Band 15, Heft 1

We analyze the transitional dynamics of an economic model with heterogeneous consumption goods where convergence is driven by two different forces: the typical diminishing returns to capital and the dynamic adjustment in consumption expenditure induced by the variation in relative prices. We show that this second force affects the growth rate if the consumption goods are produced with technologies exhibiting different capital intensities and if the intertemporal elasticity of substitution is not equal to one. Because the aforementioned growth effect of relative prices arises only under heterogeneous consumption goods, the transitional dynamics of this model exhibits striking differences with the growth model with a single consumption good. We also show that these differences in the transitional dynamics can give raise to large discrepancies in the welfare cost of shocks.

Under a linear approximation, a standard two-country business cycles model with incomplete markets delivers consumption and debt dynamics that are non-stationary (unit root) and a bond price that is independent of the wealth distribution. We argue that these two features are due to the local nature of the approximation and we show that they survive even when second or third order local approximations are used. However, these features disappear when debt limits and the associated precautionary motives are taken into account by a standard, global solution method. We subsequently investigate whether this qualitative difference has significant quantitative implications regarding the linear solution as an approximation to the model’s equilibrium dynamics. Policy function differences between the local and global solutions can be large and remain significant even in the case of debt limits as loose as the natural debt limit. These differences can lead to significant discrepancies in implied simulated second moments. In a benchmark calibration, the cross-country correlation of consumption is 0.61 under linearization, but only 0.38 when a policy iteration algorithm is used.

The monetary authorities affect macroeconomic activity through various channels of influence. This paper examines the bank lending channel, which considers how central bank actions affect the loan supply through its main indicator of policy, the real short-term interest rate. This paper employs the endogenously determined target interest rate, emanating from the European Central Bank’s monetary policy rule, to examine the operation of the bank lending channel. Furthermore, it examines whether different bank-specific characteristics affect how Eurozone banks react to monetary shocks. That is, do sounder banks react more to the monetary policy rule than less-sound banks? The paper finds evidence of an active and statistically and economically significant bank lending channel for the Eurozone between 2000 and 2009.

This study examines the dynamics and the fit of a time-to-build model. The benchmark model employs the investment adjustment cost specification of Christiano, Eichenbaum, and Evans (2005) and the alternative model utilizes the time-to-build specification of Casares (2006). The Bayesian estimation result conveys the following implications: In general, the time-to-build model generates similar dynamics as the benchmark model. But it does not improve the fit of the model to the data. The model comparison, based on marginal likelihood and simulation results, makes the benchmark model the winner of the horse race.

When monetary policy faces a zero lower bound (ZLB) constraint on the nominal interest rate, a minimum state variable (MSV) solution may not exist even if the Taylor principle holds when the ZLB does not bind. This paper shows there is a clear tradeoff between the expected frequency and average duration of ZLB events along the boundary of the convergence region – the region of the parameter space where our policy function iteration algorithm converges to an MSV solution. We show this tradeoff with two alternative stochastic processes: one where monetary policy follows a 2-state Markov chain, which exogenously governs whether the ZLB binds, and the other where ZLB events are endogenous due to discount factor or technology shocks. We also show that small changes in the parameters of the stochastic processes cause meaningful differences in the decision rules and where the ZLB binds in the state space.

The cleansing effects of recessions are investigated. We estimate a DSGE model allowing for endogenous growth to be driven by two competing theories. Either learning-by-doing effects or cleansing effects of recessions drive endogenous growth. Using Bayesian estimation techniques we find that reallocation effects in recessions dominate and also non-technological innovations have effects on productivity and, hence, long-run growth. Furthermore, we show that using directly observable TFP in the estimation has sizable effects on parameter estimates, the identification of shocks, and model dynamics.

This paper introduces health effects in an endogenous growth model with environmental concerns. To highlight the importance of health effects, we examine the time allocation of households in regard to leisure, labor, and health care, which play a crucial role in affecting the impacts of public abatement and emission taxation. We not only show that the health effect modifies the conventional consequences of environmental policy, but also thoroughly compare the effectiveness of these two distinct environmental policies. We also conduct transition and welfare analyses in a dynamic optimizing model which offers novel policy implications, given that the literature on health effects is silent on these issues.

The balance sheet adjustment in the household sector was a prominent feature of the Great Recession that is widely believed to have held back the cyclical recovery of the US economy. A key question for the US outlook is therefore whether household deleveraging has ended or whether further adjustment is needed. The novelty of this paper is to estimate a time-varying equilibrium household debt-to-income ratio determined by economic fundamentals to examine this question. The paper uses state-level data for household debt from the FRBNY Consumer Credit Panel over the period 1999Q1–2012Q4 and employs the Pooled Mean Group (PMG) estimator developed by Pesaran, Shin, and Smith (1999), adjusted for cross-section dependence. The results support the view that, despite significant progress in household balance sheet repair, household deleveraging still had some way to go as of 2012Q4, as the actual debt-to-income-ratio continued to exceed its estimated equilibrium. The baseline conclusions are rather robust to a set of alternative specifications. Going forward, our model suggests that part of this debt gap could, however, be closed by improving economic conditions rather than only by further declines in actual debt. Nevertheless, the normalisation of the monetary policy stance may imply challenges for the deleveraging process by reducing the level of sustainable household debt.

In a two-country open economy model, Bencivenga, Huybens, and Smith [2002, What to Stabilize in the Open Economy, International Economic Review 43, 1289–1307] investigate three policy regimes and find that a fixed exchange rate regime, where the country with the lowest reserve-to-deposit ratio is charged with maintaining the fixed rate, and a price-level targeting regime are both more prone to price-level instability than a constant money growth rate regime. This paper, by replacing their “helicopter drops” assumption with an open market operations assumption, shows that the two rules of fixing the money growth rate and targeting the time path of the price level work equally well. Additionally, under a regime of fixed exchange rates, it does not matter which country is charged with keeping the fixed exchange rate.

There has been a heightened interest in how households form their macroeconomic expectations. Recent innovative studies have shown that households form their expectations by observing professionals’ forecasts albeit imperfectly. Such inattentive behavior has been used to explain inflation dynamics. The purpose of the present paper is to provide further microfoundations to the “sticky information” expectations model by incorporating social learning between households. Here, social learning is modeled through spatial local interactions: households learn from their neighbors as they form their expectations. We show the convergence of households’ expectations depends on the rate of absorbing the professional’s forecasts and the interaction rate with neighbors but also on the spatial variability of the cross-section expectation distribution. The analysis also distinguishes between active and passive households as the latter do not have access to the professional’s forecast or prefer to learn from others, such as the active households. We show that the social interactions between active and passive households can lead to non-monotonic convergence. Finally, while our model with active agents is able to match only the mean inflation expectation of the Michigan survey, our model with active and passive agents is able to replicate both the first and the second moments of the inflation expectations observed in the survey.

The Thai Socio-Economic Survey suggests that new labor market entrants increasingly enter activities with high and positive productivity growth (modern sector), but continue to enter activities with low productivity growth (traditional sector). Workers appear to stick to their initial choice of entry between these two sectors throughout their work careers. We postulate that the transition from the traditional to modern sector is gradual because sector-specific work experience complements labor. We measure the technology parameters of each sector and the partition of the economy consistent with the identifying assumption of each sector (i.e., difference in productivity growth), by implementing a structural estimation on individual earnings equations. We verify the dual partition and sector-specific complementarity do indeed exist. We then build and simulate a model of sectoral choice which explains well the observed transition dynamics of workers across sectors at the estimated parameters, using the Thai micro data.

The paper analyzes the effect of positive trend inflation in the framework of a standard New Keynesian model with Calvo price setting and capital accumulation. We are building on the work of Carlstrom and Fuerst (Carlstrom, Charles T., and Timothy S. Fuerst. 2005. “Investment and Interest Rate Policy: A Discrete-Time Analysis.” Journal of Economic Theory 123: 4–20.) and Ascari and Ropele (Ascari, Guido, and Tiziano Ropele. 2007. “Optimal Monetary Policy under Low Trend Inflation.” Journal of Monetary Economics 54 (8): 2568–2583., Ascari, Guido, and Tiziano Ropele. 2009. “Trend Inflation, Taylor Principle, and Indeterminacy.” Journal of Money, Credit and Banking 48 (1): 1557–1584.) who separately considered effects of capital accumulation and trend inflation in a similar context. It is shown that the simultaneous presence of positive trend inflation and capital accumulation greatly affect the determinacy property of equilibrium under this setup. Namely, in the presence of positive trend inflation the determinacy region shrinks, and it is virtually impossible to produce a determinate equilibrium with the Taylor-type rule given a steady state of inflation of more than 5%. Even for a moderate value of 2.5%, the design of the rule that ensures the uniqueness of the equilibrium requires detailed knowledge of the parameters of an economy. We also show that for a large set of plausible parameters, the standard Taylor rule leads to indeterminacy. Alternative monetary policy rules such as interest rate smoothing, output growth targeting and price level targeting are also analyzed. It is shown that the latter improves the determinacy of the model solution, and the best way to guarantee the determinate equilibrium is to use price level targeting in the policy rule.

I have been doing research in macroeconomics since the late 1960s, almost 50 years. In this paper I pause and take stock. The paper is part personal reflections on macroeconometric modeling, part a road map of the techniques of macroeconometric modeling, and part comments on what I think I have learned about how the macroeconomy works from my research in this area. Section 1 contrasts the methodology of the Cowles Commission approach with that of DSGE modeling. Section 2 presents the general model that I am using; Section 3 discusses theory; and Section 4 discusses estimation and solution. Section 5 then discusses various results from the estimation; Section 6 discusses various properties of the model; and Section 7 uses the model to analyze various economic events. Wealth effects play a large role in the analysis of past events.