Magnification effects and acyclical real wages

An analysis of a one-period, two-sector model in which firms must pay a fixed cost of hiring. The authors show that this type of model results in more employment variability and less-procyclical wages than do models without fixed hiring costs.Business cycles ; Wages ; Employment (Economic theory)

Does the Fed cause Christmas?

A discussion of the relationship between money and output, with emphasis on the possibility that changes in output precede changes in money.Money supply ; Business cycles

The Yield Curve Slope and Monetary Policy Innovations

We separate changes of the federal funds rate into two components; one reflects the Fed's superior forecasts about the state of the economy and the other component reflects the Fed's reaction to the public's forecast about the state of the economy. Romer and Romer (2000) found that the Fed reveals information about inflation when it tightens monetary policy. Their research has implications for measuring monetary policy as well. When the Fed raises short-term interest rates it leads to some combination of increased inflationary expectations and an increased real rate. In this paper we estimate a structural VAR that allows us to separate out (identify) components of federal funds changes that are due to inflationary expectations (thus neutral) and that part which is contractionary. Our measure of monetary policy is the part of federal funds changes that exclude the Fed's revelation of its asymmetric information about future inflation.Monetary policy, Yield curve, Inflation, Price puzzle

Why we don't know whether money causes output

An examination of the commonly accepted positive correlation between money and real output, including a review of several models of business cycles and an explanation of how money can be neutral and yet still appear to affect real output.Business cycles ; Money

Forecast Errors Before and After the Great Moderation

This paper investigates the change in private-sector and Federal Reserve forecasts before and after the Great Moderation. We view the Great Moderation as a natural experiment. Using forecasts produced by the Survey of Professional Forecasters and the Federal Reserve (Greenbook forecasts) we investigate four questions: 1) How large was the decline in forecast errors? 2) Did forecast accuracy improve relative to the decline in volatility of growth and inflation? 3) Did forecasters respond to the Great Moderation? 4) What are the potential benefits to monetary policymakers of smaller forecast errors? We find that the absolute median error as well as the cross-sectional volatility of forecast errors decreased significantly. Forecasters appeared to have narrowed the dispersion of their forecasts in response to the Great Moderation. Forecast accuracy did not improve relative to the reduction in the volatility of the economy. To the extent that the Fed is forward-looking when it sets its federal funds rate target, improvements in forecast accuracy imply substantial improvements in the Fed’s ability to reach its optimum federal funds rate target.forecast errors, Greenbook, Survey of Professional Forecasters, Great Moderation

Real Wages over the Business Cycle

The real wage is acyclical. This fact is inconsistent with standard theories which assume a single shock drives the cycle and predict either a strong pro or countercyclical real wage. This paper tests the hypothesis that the real wage is acyclical because there are several shocks, some with opposing effects on the real wage, driving the business cycle. We find evidence in support of this hypothesis. In particular, we find real wages are procyclical in response to labor demand shocks and countercyclical in response to labor supply, aggregate demand and oil price shocks with the strongest countercyclical movements arising from aggregate demand.Business Cycles; Countercyclical; Cycle; Procyclical; Wage

Jointly Evaluating the Federal Reserve’s Forecasts of GDP Growth and Inflation

In this paper we jointly evaluate the Federal Reserve staff forecasts of U.S. real output growth and the inflation rate assuming the forecasts are to be used as inputs for the Taylor rule. Our simple methodology generates “policy forecast errors” which have a direct interpretation for the impact of forecast errors on the target interest rate given by the Taylor rule. Without interest rate smoothing, we find that, on average, the Taylor rule target interest rate would have been approximately a full percentage point away from the intended target because of errors in forecasting output growth and inflation. Our results are robust to changes in the forecast horizon and to changes in the weights on the variables in the policy rule.Evaluating Forecasts, Macroeconomic Forecasts, Loss Function,Inflation Forecasting, GDP Growth Forecasting, Monetary Policy

Does the Federal Reserve Lexicographically Order Its Policy Objectives?

We test a Federal Reserve reaction function for threshold effects among the Fed's policy objectives. We find evidence that the Fed responds with greater intensity to a policy objective when that policy objective moves beyond acceptable bounds. We also find that the Fed only responds to lesser objectives when its primary, or threshold, objective is within acceptable bounds--a behavior which can be described as lexicographic ordering. Finally, our results suggest that Fed policy is becoming increasingly responsive to inflation and less responsive to unemployment.Fed; Policy

Long-term Risk-Sharing Wage Contracts in an Economy Subject to Permanent and Temporary Shocks.

This article develops and tests an implication of risk shifting in labor market impl icit contracts. A two-period implicit contract model is presented. Th e optimal contract, in the face of bankruptcy constraints, calls for a real wage that responds asymmetrically to permanent and temporary s hocks to the firm's revenue function. In particular, the real wage re sponds more to a permanent shock than to a temporary shock of the sam e size. This implication is tested on twelve four-digit Standard Indu strial Classification code industries. Eleven of the twelve industrie s sampled show evidence that supports the asymmetric wage response im plication. Copyright 1988 by University of Chicago Press.