On the econometrics of world business cycles

A description of the method used in dynamic general equilibrium business-cycle research as applied in some recent work on open economies.Business cycles

Quantitative Aggregate Theory

Nobel Prize Lecture, December 8, 2004Business Cycles; Time Consistency

The role of money in a business cycle model

Two mechanisms are considered through which money can play a role in a real business cycle model. One is in the form of aggregate price surprises when there is heterogeneity across individuals or groups of individuals (“islands”). These shocks affect the accuracy of information about real compensation that can be extracted from observed wage rates. Another, perhaps complementary, mechanism is that the amount of desired liquidity services varies over the cycle due to a trade-off between real money and leisure. This mechanism leads to price fluctuations even when the nominal money stock does not fluctuate. As is the case for the U.S. economy over the postwar period, the price level is then countercyclical. A key finding is that with neither mechanism do nominal shocks account for more than a small amount of variability in real output and in hours worked. Indeed, output variability may very well be lower the larger the variance of price surprises is.Business cycles ; Money

Monetary aggregates and output

This paper offers a general equilibrium model that explains how the observed correlations of money and output fluctuations may come about through endogenously determined fluctuations in the money multiplier. The model is calibrated to meet long run features of the U.S. economy (including monetary features) and then subjected to shocks to the Solow residual following a random process like that observed in U.S. data. The model's predicted business-cycle frequency correlations, of both real and nominal variables, share the following features with U.S. data: i) M1 is positively correlated with real output; ii) the money multiplier and deposit-to-currency ratio are positively correlated with real output; iii) the price level is negatively correlated with output [in spite of (i) and (ii)]; iv) the correlation of M1 with contemporaneous prices is substantially weaker than the correlation of M1 with real output; v) correlations among real variables are essentially unchanged under different monetary policy regimes; and vi) real money balances are smoother than money demand equations would predict. Although features (i) and (iv) may have been considered support for a causal influence of money on output, the paper demonstrates that they are consistent with an economy in which money has no such causal influence.Money supply

Does being different matter?

Changes in the demographic structure of the U.S. population will affect many aspects of the US economy as we move into the next century. Concerns about the impact of an aging population on savings and interest rates, the financing of government spending programs for the elderly, and the possibility of higher taxes for future generations to pay for them have become hot topics, both in the press and among economists. Another concern is whether rising immigration will place an even greater burden on the government. In this article, Finn Kydland and D'Ann Petersen present a framework economists can use to shed ight quantitatively on such issues where individual differences matter. They also discuss why, for a certain class of questions, being different does not matter. In the final section, the authors present findings from current research that deals with the issues mentioned above.Emigration and immigration ; Social security ; Saving and investment

The gold standard as a rule

In this paper, we show that the monetary rule followed by a number of key countries before 1914 represented a commitment technology preventing the monetary authorities from changing planned future policy. The experiences of these major countries suggest that the gold standard was intended as a contingent rule. By that, we mean that the authorities could temporarily abandon the fixed price of gold during a wartime emergency on the understanding that convertibility at the original price of gold would be restored when the emergency passed.Gold standard ; Economic history ; Monetary policy

Endogenous money supply and the business cycle

This paper documents changes in the cyclical behavior of nominal data series that appear after 1979:Q3 when the Federal Reserve implemented a policy to lower the inflation rate. Such changes were not apparent in real variables. A business cycle model with impulses to technology and a role for money is used to show how alternative money supply rules are expected to affect observed business cycle facts. In this model, changes in the money supply rules have almost no effect on the cyclical behavior of real variables, yet have a significant impact on the cyclical nature of nominal variables. Computational experiments with alternative policy rules suggest that the change in monetary policy in 1979 may account for the sort of instability observed in the U.S. data.Business cycles ; Money supply

The nominal facts and the October 1979 policy change

Gavin and Kydland (1999) calculated the cyclical properties of money and prices for the periods before and after the October 1979 policy change. In this article, we extend that work by adding four more years of data and including a study of nominal interest rates and inflation. The adoption of a disinflation policy in October 1979 does not appear to have had a measurable impact on the cyclical properties of real variables. However, it made a dramatic difference in the cyclical properties of nominal variables. We also examine the covariance structure of several nominal relationships: the autocovariance of inflation, the lag from money growth to inflation, and lag from money growth to nominal GDP growth. Generally, the monetary policy in the early period allowed the average inflation rate to ratchet upward with each business cycle. This policy was associated with high variances, high autocorrelations, and high cross-correlations among nominal variables. The moderate inflation policy followed in the second period was associated with lower mean growth rates, less volatility, and lower cross-correlations between money growth and inflation.Business cycles ; Monetary policy ; Inflation (Finance)

The nominal facts and the October 1979 policy change

Business cycles ; Monetary policy ; Inflation (Finance)

The computational experiment: an econometric tool

A specification of the steps in designing a computational experiment to address a well-posed quantitative question, emphasizing that the computational experiment is an econometric tool used in the task of deriving the quantitative implications of theory.Econometrics ; Econometric models