Monetary policy report to the Congress, July 18, 2001

The weakness in the economy that emerged late last year has become more persistent and widespread. In response, the FOMC has lowered the target federal funds rate six times this year, for a cumulative total reduction of 2-3/4 percentage points. A number of factors account for this unusually steep reduction in the federal funds rate, including the magnitude and rapidity of the slowdown and the need to offset a stronger dollar and lower equity prices. At midyear the information available for the recent performance of both the U.S. economy and some of our key trading partners remains somewhat downbeat, on balance. Nonetheless, a number of factors are in place that should set the stage for stronger growth later this year and in 2002. Moreover, the outlook for productivity growth over the longer run remains favorable.Economic conditions - United States ; Monetary policy - United States

What Inventory Behavior Tells Us About Business Cycles

Manufacturers' finished goods inventories move less than shipments over the business cycle. We argue that this requires marginal cost to be more procyclical than is conventionally measured. We construct, for six manufacturing industries, alternative measures of marginal cost that attribute high-frequency productivity shocks to procyclical work effort, and find that they are much more successful in accounting for inventory behavior. The difference is attributable to cyclicality in the shadow price of labor, not to diminishing returns in fact, parametric evidence suggests that the short-run slope of marginal cost is close to zero for five of the six industries. Moreover, while our measures of marginal cost are procyclical relative to output price, they are too persistent for intertemporal substitution to be important. We conclude that countercyclical markups are chiefly responsible for the sluggish response of inventory stocks over the cycle.

Co-Integration, Aggregate Consumption, and the Demand For Imports: A Structural Econometric Investigation

This paper uses a two-good version of Hall's (1978) representative agent, permanent income model to derive a structural import demand equation for nondurable consumer goods. Under the identification restriction that taste shocks are stationary, the model is shown to imply that log imports, log domestic goods, and the log relative price of imports are co-integrated. The data decisively reject the null hypothesis that imports, the relative price of imports, and the consumption of home goods are not co-integrated. We employ the non-linear least squares technique recently proposed by Phillips and Loretan (1990> to estimate the parameters of the import demand equation. The long-run price elasticity of import demand is estimated to be -0.95. The elasticity of import demand with respect to a permanent increase in real spending is estimated to be 2.20. These estimates fall within the range reported in studies by Helkie and Hooper (1986), Cline (1989), and the many studies surveyed by Goldstein and Kahn (1985) The message of this paper is that, at least for non-durable consumer goods, it is possible to interpret the traditional import demand equation as a co-integrating regression, and to interpret the price and expenditure elasticities estimated from such a trade equation as a co-integrating vector. Estimates of the co-integrating vector can be used to recover estimates of the utility parameters of the representative household. The similarity between the OLS and Phillips-Loretan estimates of the parameters suggests that the simultaneous equation bias is not large.

Explosive oil prices

The author is grateful for the hospitality of the University of California, Berkeley as well as Resources for the Future, Washington, DC, while working on the paper. Financial support by the Fritz Thyssen Foundation for these research visits is gratefully acknowledged. An earlier version of this paper appeared as CESifo Working Paper No 4376.Peer reviewedPostprin

Inventories and sales uncertainty

We investigate the empirical linkages between sales uncertainty and firms’ inventory investment behavior while controlling for firms’ financial strength. Using large panels of manufacturing firms from several European countries we find that higher sales uncertainty leads to larger stocks of inventories. We also identify an indirect effect of sales uncertainty on inventory accumulation through the financial strength of .rms. Our results provide evidence that financial strength mitigates the adverse effects of uncertainty.inventory investment, uncertainty, financial constraints.

A search-theoretic monetary business cycle model with capital formation

Search-theory has become the main paradigm for the micro-foundation of money. But no comprehensive business cycle analysis has been undertaken yet with a search-based monetary model. We extend the model with divisible goods and divisible money of Shi (JET, 1998) to allow for capital formation, analyze the monetary propagation mechanism and contrast the model's implications with US business cycle stylized facts. With empirically plausible adjustment costs the model features a persistent propagation of monetary shocks and is able to replicate fairly well the volatility and cross-correlation with output of key US time series, including sales and inventory investment. We find that monetary policy shocks are unlikely to be an important source of business cycle fluctuations but discover another dimension where money matters: the very frictions that make money essential shape also the responses of variables to real shocks

Capital markets in 1956

Capital market

Inventory Investment, Global Engagement, and Financial Constraints in the UK: Evidence from Micro Data

We use a panel of 9381 UK firms to study the links between firms’ global engagement status and their financial health. We estimate inventory investment equations augmented with a financial composition variable, and interpret the sensitivity of inventory investment to the latter as a measure of the strength of the financial constraints faced by firms. We find that smaller, younger, and more risky firms; and firms that do not export and are not foreign owned exhibit higher sensitivities. Moreover, global engagement substantially reduces the sensitivities displayed by the former categories of firms: this suggests that it shields firms from financial constraints.Financial constraints, Global engagement, Inventory investment.

Environmental Regulations and Livestock Production Levels: What is the Direction of Causality?

Fundamental to the assertion that environmental regulatory standards are strategically set by decentralized authorities and consequently firms respond to spatial differences in regulatory standards is the underline causal relationship. Establishing the cause-effect association between regulatory standard setting and industry response is essential to justify the existence of the pollution haven and the potential for a race to the bottom. In this paper using 25 years data of the livestock production intensities for hog, dairy and fed cattle sectors and environmental regulatory stringency measure from 1975 to 2000 for 48 contiguous states we explore whether the direction of causality as suggested by race to the bottom hypothesis is in fact supported by the empirical evidence and hence the potential for existence of pollution haven is real in the U.S. livestock production sector. The results in general support the existence of pollution havens and potential for a race to the bottom at the regional level. There were no convincing evidences supporting the reserve causality that the "industry driving policy" hypothesis. Across the different livestock types, dairy sector provided conclusive evidence that in the regions with substantial growth of dairy inventories, there are strong evidences for a race to the bottom.Environmental Economics and Policy,