policies that are optimal from the perspective of a model that ignores the micro-data. The findings reported in the paper suggest that policy conclusions are significantly affected by whether persistence arises in a manner consistent with the micro-data and that employing models that do not respect micro-data can lead to costly policy mistakes.

We measure the “evolution” of the housing and financial wealth effects in the United States over different time periods from 1952 to 2009. To understand how the housing and financial wealth effects have changed over time, we use a combination of recent time series techniques, including system structural break tests and linear projections, to estimate impulse response functions of consumption to both forms of wealth over relatively short sub-samples. Our key results are that the housing wealth effect gets larger over time, with the largest effect apparent after 1998; while the financial wealth effect diminishes over the same sub-samples, even over a period that includes the equities boom of the 1990s. Our results provide insight into what mechanisms may explain the differing responses of consumption to wealth.

By examining firm-level data from the U.S. manufacturing sector, we show that the short-run employment response to technology shock exhibits substantial cross-industry variation. We find that firms in industries with low inventory-sales ratios employ more workers in response to a favorable technology shock, while those with high inventory-sales ratios employ fewer workers. These results are consistent with Chang, Hornstein, and Sarte (2009) who emphasize the role of inventory-holding costs in intertemporal substitution of production. However, we could not find any systematic relationship between employment response to technology shock and the price-stickiness measure.

This paper attempts to explore monetary policy transmission under zero interest rates by explicitly incorporating the zero lower bound (ZLB) of nominal interest rates into the time-varying parameter structural vector autoregression model with stochastic volatility (TVP-VAR-ZLB). Nominal interest rates are modeled as censored variables with Tobit-type non-linearity and are incorporated into the TVP-VAR framework. For estimation, an efficient Markov chain Monte Carlo (MCMC) method is constructed in the context of Bayesian inference. The model is applied to Japanese macroeconomic data, including the periods of the zero interest rates policy and the quantitative easing policy. The empirical results show that a dynamic relationship between monetary policy and macroeconomic variables operates through changes in medium-term interest rates rather than policy interest rates under the ZLB. However, the explicit consideration of the ZLB does not otherwise affect macroeconomic dynamics.

We compare alternative optimal public debt adjustment strategies in a New Keynesian economy. We find that the unconditionally optimal policy is consistent with a gradual adjustment in public debt towards its mean value at a speed determined by the rate of time preference of agents. To a second-order approximation in a stochastic setting, debt follows a unit root process with a negative drift under the `timeless-perspective' approach but converges to an unconditional mean different from the non-stochastic steady state in the unconditionally optimal economy. Overall, increases in public debt are shown to be optimally reduced by half only after approximately two decades at best.

We consider policy distortions in a model where plants face idiosyncratic productivity shocks that evolve following a Brownian motion. Introducing idiosyncratic shocks into the model implies that plants have non-constant operating profits and as a result there is an endogenous exit margin and incumbent plants must decide in each period whether or not to remain in the industry. By using the forward Kolmogorov equation, we analytically characterize the Stationary Equilibrium. Our main contribution is to show that if a model is being calibrated/estimated without idiosyncratic shocks, where plants face constant productivity over time and the exit rate is exogenous to fit data generated from a model with shocks and endogenous entry, TFP distortions will be overestimated.

U.S. equipment investment is negatively correlated with its price in consumption units in the short run. I show that this is not the case in many OECD countries, and that cross-country differences in the behavior of the relative price of equipment can be explained by the presence of time-varying markups and the fact that barriers to firm entry differ across countries. A calibrated version of the model can account for about one-fourth of the observed fluctuations in the relative price of equipment investment in the U.S., as well as a sizable part of the qualitative differences in the behavior of this price across countries.

We empirically investigate the effect of net external-debt positions on the size of medium-term current account balances. We utilize an approach where net external-debt positions dampen the widening of the current account balances. In a simple accounting framework, we find supportive evidence of the adjustment role of the net external-debt positions on the current account balances. Our findings show that net external-debt holdings affect current account imbalances through their effect on private consumption. Government expenditure and domestic investment, on the other hand, are not negatively affected by net external-debt holdings. We show that, on average, developing countries in the sample would have run a 2.7 percentage points wider current account deficit in the absence of the negative impact of net external debts. Net external-debt positions, therefore, reduce the dispersions of current account imbalances and thus increase the correlation of investment and saving ratios.

This paper calculates welfare costs of nominal rigidities in a currency union (calibrated to the EMU) that is characterized by a rich array of regional asymmetries. I employ a two-country DSGE model that features optimizing agents, monopolistic price setting, sectoral heterogeneity, and government debt dynamics and find that these costs are virtually identical for all members of the union. The driving factor behind this result is economic integration in the Eurozone (in the form of trade openness and highly correlated technological processes), which almost compensates for idiosyncratic regional shocks and causes national and Euro-wide inflations to move together. The findings are robust to the inclusion of distortionary taxes, government indebtedness, and non-traded goods.

US data show that the external finance premium, measured by the high yield bond spread, moves countercyclically and leads movements in output by four quarters. This paper constructs a model with nominal rigidities and financial accelerator to explain this observation. The key finding of this paper is: it is agents' reaction on news about future technology changes that generates the observed countercyclical movement and lead-lag pattern of the external finance premium, while a contemporary technology shock generates a procyclical movement of the external finance premium. The variance decomposition based on the estimated model demonstrates that news shocks account for about 72% of fluctuations in the external finance premium.

We study the quantitative effects of interest rates on the business cycles of emerging markets. The real business cycle model featured in Neumeyer and Perri (“Business cycles in emerging economies: The role of interest rates.” Journal of Monetary Economics, March 2005, 52 (2), 345-380.) is calibrated to match Turkish data. Fluctuations in country spread account for only less than 9 percent of output volatility, less than one-third of the value found in Neumeyer and Perri. We show that their result critically depends on the magnitude of the working capital parameter, the persistence of productivity shocks, and the factor shares. Our simulations highlight the importance of country spreads for the volatility of investment and the cyclicality of net exports. We also discuss the effect of correlated shocks on the countercyclicality of real interest rate and net exports.