INVESTMENT SHOCKS,CONSUMPTION PUZZLE,AND BUSINESS CYCLES

A mass of recent research shows that investment shocks are primary driving forces of business cycles. A thorny issue, however, arises due to countercyclical consumption behavior following the investment shocks. This article contributes to the literature by resolving this anomalous issue in a model that features time inconsistency, modeled as naïve hyperbolic discounting. The proposed model delivers positive responses of consumption to an investment shock and thus produces comovement of key macroaggregates, which is in line with the observed U.S. business cycles. Furthermore, this article also substantiates the validity of the proposed model by producing comovement following an investment news (or anticipated investment) shock. Additional analyses on changes in model structure and parameter value do not reverse the main finding. (JEL E3, E7)     

NONLINEAR BUSINESS CYCLE DYNAMICS: CROSS-COUNTRY EVIDENCE ON THE PERSISTENCE OF AGGREGATE SHOCKS

We look for asymmetries in the dynamics of real GDP growth for the G7 countries, using a model by Beaudry and Koop that allows the depth of a recession to influence the rate of growth of output. We find evidence supporting these nonlinearities in four countries, including the United States, but we do not find evidence that the asymmetries are common even among the four countries exhibiting asymmetric behavior. A modification of the model to distinguish between the recession and recovery phases of a business cycle does not change this general finding. The asymmetries discovered by Beaudry and Koop do not appear to be common among the G7 nations. (JEL E32)     

REAL BUSINESS CYCLES AND THE LUCAS PARADIGM

When the Lucas paradigm is generalized to include real effects, the effects of real factors and monetary factors on the business cycle are always interrelated. Furthermore, in such models monetary factors can affect the long-run behavior of real output, contrary to the commonly held view that they cannot. Real business cycle models and Lucas-type models are different paradigms, but not in the sense of real versus monetary. Rather, interrelationships between real and monetary factors are intrinsic to the Lucas paradigm, whereas the real business cycle literature implies a dichotomy between real and monetary factors.     

DECONSTRUCTING THE SUCCESS OF REAL BUSINESS CYCLES

The empirical success of Real Business Cycle (RBC) models is often judged by their ability to explain the behavior of a multitude of real macroeconomic variables using a single exogenous shock process. This paper shows that in a model with the same basic structure as the bare bones RBC model, monetary, cost-push or preference shocks are equally successful at explaining the behavior of macroeconomic variables. Thus, the empirical success of the RBC model with respect to standard RBC evaluation techniques arises from the basic form of the dynamic stochastic general equilibrium model, not from the specific role of the productivity shock. ( JEL E32, E37)     

IDENTIFYING THE ROLE OF RISK SHOCKS IN THE BUSINESS CYCLE USING STOCK PRICE DATA

I analyze the sources of U.S. business cycle fluctuations in an estimated Dynamic Stochastic General Equilibrium model with a rich set of nominal and real rigidities and various exogenous disturbances. The model includes a shock to the expected risk‐premium, which introduces a time‐varying wedge between the policy rate set by the central bank and the cost‐of‐capital of firms. In the aggregate data, most U.S. corporations finance their investment using internal funds, and stock prices reveal the opportunity cost of this type of financing. I therefore use corporate market value and dividend data in the Bayesian estimation of the model to identify risk shocks. Variance decomposition exercises show that these shocks account for a substantial part of the variation in the stock market, as well as the variation in output and investment, especially at short forecast horizons. The variation of these variables at longer forecast horizons are mainly captured by shocks to investment‐specific technological change. Historical decomposition points to the important role played by risk shocks in the run up of stock prices and output in the late 90s, and in the reversal of these variables in the early 2000s and during the recent recession. (JEL E32, E44)     

POLITICAL BUSINESS CYCLES IN THE NEW KEYNESIAN MODEL

This paper tests various political business cycle theories in a New Keynesian model with a monetary and fiscal policy mix. All the policy coefficients, the target levels of inflation and the budget deficit, the firms' frequency of price setting, and the standard deviations of the structural shocks are allowed to depend on “political” regimes: a preelection versus postelection regime, a regime that depends on whether the president (or the Fed chairman) is a Democrat or a Republican, and a regime under which the president and the Fed chairman share party affiliation in preelection quarters or not. The results provide evidence that several coefficients are influenced by political variables. The best‐fitting specification, in fact, is one that allows coefficients to vary according to a regime that depends on whether the economy is in the few quarters before a presidential election or not. Monetary policy becomes considerably more inertial before elections and fiscal policy deviations from a simple rule are more common. There is some evidence that policies become more expansionary before elections, but this evidence disappears for monetary policy in the post‐1985 sample. (JEL C11, D72, E32, E52, E58, E63)     

AGGREGATE PRICE SHOCKS AND FINANCIAL INSTABILITY: A HISTORICAL ANALYSIS

This article presents evidence on the relationship between price and financial stability. We construct an annual index of financial conditions for the United States, 1790–1997, and estimate the effect of aggregate price shocks on the index using a dynamic ordered probit model. We find that price-level shocks contributed to financial instability during 1790–1933 and that inflation rate shocks contributed to financial instability during 1980–97. The size of the aggregate price shock needed to alter financial conditions depends on the institutional environment, but we conclude that a monetary policy focused on price stability would contribute to financial stability.     

THE EFFECT OF BUSINESS CYCLES ON GROWTH: KEYNES VS. SCHUMPETER

In contrast to recent 'neo-Schumpeterian' models, which argue that business cycles are good for growth, we develop a 'neo-Keynesian' model, where monopolistically competitive firms set prices and produce output in advance of the realization of (stochastic) monetary velocity. In such a setting, there is an asymmetry in the effect of business cycles on income: recessions are bad, because the representative firm is demand-constrained and its unsold output is wasted, but booms are not good, because the firm is output-constrained and cannot produce any more output. A more severe business cycle thus reduces the expected income of a firm, and the expected return to investment, which reduces the growth rate of the economy. ( JEL E32, E52, O41, L13)     

ASYMMETRY IN THE EFFECTS OF MONETARY AND GOVERNMENT SPENDING SHOCKS: CONTRASTING EVIDENCE AND IMPLICATIONS

Using quarterly data for the United States, demand contraction exceeds expansion in the face of monetary and government spending shocks. Demand contraction in the face of government spending shocks, is absorbed in nominal wage and price deflation. The variability of government spending shocks decreases average wage and price inflation. In contrast, the upward flexibility of price appears in sharp contrast to its downward rigidity in the face of monetary shocks. Furthermore, output contraction is notably larger relative to expansion in the face of monetary shocks. Monetary variability accelerates average price inflation and decreases average output and real wage growth.     

CAREER AND PERSONAL CHARACTERISTICS OF THE MANAGERIAL TECHNOSTRUCTURE IN CANADIAN BUSINESS

Cette étude est basée sur un sondage de 483 directeurs du rang le plus élevé dans 17 compagnies canadiennes de taille grande et moyenne. L‘étude, qui fait parti d'un ouvrage plus grand avec des objets différents, avait recherché des renseignments sur plusiers charactéristiques de fond de ces membres de la “technostructure,” et aussi sur le développement récent de leurs carrières. Les résultats ont indiqué qu'en général les directeurs canadiens sur les échelons les plus élevés sont pour la plupart masculins, et britanniques en nombres disproportionnés. Leur âge varie beaucoup. Leur scolarité varie en fonction de la taille des compagnies. Leur taux de mobilité sont plus bas que durant les années 60 et le début des années 70 et leur carrières se situent surtout dans les fonctions de ligne d'affaires dans les compagnies de taille moyenne. Les déviations de ces résultats étaient reliées à plusieurs variables économiques et technologiques. Les implications de ces résultats sur la mobilité future aux rangs supérieurs de la gestion sont discutées. This study is based on a survey of 483 upper level managers in 17 large and middle sized Canadian companies. The survey, made as a part of a larger study with different objectives, sought information on several background characteristics of these members of the “technostructure” as well as a history of their recent career development. Results indicated that in general Canadian upper managers are predominantly male, disproportionately British, widely varying in age and differentiated on the basis of company size as to their education. Their mobility rate is slowing down compared to the 1960s and early 1970s and their careers have been primarily in the main line functions of business especially in middle-sized companies. Variations in these general results were also found to be related to several economic and technological variables. The implications of these results for future mobility into upper management ranks are discussed.     

THE QUANTITATIVE IMPORTANCE OF OPENNESS IN DEVELOPMENT

This paper deals with a classic development question: how can the process of economic development—transition from stagnation in a traditional technology to industrialization and prosperity with a modern technology—be accelerated? Lewis (1954) and Rostow (1956) argue that the pace of industrialization is limited by the rate of capital formation which in turn is limited by the savings rate of workers close to subsistence. We argue that access to capital goods in the world market can be quantitatively important in speeding up the transition. We develop a parsimonious open‐economy model where traditional and modern technologies coexist (a dual economy in the sense of Lewis 1954). We show that a decline in the world price of capital goods in an open economy increases the rate of capital formation and speeds up the pace of industrialization relative to a closed economy that lacks access to cheaper capital goods. In the long run, the investment rate in the open economy is twice as high as in the closed economy and the per capita income is 23% higher. (JEL O11, F43, O14)     

UNDERSTANDING THE MACROECONOMIC IMPACT OF ILLIQUIDITY SHOCKS IN THE UNITED STATES

In this paper, we empirically investigate the role of stock market illiquidity shocks, stemming from Amihud's illiquidity measure, in explaining U.S. macroeconomic fluctuations from 1973 to 2018. We find that the impact of illiquidity shocks on economic activity is substantial, and historical decomposition analysis shows that cumulative illiquidity shocks were an essential contributor to the prolonged economic slump of the Great Recession. Moreover, our identified illiquidity shocks represent a distinct source of macroeconomic instability. This suggests that illiquidity shocks, measured by the stock price impacts, may contain more information than other types of shocks in recent studies, such as financial shocks and uncertainty shocks. (JEL C32, E32)     

SECTORAL COMPOSITION OF GOVERNMENT SPENDING AND MACROECONOMIC (IN)STABILITY

This article examines the quantitative interrelations between sectoral composition of public spending and equilibrium (in)determinacy in a two‐sector real business cycle model with positive productive externalities in investment. When government purchases of consumption and investment goods are set as constant fractions of their respective sectoral output, we show that the public‐consumption share plays no role in the model's local dynamics, and that a sufficiently high public‐investment share can stabilize the economy against endogenous belief‐driven cyclical fluctuations. When each type of government spending is postulated as a constant proportion of the economy's total output, we find that there exists a trade‐off between public consumption versus investment expenditures to yield saddle‐path stability and equilibrium uniqueness. (JEL E32, E62, O41)     

THE IMPORTANCE OF FINANCIAL CONSIDERATIONS IN DIVORCE DECISIONS

This paper studies the linkage between the expected financial consequences of divorce and the decision to become divorced. A standard choice-theoretic model predicts that the probability of divorce will be negatively related to the financial opportunity cost of divorce. This opportunity cost is measured as the difference in the present values of the future income streams that a married woman might expect if she were to stay married rather than become divorced. Our empirical results indicate that the expected short-term financial consequences are a better predictor of subsequent divorce than are the longer-term consequences.     

ELECTORAL CYCLES AND THE EARNINGS OF FEDERAL BUREAUCRATS

This paper analyzes the relationship between the timing of federal elections and the pay raises received by civilian employees of the federal government. The theoretical framework discusses how electoral wage cycles are generated as a result of optimizing behavior on the part of voters, bureaucrats, and the government. The empirical analysis uses a time series of wage rates for the twenty-eight largest federal agencies over the period 1961–1978. The study indicates that pay hikes during the Presidential election year are significantly greater (about 2 to 3 percent higher) than bureaucratic pay raises in other years.     

SUPPLY SHOCKS AND THE INTEREST RATE

The classic example of a temporary supply shock is a failed agricultural harvest. Theoretically, adverse temporary supply shocks are predicted to raise the ex ante real interest rate; that is, a below-normal harvest raises the interest rate. Apparently, however, no one has tested this conclusion using agriculture as the supply shock. This paper examines nineteenth century French data and confirms the hypothesis that deviations from the "average" harvest have an inverse effect on the interest rate. It also finds that temporary fluctuations in government spending affect the interest rate: higher than normal government spending raises the interest rate.     

RATIONAL EXPECTATIONS IN THE AGGREGATE

This paper investigates the relationship between the way rational expectations is employed in practice and the argument initially put forth to justify its use. In practice rational expectations has meant that the expectations of each agent taken separately is consistent with the predictions of the theory. This is different than the argument frequently used by proponents of rational expectations that on an aggregate level expectations should be consistent with the theory. The primary findings are that standard and aggregate rational expectations typically yield systematically different equilibria and that the size of the difference depends positively on the degree of synergism.     

EXCHANGE RATE VOLATILITY: THE ROLE OF REAL SHOCKS AND THE VELOCITY OF MONEY

The effects of stochastic output shocks on the behavior of ex-change rates and nominal price levels is studied within the context of a two-country, cash-in-advance model. The analysis of this model, in contrast to the existing cash-in-advance literature, demonstrates that exchange rates can be more volatile than price levels even though agents' elasticity of substitution between foreign and domestic goods is greater than one-half. This possibility arises when output shocks are autocorrelated and are due to revisions in expectations that affect the terms of trade and/or the velocity of money.     

AN EMPIRICAL ANALYSIS OF OIL PRICE SHOCKS IN THE INTERWAR PERIOD

This paper presents results that indicate that oil price shocks were economically important in explaining movements in industrial production, and, to a lesser degree, movements in wholesale prices in the period between World Wars I and II. The framework for analysis is a vector autoregressive model estimated using monthly data over 1924:2–38:6 that employs a financial intermediation variable, a measure of relative oil prices, and other variables typically found in small macroeconomic models. The impact of oil price shocks is evaluated through computation of variance decompositions and an historical decomposition over the 1929:9–38:6 period.