Technology shocks and the business cycle

Business cycles

Some comments on the role of econometrics in economic theory

The basic tension facing econometricians is that structural models are necessary for addressing monetary policy questions. But all models are, by their very nature, false. Econometric programs that focus on testing whether models are true will be ignored by practicing macroeconomists. The critical task facing econometricians is to develop diagnostic tools for assessing the usefulness of models for addressing particular questions. This article reviews two diagnostic strategies.Econometrics ; Economics

Complementary Roles of Hippocampus and Medial Entorhinal Cortex in Episodic Memory

Spatial mapping and navigation are figured prominently in the extant literature that describes hippocampal function. The medial entorhinal cortex is likewise attracting increasing interest, insofar as evidence accumulates that this area also contributes to spatial information processing. Here, we discuss recent electrophysiological findings that offer an alternate view of hippocampal and medial entorhinal function. These findings suggest complementary contributions of the hippocampus and medial entorhinal cortex in support of episodic memory, wherein hippocampal networks encode sequences of events that compose temporally and spatially extended episodes, whereas medial entorhinal networks disambiguate overlapping episodes by binding sequential events into distinct memories.National Institute of Mental Health Grants (MH51570, MH071702); National Science Foundation (Science of Learning Center grant SBE-0354378

Dynamics of Hippocampal and Cortical Activation during Consolidation of a Nonspatial Memory

Observations of temporally graded retrograde amnesia after hippocampal damage suggest that the hippocampal region plays a critical, time-limited role in memory consolidation. However, these observations do not indicate where permanentmemory is stored, nor do they clarify whether the hippocampus normally remains involved in a nonessential way. Evidence from multiple neural imaging studies indicate the time-limited role of the hippocampus and suggest that the anterior cingulate cortex is a critical storage site of different types of long-term memory. However, each of the previous studies examined spatial memory, leaving open the question of whether different cortical areas support long-term memory for other types ofmaterial. We characterized the course of involvement of cortical and hippocampal areas in animals trained in an explicitlynonspatial task. First, we confirmed previous findings that hippocampal damage produces temporally graded retrogradeamnesia for the social transmission of a food preference (STFP) within our experimental protocol. Damage to thehippocampal region 1 d, but not 21 d, after training impaired subsequent recall of STFP. Then, we characterized theanatomical patterns of activation of the immediate early gene c-fos during retrieval of STFP immediately and 1, 2, and 21 dafter training. The ventral subiculum was activated during retrieval shortly after learning, but the level of activation declined at successive times. In contrast, olfactory recipient regions including piriform, entorhinal, and orbitofrontal cortex showed the opposite pattern, increasingly greater activation in successively later retrieval tests. These findings support the view that different cortical networks support long-term memory for different types of information

Fiscal Policy in the Aftermath of 9/11

This paper investigates the nature of U.S. fiscal policy in the aftermath of 9/11. We argue that the recent dramatic fall in the government surplus and the large fall in tax rates cannot be accounted for by either the state of the U.S. economy as of 9/11 or as the typical response of fiscal policy to a large exogenous rise in military expenditures. Our evidence suggests that, had tax rates responded in the way they `normally' do to large exogenous changes in government spending, aggregate output would have been lower and the surplus would not have changed by much. The unusually large fall in tax rates had an expansionary impact on output and was the primary force underlying the large decline in the surplus. Our results do not bear directly on the question of whether the decline in tax rates and the decline in the surplus after 9/11 were desirable or not.

Government Finance in the Wake of Currency Crises

Currency crisis, banking crisis, speculative attacks, seigniorage, fiscal reform, bailouts

Factor Hoarding and the Propagation of Business Cycles Shocks

This paper analyzes the role of variable capital utilization rates in propagating shocks over the business cycle. To this end we formulate and estimate an equilibrium business cycle model in which cyclical capital utilization rates are viewed as a form of factor hoarding. We find that variable capital utilization rates substantially magnify and propagate the impact of shocks to agents' environments. The strength of these propagation effects is evident in the dynamic response functions of various economy wide aggregates to shocks in agents' environments, in the statistics that we construct to summarize the strength of the propagation mechanisms in the model and in the volatility of exogenous technology shocks needed to explain the observed variability in aggregate U.S. output. Other authors have argued that standard Real Business Cycle (RBC) models fail to account for certain features of the data because they do not embody quantitatively important propagation mechanisms. These features include the observed positive serial correlation in the growth rate of output, the shape of the spectrum of the growth rate of real output and the correlation between the forecastable component of real output and various other economic aggregates. Allowing for variable capital utilization rates substantially improves the ability of the model to account for these features of the data.

Fiscal policy in the aftermath of 9/11

This paper investigates the nature of U.S. fiscal policy in the aftermath of 9/11. We argue that the recent dramatic fall in the government surplus and the large fall in tax rates cannot be accounted for by either the state of the U.S. economy as of 9/11 or as the typical response of fiscal policy to a large exogenous rise in military expenditures. Our evidence suggests that, had tax rates responded in the way they ‘normally’ do to large exogenous changes in government spending, aggregate output would have been lower and the surplus would not have changed by much. The unusually large fall in tax rates had an expansionary impact on output and was the primary force underlying the large decline in the surplus. Our results do not bear directly on the question of whether the decline in tax rates and the decline in the surplus after 9/11 were desirable or not.Fiscal policy ; Terrorism

Evaluating the Calvo Model of Sticky Prices

Can variants of the classic Calvo (1983) model of sticky prices account for the statistical behavior of post-war US inflation? We develop and test versions of the model for which the answer to this question is yes. We then investigate whether these models imply plausible degrees of inertia in price setting behavior by firms. We find that they do, but only if we depart from two auxiliary assumptions made in standard expositions of the Calvo model. These assumptions are that monopolistically competitive firms face a constant elasticity of demand and capital can be instantaneously reallocated after a shock. When we modify these assumptions our model is consistent with the view that firms re-optimize prices