A New Keynesian Model with Overtime Labor

This paper extends the standard New Keynesian model by incorporating labor adjustment costs and overtime work. I show that labor frictions help reconcile the frequent price changes found in the microdata with the degree of sluggishness in inflation adjustment to output changes at the macro level. The introduction of labor frictions affects the dynamic behavior of economic variables (particularly employment and inflation) and implies that firms marginal costs should be measured in overtime costs. Marginal costs measured in overtime hours are procyclical and are predicted by inflation as suggested by theory.New Keynesian Phillips Curve, business cycle models, labor frictions, inflation dynamics.

Return predictability, dividend growth, and the persistence of the price–dividend ratio

Empirical evidence shows that the order of integration of returns and dividend growth is approximately equal to the order of integration of the first-differenced price–dividend ratio, which is about 0.7. Yet the present-value identity implies that the three series should be integrated of the same order. We reconcile this puzzle by showing that the aggregation of antipersistent expected returns and expected dividends gives rise to a price–dividend ratio with properties that mimic long memory in finite samples. In an empirical implementation, we extend and estimate the state-space present-value model by allowing for fractional integration in expected returns and expected dividend growth. This extension improves the model’s forecasting power in-sample and out-of-sample. In addition, expected returns and expected dividend growth modeled as ARFIMA processes are more closely related to future macroeconomic variables, which makes them suitable as leading business cycle indicators

Return predictability, dividend growth, and the persistence of the price–dividend ratio

Empirical evidence shows that the order of integration of returns and dividend growth is approximately equal to the order of integration of the first-differenced price–dividend ratio, which is about 0.7. Yet the present-value identity implies that the three series should be integrated of the same order. We reconcile this puzzle by showing that the aggregation of antipersistent expected returns and expected dividends gives rise to a price–dividend ratio with properties that mimic long memory in finite samples. In an empirical implementation, we extend and estimate the state-space present-value model by allowing for fractional integration in expected returns and expected dividend growth. This extension improves the model’s forecasting power in-sample and out-of-sample. In addition, expected returns and expected dividend growth modeled as ARFIMA processes are more closely related to future macroeconomic variables, which makes them suitable as leading business cycle indicators

The effect of FOMC votes on financial markets

This article shows that since votes of FOMC members have been included in press statements, stock prices increase after the announcement when votes are unanimous but fall when dissent (which typically is due to preference for higher interest rates) occurs. This pattern started prior to the 2007--2008 financial crisis. The differences in stock market reaction between unanimity and dissent remain even controlling for the stance of monetary policy and consecutive dissent. Statement semantics also do not seem to explain the documented effect. We find no differences between unanimity and dissent with respect to impact on market risk and Treasury securities

Firm-specific capital, inflation persistence and the sources of business cycles

This paper estimates a firm-specific capital DSGE model. Firm-specific capital improves the fit of DSGE models to the data (as shown by a large increase in the value of the log marginal likelihood). This results from a lower implied estimate of the NKPC slope for a given degree of price stickiness. Firm-specific capital leads to a better fit to the volatilities of macro variables and a greater persistence of inflation. It is also shown that firm-specific capital reduces the dependence of New Keynesian models on price markup shocks and that it increases the persistence of output to monetary shocks

Overtime Labor, Employment Frictions, and the New Keynesian Phillips Curve

This paper presents a New Keynesian (NK) model that is extended to differentiate between straight time and overtime work. The model proposes that the New Keynesian Phillips curve (NKPC) should be estimated with marginal cost measured in terms of overtime labor; the resulting coefficient estimates are in accordance with theory and statistically significant for the hybrid NKPC (which allows for backward-looking price setters) but not for the purely forward-looking NKPC. In the hybrid model, backward-looking behavior is found to be predominant. The paper also shows that the incorporation of employment frictions (predetermined employment and convex adjustment costs) in NK models helps reconcile the frequent price changes found in the microdata with the degree of sluggishness in inflation adjustment to output changes at the macro level

Fractional Integration of the Price-Dividend Ratio in a Present-Value Model.

We re-examine the dynamics of returns and dividend growth within the present-value framework of stock prices. We find that the finite sample order of integration of returns is approximately equal to the order of integration of the first-differenced price-dividend ratio. As such, the traditional return forecasting regressions based on the price-dividend ratio are invalid. Moreover, the nonstationary long memory behaviour of the price-dividend ratio induces antipersistence in returns. This suggests that expected returns should be modelled as an ARFIMA process and we show this improves the forecast ability of the present-value model in-sample and out-of-sample