The magnitude and Cyclical Behavior of Financial Market Frictions

We analyze a new panel data set that includes balance sheet information, measures of expected default risk, and credit spreads on publicly-traded debt for more than 900 firms over the period 1997Q1 through 2003Q3. We obtain precise time-specific estimates of the financial frictions parameter underlying the benchmark financial accelerator model of Bernanke, Gertler, and Gilchrist (1999) and clearly reject the null hypothesis of no credit market imperfections; furthermore, for the expansionary period through mid-2000, these estimates are quite similar to the calibrated values used in previous research. Finally, we find that financial market frictions exhibit strong cyclical pattern, with parameter estimates rising by a factor of two during the latest economic downturn before returning to pre-recession levels in 2003.perturbation, policy

Schumpeterian technology shocks

We analyze the labor market effects of neutral and investment-specific technology shocks along the intensive margin (hours worked) and the extensive margin (unemployment). We characterize the dynamic response of unemployment in terms of the job separation and the job finding rate. Labor market adjustments occur along the extensive margin in response to neutral shocks, along the intensive margin in response to investment specific shocks. The job separation rate accounts for a major portion of the impact response of unemployment. Neutral shocks prompt a contemporaneous increase in unemployment because of a sharp rise in the separation rate. This is prolonged by a persistent fall in the job finding rate. Investment specific shocks rise employment and hours worked. Neutral shocks explain a substantial portion of the volatility of unemployment and output; investment specific shocks mainly explain hours worked volatility. This suggests that neutral progress is consistent with Schumpeterian creative destruction, while investment-specific progress operates as in a neoclassical growth model.Search frictions, technological progress, creative destruction

The ins and outs of unemployment: An analysis conditional on technology shocks

We analyze how unemployment, job finding and job separation rates react to neutral and investment-specific technology shocks. Neutral shocks increase unemployment and explain a substantial portion of it volatility; investment-specific shocks expand employment and hours worked and contribute to hours worked volatility. Movements in the job separation rates are responsible for the impact response of unemployment while job finding rates for movements along its adjustment path. The evidence warns against using models with exogenous separation rates and challenges the conventional way of modelling technology shocks in search and sticky price models.Unemployment, technological progress, labor market flows, business cycle models.

Robustness of the Estimates of the Hybrid New Keynesian Phillips Curve

Galí and Gertler (1999) developed a hybrid variant of the New Keynesian Phillips curve that relates inflation to real marginal cost, expected future inflation and lagged inflation. GMM estimates of the model suggest that forward looking behavior is dominant: The coefficient on expected future inflation substantially exceeds the coefficient on lagged inflation. While the latter differs significantly from zero, it is quantitatively modest. Several authors have suggested that our results are the product of specification bias or suspect estimation methods. Here we show that these claims are incorrect, and that our results are robust to a variety of estimation procedures, including GMM estimation of the closed form, and nonlinear instrumental variables. Also, as we discuss, many others have obtained very similar results to ours using a systems approach, including FIML techniques. Hence, the conclusions of GG and others regarding the importance of forward looking behavior remain robust.

Rule-of-Thumb Consumers and the Design of Interest Rate Rules

We introduce rule-of-thumb consumers in an otherwise standard dynamic sticky price model, and show how their presence can change dramatically the properties of widely used interest rate rules. In particular, the existence of a unique equilibrium is no longer guaranteed by an interest rate rule that satisfies the so called Taylor principle. Our findings call for caution when using estimates of interest rate rules in order to assess the merits of monetary policy in specific historical periods.

Markups, Gaps, and the Welfare Costs of Business Fluctuations

In this paper we present a simple, theory-based measure of the variations in aggregate economic efficiency associated with business fluctuations. We decompose this indicator, which we refer to as 'the gap', into two constituent parts: a price markup and a wage markup, and show that the latter accounts for the bulk of the fluctuations in our gap measure. Finally, we derive a measure of the welfare costs of business cycles that is directly related to our gap variable, and which takes into account explicitly the existence of a varying aggregate inefficiency. When applied to postwar U.S. data, for plausible parametrizations, our measure suggests welfare losses of fluctuations that are of a higher order of magnitude than those derived by Lucas (1987). It also suggests that the major postwar recessions involved substantial efficiency costs.

Intertemporal Substitution and the Liquidity Effect in a Sticky Price Model

The liquidity effect, defined as a decrease in nominal interest rates in response to a monetary expansion, is a major stylized fact of the business cycle. This paper seeks to understand under what conditions such an effect can be explained in a general equilibrium model with sticky prices and capital adjustment costs. The paper first confirms that, with separable preferences, a low degree of intertemporal substitution in consumption is a necessary condition for the existence of the liquidity effect. Contrary to this result, in a model with non-separable preferences and capital accumulation it takes an implausibly high degree of intertemporal substitution to produce a liquidity effect. The robustness of these results to alternative degrees of nominal rigidities, money demand properties and real rigidities is also analyzed.

Technology Shocks and Monetary Policy: Assessing the Fed's Performance

The purpose of the present paper is twofold. First, we characterize the Fed's systematic response to technology shocks and its implications for U.S. output, hours and inflation. Second, we evaluate the extent to which those responses can be accounted for by a simple monetary policy rule (including the optimal one) in the context of a standard business cycle model with sticky prices. Our main results can be described as follows: First, we detect significant differences across periods in the response of the economy (as well as the Fed's) to a technology shock. Second, the Fed's response to a technology shock in the Volcker-Greenspan period is consistent with an optimal monetary policy rule. Third, in the pre-Volcker period the Fed's policy tended to over stabilize output at the cost of generating excessive inflation volatility. Our evidence reinforces recent results in the literature suggesting an improvement in the Fed's performance.

Postwar Financial Crises and Economic Recoveries in the United States

We reconsider the connection between financial crises and economic recoveries in the postwar United States. We proceed in two steps. First, we provide a chronology of financial crises in the United States. We make the case that the postwar period prior to 2007 should be characterized as featuring three periods of financial crisis: 1973−1975, 1982−1984, and 1988−1991. This implies a substantially different postwar chronology of financial crises from that advanced by Reinhart and Rogoff (2009a, 2009b). The second step in our analysis is to reexamine economic recoveries in the wake of financial crises with this revised chronology. We find that the regularity that recoveries are systematically slower in the aftermath of financial crises does not hold for the postwar United States. Historically, the pace of the expansion after recessions seems to reflect aggregate demand conditions

Postwar Financial Crises and Economic Recoveries in the United States

We reconsider the connection between financial crises and economic recoveries in the postwar United States. We proceed in two steps. First, we provide a chronology of financial crises in the United States. We make the case that the postwar period prior to 2007 should be characterized as featuring three periods of financial crisis: 1973−1975, 1982−1984, and 1988−1991. This implies a substantially different postwar chronology of financial crises from that advanced by Reinhart and Rogoff (2009a, 2009b). The second step in our analysis is to reexamine economic recoveries in the wake of financial crises with this revised chronology. We find that the regularity that recoveries are systematically slower in the aftermath of financial crises does not hold for the postwar United States. Historically, the pace of the expansion after recessions seems to reflect aggregate demand conditions