888 research outputs found

    Calibration and the Volatility of Labor: A Cautionary Note

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    A key parameter in real business cycle models is the weight on the utility of leisure. Typically this parameter is chosen so that the steady-state level of work activity matches the corresponding measure in the data, i.e. the amount of time workers spend in market activity. While the calibration of this parameter is often highlighted in business cycle research, this paper demonstrates that this parameter has no influence on equilibrium characteristics of the Hansen (1985) indivisible labor model, when solved using traditional methods. Hence, the functional form of utility rather than the parameterization of utility is the critical factor.calibration, real business cycles

    Some Fiscal Implications of Monetary Policy

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    We study the implications of alternative monetary targeting procedures for real interest rates and economic activity. We find that countercyclical monetary policy rules lead to higher real interest rates, higher average tax rates, lower output but lower variability of tax rates and consumption relative to procyclical rules. For a country with a high level of public debt (e.g. Italy), the adoption of a counter cyclical proceedure such as interest rate pegging may conceivably raise public debt servicing costs by more than half a percentage point of GNP. Our analysis suggests that the current debate on the targeting proceedures of the European Central Bank ought to be broadened to include a discussion of the fiscal implications of monetary policy.

    Time-Varying Uncertainty and the Credit Channel

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    We extend the Carlstrom and Fuerst (1997) agency cost model of business cycles by including time varying uncertainty in the technology shocks that affect capital production. We first demonstrate that standard linearization methods can be used to solve the model yet second moments enter the economy's equilibrium policy functions. We then demonstrate that an increase in uncertainty causes, ceteris paribus, a fall in investment supply. A second key result is that time varying uncertainty results in countercyclical bankruptcy rates - a finding which is consistent with the data and opposite the result in Carlstrom and Fuerst. Third, we show that persistence of uncertainty affects both quantitatively and qualitatively the behavior of the economy. However, the shocks to uncertainty imply a quantitatively small role for uncertainty over the business cycle.agency costs, credit channel, time-varying uncertainty

    The Response of Term Rates to Monetary Policy Uncertainty

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    This paper shows that greater uncertainty about monetary policy can lead to a decline in nominal interest rates. In the context of a limited participation model, monetary policy uncertainty is modeled as a mean-preserving spread in the distribution for the money growth process. This increase in uncertainty lowers the yield on short-term maturity bonds because the household sector responds by increasing liquidity in the banking sector. Long-term maturity bonds also have lower yields but this decrease is a result of the effect that greater uncertainty has on the nominal intertemporal rate of substitution - which is a convex function of money growth. These predictions are broadly supported by the data: the conditional variance of monetary policy shocks identified from a conventional monetary VAR negatively affects the yields of federal funds, and the three and six-month treasury bills.limited participation, term structure, time-varying uncertainty

    Time-Varying Uncertainty and the Credit Channel

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    We extend the Carlstrom and Fuerst (1997) agency cost model of business cycles by including time varying uncertainty in the technology shocks that affect capital production. We first demonstrate that standard linearization methods can be used to solve the model yet second moment effects still influence equilibrium characteristics. The effects of the persistence of uncertainty are then analyzed. Our primary findings fall into four categories. First, it is demonstrated that uncertainty affects the level of the steady-state of the economy so that welfare analyses of uncertainty that focus entirely on the variability of output(or consumption) will understate the true costs of uncertainty. A second key result is that time varying uncertainty results in countercyclical bankruptcy rates - a finding which is consistent with the data and opposite the result in Carlstrom and Fuerst. Third, we show that persistence of uncertainty affects both quantitatively and qualitatively the behavior of the economy. Finally, we demonstrate that the magnitude of changes in uncertainty affecting the economy could be quite large; the implicationagency costs, credit channel, time-varying uncertainty

    Taking the Monetary Implications of a Monetary Model Seriously

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    It has become common practice in applied monetary economics to posit an interest rate rule as a component of the economic environment. Since the general equilibrium setting imposes a money demand relationship, the interest rate rule implies that the money supply is endogenous. Rarely are the properties of the money supply implied by the model compared to the data. In this paper, we take the monetary implications of a monetary model seriously in a limited participation model that permits both technology and money shocks. We model the money supply as an exogenous Markov process and calibrate the parameters of the Markov process to the data. We then examine whether the model produces an interest rate rule similar to the Taylor rule relationship observed in the data. The model is able to duplicate qualitatively the relationship between inflation and nominal interest implied by the Taylor rule, but fails dramatically to replicate the correlation between nominal interest rates and output.calibration

    A New Application of Taylor Rules: Model Evaluation

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    Taylor rules posit a linear relationship between the output gap, inflation, and short-term nominal interest rates. Previous work has shown that the relationship between these key economic variables as captured by the Taylor rule is quite robust both across countries and monetary policy regimes. Consequently, the Taylor rule has become a useful characterization of monetary policy with much recent work focussed on the optimal formulation of the Taylor rule and the properties of equilibrium. Our interest in the Taylor rule is from a quite different perspective: we ask whether a calibrated monetary model can produce Taylor rule behavior similar to that seen in the data. That is, since the Taylor rule is a useful summary of the characteristics of a monetary economy, it seems reasonable to ask whether a monetary model, when calibrated to the data, produces a similar relationship. For our analysis, we employ a version of the limited participation model of Christiano, Eichenbaum, and Evans (1997) that permits both technology and money shocks. We find that this model, when the shock process is calibrated to US data, is able to replicate qualtitatively the correlation of interest rates with inflation implied by the Taylor rule but fails dramatically to match that between nominal interest rates and output.Taylor rule, limited participation, calibration

    Risk Shocks and Housing Markets

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    This paper analyzes the role of uncertainty in a multi-sector housing model with financial frictions. We include time varying uncertainty (i.e. risk shocks) in the technology shocks that affect housing production. The analysis demonstrates that risk shocks to the housing production sector are a quantitatively important impulse mechanism for the business cycle. Also, we demonstrate that bankruptcy costs act as an endogenous markup factor in housing prices; as a consequence, the volatility of housing prices is greater than that of output, as observed in the data. The model can also account for the observed countercyclical behavior of risk premia on loans to the housing sector.agency costs, credit channel, time-varying uncertainty, residential investment, housing production, calibration

    Agency Costs and Investment Behaviour. ENEPRI Working Paper, No. 47, 3 February 2007

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    How do differences in the credit channel affect investment behavior in the U.S. and the Euro area? To analyze this question, we calibrate an agency cost model of business cycles. We focus on two key components of the lending channel, the default premium associated with bank loans and bankruptcy rates, to identify the differences in the U.S. and European financial sectors. Our results indicate that the differences in financial structures affect quantitatively the cyclical behavior in the two areas: the magnitude of the credit channel effects is amplified by the differences in the financial structures. We further demonstrate that the effects of minor differences in the credit market translate into large, persistent and asymmetric fluctuations in price of capital, bankruptcy rate and risk premium. The effects imply that the Euro Area's supply elasticities for capital are less elastic than the U.S

    Risk Shocks and Housing Markets

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    This paper analyzes the role of uncertainty in a multi-sector housing model with financial frictions. We include time varying uncertainty (i.e. risk shocks) in the technology shocks that affect housing production. The analysis demonstrates that risk shocks to the housing production sector are a quantitatively important impulse mechanism for the business cycle. Also, we demonstrate that bankruptcy costs act as an endogenous markup factor in housing prices; as a consequence, the volatility of housing prices is greater than that of output, as observed in the data. The model can also account for the observed countercyclical behavior of risk premia on loans to the housing sector.Agency costs, credit channel, time-varying uncertainty, residential investment, housing production, calibration
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