STRUCTURAL ESTIMATION OF THE OUTPUT GAP: A BAYESIAN DSGE APPROACH

We estimate the output gap that is consistent with a standard New Keynesian dynamic stochastic general equilibrium (DSGE) model, where the output gap is defined as a deviation of output from its flexible‐price equilibrium, using Bayesian methods. Our output gap illustrates the U.S. business cycles well, compared with other estimates. We find that the main source of the output gap movements is the demand shocks, but that the productivity shocks contributed to the stable output gap in the late 1990s. The robustness analysis shows that the estimated output gap is sensitive to the specification for monetary policy rules. (JEL E30, E32, C11)     

THE RELATIVE STICKINESS OF WAGES AND PRICES

While many modern business cycle theories posit the existence of nominal wage and/or output price stickiness, their relative importance remains an unsettled issue. Using a structural VAR model, this paper exploits evidence on the behavior of real wages to assess the relative importance of these two sources of stickiness. The empirical results suggest that a positive shock to aggregate demand causes a significant temporary fall in real wages. This is taken as evidence that sticky wages have played a more important role than sticky prices in transmitting aggregate demand shocks to real economic activity in the post-war U.S. (JEL E32)     

AN EXAMINATION OF LINEAR AND NONLINEAR CAUSAL RELATIONSHIPS BETWEEN COMMODITY PRICES AND U.S. INFLATION

This article uses both linear and nonlinear causality tests to examine the causal relationships between changes in commodity prices and U.S. inflation. Prior to the Great Moderation, there is evidence that changes in commodity price indices linearly lead inflation. The stability of the causal relationship appears to vary over time with a stronger bivariate link established before the Great Moderation. Further, there is evidence of significant nonlinear causality from raw industrials and metals indices to inflation with most of this detected nonlinear relationship being captured using the Baba, Engle, Kraft, and Kroner asymmetric generalized autoregressive conditional heteroskedasticity model. This implies that the observed nonlinear Granger causality is largely driven by unanticipated shocks and volatility spillovers in the run‐up of commodity prices in late 2000. (JEL C18, C22, E31)     

HAS PRODUCTION MANAGEMENT IMPROVED SINCE 1984?

The growth rate of GDP stabilized around 1984, and improvements in production management have been cited as a possible cause. This article examines this rationale with two‐digit SIC manufacturing data. The empirical questions are whether there is evidence of structural change in industry output around 1984 and, if so, did output track demand more closely following the change? The results indicate that only two industries exhibited structural change in the 1982–86 period. There is evidence that output has tracked demand more closely in recent years, but this is because demand shocks have become less persistent. (JEL C15, D21, E22)     

ANALYZING COMOVEMENTS IN HOUSING PRICES USING VINE COPULAS

Prior to the housing crisis, the Gaussian copula provided the basis for estimates of the degree of diversification of structured mortgage‐based securities. The Gaussian copula's popularity stemmed not only from its link to the familiar normal distribution, but also from the fact that, unlike other copula‐based models, it readily extends to higher dimensions. But the Gaussian copula has asymptotic independence, such that events, regardless of the strength of their correlation, become independent if one pushes far enough into the tails. Instead, this article forms multivariate models of housing price comovements using vine copulas. These more flexible models not only fit the data better, but they also uncover far stronger correlations between housing price movements, especially during extreme market swings. (JEL G21, C32, C51)     

THE U.S. LABOR INCOME SHARE AND AUTOMATION SHOCKS

The causes and consequences of the 1964–2016 swings in the U.S. labor income share/labor share (LS) are parsed through the lens of a structural model estimated on aggregate and LS series jointly. Where conventional models fall short, the present model yields a counter-cyclical LS unconditionally and in response to demand and monetary policy shocks, as well as a small wage pro-cyclicality, via moderate wage indexation. Shifts in automation, workers' market power, investment efficiency, and the relative price of investment account for 54%, 24%, 6%, and 4% of LS fluctuations, respectively. Automation shocks explain the lion's share of the post-2007 cyclical LS tumble and 11% of output cycles, and generate a distinctive counter-cyclical labor response. (JEL E32, E25, E52)     

AGGREGATION AND THE STAGGERING OF PRICE CHANGES

Temporal distribution of individual price changes is of crucial importance for business cycle theory and for the microfoundations of price adjustment. While it is routinely assumed that price changes are staggered over time, both theory and evidence are ambiguous. We use a large Belgian data set to analyze whether price changes are staggered or synchronized. We find that the more aggregated are the data, the closer is the distribution to perfect staggering. The results hold both for aggregation across products, and across locations. They are consistent with an economy in which idiosyncratic shocks are the main cause of price changes. (JEL E30, E31, D40)     

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)     

INDUSTRIAL OUTPUT VARIABILITY AND REAL WAGE FLUCTUATIONS: DETERMINANTS AND IMPLICATIONS

The cyclical behavior of the real wage differentiates between the empirical validity of major new Keynesian sticky-wage and sticky-price explanations of business cycles. Across industries of the United States, an increase in price flexibility relative to wage flexibility correlates with a reduction in output fluctuations in the face of demand shocks. Further, industrial real output variability does not vary significantly with nominal wage flexibility. In contrast, an increase in price flexibility moderates industrial real output variability. Consistently, an increase in the real wage response to demand shocks correlates with an increase in industrial output variability. ( JEL E32, E31)     

THE VALUE OF RISK: MEASURING THE SERVICE OUTPUT OF U.S. COMMERCIAL BANKS

Banks often charge implicitly for their services via interest spreads, instead of explicit fees. Much of bank output thus has to be estimated indirectly. In contrast to current statistical practice, dynamic optimizing models of banks argue that compensation for bearing systematic risk is not part of bank output. We apply these models and find that in the U.S. National Accounts between 1997 and 2007, bank output was overestimated by 21% and gross domestic product (GDP) by 0.3%. Compared with current methods, our new estimates imply more plausible estimates of the income share of capital and the return on fixed capital of the banking industry. (JEL E01, E44, O47)     

GASOLINE PRICES AND ROAD FATALITIES: INTERNATIONAL EVIDENCE

This study utilizes data for 144 countries from 1991 to 2010 to present the first international estimates of the gasoline price elasticity of road fatalities. We instrument each country's gasoline price with that country's oil reserves and the yearly international crude oil price to address potential endogeneity concerns. Our findings suggest that the average reduction in road fatalities resulting from a 10% increase in the gasoline pump price is in the order of 3%–6%. Around 35,000 road deaths per year could be avoided by the removal of global fuel subsidies. (JEL R41, H23, O18, Q43)     

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)     

VERTICAL SEPARATION INCREASES GASOLINE PRICES

I examine the relationship between vertical separation and gasoline stations' prices and sales. The endogeneity of stations' organizational forms is addressed using both panel methods and an instrumental variables strategy. Controlling for the endogeneity of form, I find that vertical separation raises margins by 25%–45% but does not have a statistically significant impact on output. I interpret these results as suggesting that vertical separation induces local agents to exert effort in ways that increase consumers' demand. (JEL L14, L24, L81)     

ASYMMETRIES IN THE RESPONSES OF REGIONAL JOB FLOWS TO OIL PRICE SHOCKS

This paper studies the effect of oil price innovations on manufacturing job flows across U.S. states. First, I estimate a nonlinear structural equation model and compute impulse response functions by Monte Carlo integration. I find asymmetries in the responses of job flows to positive and negative oil price innovations. Yet, these asymmetries do not pass a test of symmetry on the impulse responses, especially after accounting for data mining. Third, I use a test for the absence of job reallocation to evaluate whether an unexpected increase in the real price of oil price triggers an important change in job reallocation. I find that oil price shocks have limited regional allocative effects. (JEL E24, E32, Q43)     

MONETARY NEUTRALITY UNDER EVOLUTIONARY DOMINANCE OF BOUNDED RATIONALITY

We provide evolutionary game‐theoretic microfoundations to a dynamic complete nominal adjustment in response to a monetary shock by introducing a novel analytical notion that we call boundedly rational inattentiveness. We investigate the behavior of the general price level in a context where a firm can either pay a cost (featuring a random component) to update its information set and establish the optimal price (Nash strategy) or freely use non‐updated information and establish a lagged optimal price (bounded rationality strategy). We devise evolutionary microdynamics (with and without mutation) that, by interacting with the dynamics of the aggregate variables, determines the coevolution of the frequency distribution of information‐updating strategies in the population of firms and the extent of the nominal adjustment of the general price level to a monetary shock. As it turns out, evolutionary learning dynamics take the information‐updating process to a long‐run equilibrium configuration in which, albeit either most or even all firms play the bounded rationality strategy, the general price level is the symmetric Nash equilibrium price and the monetary shocks have persistent, although not permanent, impacts on real output. (JEL E31, C73, D83)     

ACCOUNTING FOR THE CYCLICAL DYNAMICS OF INCOME SHARES

Over the business cycle, labor's share of output is negatively but weakly correlated with output, and it lags output by about four quarters. Profits' share is strongly pro‐cyclical. It neither leads nor lags output, and its volatility is about five times that of output. Those assumptions relate to the structure of aggregate technology and the degree of competition in factor markets. Despite much evidence in favor of time‐varying income shares, macroeconomics still lacks models that can account for their time series facts. This article constructs a model that can replicate those facts. We introduce costly entry of firms in a model with frictional labor markets and find a link between the ability of the model to replicate income shares' dynamics and the ability of the model to amplify and propagate shocks. That link is a weak correlation between the real interest rate and output, a fact in U.S. data but a feature that models of aggregate fluctuations have had difficulty achieving. (JEL E3, E25, J3, E24)     

THE SWINGS OF U.S. INFLATION AND THE GIBSON PARADOX

In recent business cycles, U.S. inflation has experienced a reduction of volatility and a severe weakening in the correlation to the nominal interest rate (Gibson paradox). We examine these facts in an estimated dynamic stochastic general equilibrium model with money. Our findings point at a flatter New Keynesian Phillips Curve (higher price stickiness) and a lower persistence of markup shocks as the main explanatory factors. In addition, a higher interest‐rate elasticity of money demand, an increasing role of demand‐side shocks, and a less systematic behavior of Fed's monetary policy also account for the recent patterns of U.S. inflation dynamics. (JEL E32, E47)     

THE CYCLICALITY OF PRICE‐COST MARGINS IN BANKING: AN EMPIRICAL ANALYSIS OF ITS DETERMINANTS

We study the determinants of the cyclical behavior of banks' price‐cost margins in the United States banking sector, using time series quarterly data for the period 1979–2005. We contribute to the literature by building an empirical model of the countercyclical behavior of these margins first documented by Aliaga‐Díaz and Olivero (2010a) . Doing so we are able to explore potential explanations for this behavior, and to show that margins are consistently countercyclical, even after controlling for the effects of credit risk and monetary policy. As a mechanism for the propagation of aggregate shocks, the countercyclical nature of margins in banking can provide additional support to stabilization policy. (JEL E32, E44, G21)     

ASSET PRICE BUBBLES AND TECHNOLOGICAL INNOVATION

We introduce borrowing constraints into a two‐sector Schumpeterian growth model and examine the impact of asset price bubbles on innovation. In this environment, rational bubbles arise when the intermediate good producing R&D sector is faced with adverse productivity shocks. Importantly, these bubbles help alleviate credit constraints and facilitate innovation in the stagnant economy. On the policy front, we make a case for debt financed credit to the R&D sector. Further, we establish that a constant credit growth rule (akin to the Friedman rule) outperforms the often prescribed counter‐cyclical “lean against the wind” credit policy. (JEL E32, E44, O40)     

MEASUREMENT ERROR IN MACROECONOMIC DATA AND ECONOMICS RESEARCH: DATA REVISIONS,GROSS DOMESTIC PRODUCT,AND GROSS DOMESTIC INCOME

We use a preanalysis plan to analyze the effect of measurement error on economics research using the fact that the Bureau of Economic Analysis both revises its gross domestic product (GDP) data and also publishes a second, theoretically identical estimate of U.S. output that only differs from GDP due to measurement error: gross domestic income (GDI). Using a sample of 23 models published in top economics journals, we find that reestimating models using revised GDP always gives the same qualitative result as the original publication. Estimating models using GDI instead of GDP gives a different qualitative result for three of 23 models (13%). (JEL C80, C82, E01)