News and Business Cycles in Open Economies

Aggregate and sectoral comovement are central features of business cycle data. Therefore, the ability to generate comovement is a natural litmus test for macroeconomic models. But it is a test that most existing models fail. In this paper we propose a unified model that generates both aggregate and sectoral comovement in response to contemporaneous shocks and news shocks about fundamentals. The fundamentals that we consider are aggregate and sectoral TFP shocks as well as investment-specific technical change. The model has three key elements: variable capital utilization, adjustment costs to investment, and a new form of preferences that allow us to parameterize the strength of short-run wealth effects on the labor supply.

Undercapitalized Banks, Uncertain Government Policies, and Declines in Total Factor Productivity

Recently a number of countries have experienced a prolonged slowdown in aggregate economic activity accompanied by a signi.cant deterioration of the banks.net worth. This paper studies the optimal bank behavior when they are severely undercapitalized but continue to operate due to lax government policies. In particular, we show that when the government policies generate uncertainties regarding (i) the exact timing at which the government intervention will occur, and (ii) the fraction of the banks that will be forced to shut down, then banks change their lending behavior. These changes are largely responsible for the prolonged recession, which occurs in the aftermath of the banking crisis. The mechanism through which this e¤ect occurs is as follows. In the model economy, .rms need .time to build.in order to achieve the maximum return on investment they undertake. Due to the uncertainty regarding the probability of survival, the banks. discount rate increases dramatically. This implies that the banks do not wish to .nance long-term investment, forcing .rms to switch to the short-term projects. These projects do not require .time to build., but are less productive. As the quality of investment falls, the total factor productivity (TFP) falls, contributing to the fall in aggregate output. Such a joint decline in the TFP and aggregate output in the aftermath of the banking crisis is a salient feature of the Japan.s and Mexico.s recent experiences.

Behavioral Theories of the Business Cycle

We explore the business cycle implications of expectation shocks and of two well-known psychological biases, optimism and overconfidence. The expectations of optimistic agents are biased toward good outcomes, while overconfident agents overestimate the precision of the signals that they receive. Both expectation shocks and overconfidence can increase business-cycle volatility, while preserving the model's properties in terms of comovement, and relative volatilities. In contrast, optimism is not a useful source of volatility in our model.business cycle, optimism, overconfidence, volatility

Can News About the Future Drive the Business Cycle?

Aggregate and sectoral comovement are central features of business cycle data. Therefore, the ability to generate comovement is a natural litmus test for macroeconomic models. But it is a test that most existing models fail. In this paper we propose a unified model that generates both aggregate and sectoral comovement in response to contemporaneous shocks and news shocks about fundamentals. The fundamentals that we consider are aggregate and sectoral TFP shocks as well as investment-specific technical change. The model has three key elements: variable capital utilization, adjustment costs to investment, and a new form of preferences that allow us to parameterize the strength of short-run wealth effects on the labor supply.

The Young, the Old, and the Restless: Demographics and Business Cycle Volatility

In this paper we investigate the consequences of demographic change for business cycle analysis. We find that changes in the age composition of the labor force account for a significant fraction of the variation in business cycle volatility observed in the US and other G7 economies. During the postwar period, these countries have experienced dramatic demographic change, though details regarding extent and timing differ from place to place. Using panel data methods, we exploit this variation to show that the age composition of the workforce has a large and statistically significant effect on cyclical volatility. We conclude by relating these findings to the recent decline in US business cycle volatility. Through simple quantitative accounting exercises, we find that demographic change accounts for a significant part of this moderationbusiness cycles

The young, the old, and the restless: demographics and business cycle volatility

We investigate the consequences of demographic change for business cycle analysis. We find that changes in the age composition of the labor force account for a significant fraction of the variation in business cycle volatility observed in the U.S. and other G7 economies. During the postwar period, these countries experienced dramatic demographic change, although details regarding extent and timing differ from place to place. Using panel-data methods, we exploit this variation to show that the age composition of the workforce has a large and statistically significant effect on cyclical volatility. We conclude by relating these findings to the recent decline in U.S. business cycle volatility. Using both simple accounting exercises and a quantitative general equilibrium model, we find that demographic change accounts for a significant part of this moderation.Business cycles - Econometric models ; Demography

Nonlinear effects of taxation on growth

We propose a model consistent with two observations. First, the tax rates adopted by different countries are generally uncorrelated with their growth performance. Second, countries that drastically reduce private incentives to invest severely hurt their growth performance. In our model, the effects of taxation on growth are highly nonlinear. Low tax rates have a very small impact on long-run growth rates. But as tax rates rise, their negative impact on growth rises dramatically. The median voter chooses tax rates that have a small impact on growth prospects, making the relation between tax rates and economic growth difficult to measure empirically