Reading inflation expectations from CPI futures

Consumer price indexes ; Inflation (Finance)

Oil price volatility and U.S. macroeconomic activity

Oil shocks exert influence on macroeconomic activity through various channels, many of which imply a symmetric effect. However, the effect can also be asymmetric. In particular, sharp oil price changes-either increases or decreases-may reduce aggregate output temporarily because they delay business investment by raising uncertainty or induce costly sectoral resource reallocation. Consistent with these asymmetric-effect hypotheses, the authors find that a volatility measure constructed using daily crude oil futures prices has a negative and significant effect on future gross domestic product (GDP) growth over the period 1984-2004. Moreover, the effect becomes more significant after oil price changes are also included in the regression to control for the symmetric effect. The evidence here provides economic rationales for Hamilton's (2003) nonlinear oil shock measure: It captures overall effects, both symmetric and asymmetric, of oil price shocks on output.Petroleum products - Prices ; Macroeconomics

Fiscal policy, increasing returns, and endogenous fluctuations

We examine the quantitative implications of government fiscal policy in a discrete-time one-sector growth model with a productive externality that generates social increasing returns to scale. Starting from a laissez-faire economy that exhibits an indeterminate steady state (a sink), we show that the introduction of a constant capital tax or subsidy can lead to various forms of endogenous fluctuations, including stable 2-, 4-, 8-, and 10- cycles, quasi-periodic orbits, and chaos. In contrast, a constant labor tax or subsidy has no effect on the qualitative nature of the model's dynamics. We also show that the use of local steady-state analysis to detect the presence of multiple equilibria in this class of models can be misleading. For a plausible range of capital tax rates, the log-linearized dynamical system exhibits saddle-point stability (suggesting a unique equilibrium) while the true nonlinear model exhibits global indeterminancy. Finally, we explore the use of a state-contingent capital subsidy/tax scheme for stabilization purposes. We show that a local control policy designed using the log-linearized model can rule out sunspot equilibria near the steady state but may not prevent fluctuations arising from global indeterminacy. We proceed to use the nonlinear model to design a policy that can stabilize the economy against all forms of endogenous fluctuations and select a globally unique equilibrium.Fiscal policy ; Business cycles ; Chaotic behavior in systems

Capital-Labor Substitution, Equilibrium Indeterminacy, and the Cyclical Behavior of Labor Income

This paper examines the quantitative relationship between the elasticity of capital-labor substitution and the conditions needed for equilibrium indeterminacy (and belief-driven áuctuations) in a one-sector growth model. Our analysis employs a ìnormalizedîversion of the CES production function so that all steady-state allocations and factor income shares are held constant as the elasticity of substitution is varied. We demonstrate numerically that higher elasticities cause the threshold degree of increasing returns for indeterminacy to decline monotonically, albeit very gradually. When the elasticity of substitution is unity (the Cobb-Douglas case), our model requires increasing returns to scale of around 1.08 for indeterminacy. When the elasticity of substitution is raised to 5, which far exceeds any empirical estimate, the threshold degree of increasing returns reduces to around 1.05. We also demonstrate analytically that laborís share of income becomes pro-cyclical as the elasticity of substitution increases above unity, whereas laborís share in postwar U.S. data is countercyclical. This observation, together with other empirical evidence, indicates that the elasticity of capital-labor substitution in the U.S. economy is actually below unity.Capital-Labor Substitution, Equilibrium Indeterminacy, Capital Utilization, Real Business Cycles, Labor Income

Indeterminacy and stabilization policy

A demonstration of how an income tax schedule that exhibits a progressivity feature can ensure saddle-path stability in a one-sector, real business-cycle model with sufficient increasing returns in production, thereby shielding the economy against sunspot fluctuations.Economic stabilization ; Business cycles

Tax structure, welfare, and the stability of equilibrium in a model of dynamic optimal fiscal policy

A demonstration that the assumed structure of taxation can have dramatic effects on economic welfare and on the stability of the steady state in a dynamic general-equilibrium model of optimal fiscal policy. The authors find that household welfare is highest under a structure that includes separate tax rates on labor and capital incomes, double taxation of dividends, and tax-deductible depreciation.Taxation ; Fiscal policy

The welfare effects of tax simplification: a general-equilibrium analysis

An analysis of various schemes for simplifying the U.S. tax system, which finds that a uniform tax system performs almost as well as a system with separate taxes on labor and capital incomes, provided that a depreciation allowance is maintained.Taxation

Tax structure and welfare in a model of optimal fiscal policy

A study of the welfare implications of some basic structural features of the U.S. tax code, including the tax deductibility of depreciation and the practice of taxing labor income differently than capital income. The results show that long-run welfare and output can be improved by a policy of accelerated depreciation, whereby the depreciation rate for tax purposes exceeds the rate of economic depreciation.Taxation ; Fiscal policy

Capital-labor substitution, equilibrium indeterminacy, and the cyclical behavior of labor income

This paper examines the quantitative relationship between the elasticity of capital-labor substitution and the conditions needed for equilibrium indeterminacy (and belief-driven fluctuations) in a one-sector neoclassical growth model. Our analysis employs a “normalized” version of the CES production function so that all steady-state allocations and factor income shares are held constant as the elasticity of substitution is varied. We demonstrate numerically that higher elasticities cause the threshold degree of increasing returns for indeterminacy to decline monotonically, albeit very gradually. When the elasticity of substitution is unity (the Cobb-Douglas case), our model requires increasing returns to scale of around 1.08 for indeterminacy. When the elasticity of substitution is raised to 5, which far exceeds any empirical estimate, the threshold degree of increasing returns reduces to around 1.05. We also demonstrate analytically that labor’s share of income becomes procyclical as the elasticity of substitution increases above unity, whereas labor’s share in postwar U.S. data is countercyclical. This observation, together with other empirical evidence, indicates that the elasticity of capital-labor substitution in the U.S. economy is actually below unity.Capital ; Labor supply