The Cost of Omitting Credit Channel in DSGE Model

This paper discusses whether the parameter invariance problem as in Lucas (1976) applies to the standard new Keynesian DSGE model when the credit channel is left out from its structure. We simulate a financial crisis in which the credit market friction is positive and we shift the monetary policy to stimulate the economy. We evaluate the cost of omitting the credit channel by examining the changes of the estimated model parameters and by using policy outcomes. We find that although some parameters incur nontrivial changes after the policy shift, overall these parameter changes have little impact on the conduct of monetary policy

How Costly is a Misspecified Credit Channel DSGE Model in Monetary Policymaking?

This paper examines whether misspecification in credit market friction could be costly in the context of monetary policymaking. Using two widely known dynamic stochastic general equilibrium (DSGE) models, we simulate a hypothetical financial crisis and examine how each model performs when the misspecification occurs in the credit channel. We demonstrate that monetary policy suggested by misspecified models tends to destabilize the economy during crisis, even though one of the two models does reasonably well in estimating policy-invariant model parameters. We also show that the opportunity cost of using a misspecified model is high relative to the outcome achieved under a correctly specified model, particularly when public financial intermediation is available in the correctly specified model. Introducing labor-related variables in either the monetary policy rule or stabilization objectives has the potential of improving policy outcomes in the misspecified credit channel model

Goods-Time Elasticity of Substitution in Health Production

We examine how inputs for health production, in particular, medical care and health-enhancing time, are combined to improve health. The estimated elasticity of substitution from a constant elasticity of substitution production function is significantly less than one for the working-age population, rejecting the unit elasticity of substitution used in previous studies

Examining Industrial Interdependence Between Japan and South Korea: A FAVAR Approach

This paper investigates the economic relationship between Japan and South Korea by incorporating disaggregated output measures. Using a factor-augmented vector autoregression (FAVAR) model, we conduct several experiments to test the nature of the interdependence, both in the aggregate and by sector. We find that South Korean output shocks affect the Japanese economy in a significant manner, whereas Japanese output shocks have a limited effect on South Korea. By further examining the transmission mechanism of sectoral output shocks and comparing them with the direction of sectoral trade, we find evidence of cross-border production sharing, which explains the asymmetric results seen in the aggregate output

How Do The Trans-Pacific Economies Affect the USA? An Industrial Sector Approach

This paper studies how the Trans-Pacific region affects the US economy in terms of business cycle transmission. We use a large data set consisting of disaggregated sectoral industrial production indexes from selected countries in the region and employ a factor-augmented vector autoregression (FAVAR) approach to analyze the transmission of shocks in different industries. We find that a positive output shock in the entire Trans-Pacific region has positive effects on the majority of US manufacturing sectors. We also find that sectoral shocks in five sectors of the Trans-Pacific region have a large impact on the overall US economy. Three of the five sectors displayed strong same-sector responses relative to the overall response, suggesting that vertical production linkages might play a key role in the transmission of shocks. Our results highlight the importance of examining industrial sectors in studying the transmission of shocks in the Trans-Pacific region

The Possible Role of Tumor Necrosis Factor-α in Diabetic Polyneuropathy

In this review, the authors provide evidences that imply the role of tumor necrosis factor-α (TNF-α) in the pathogenesis of diabetic complications, especially diabetic polyneuropathy. Under chronic hyperglycemia, endogenous TNF-α production is accelerated in microvascular and neural tissues, which may undergo an increased microvascular permeability, hypercoagulability, and nerve damage, thus initiating and promoting the development of characteristic lesions of diabetic microangiopathy and polyneuropathy. Enhanced TNF-α production may also promote atherosclerosis due to increased insulin resistance and the expression of adhesion molecules. Clinical application of specific agents that suppress production and/or activity of TNF-α may inhibit the development and exacerbation of chronic diabetic complications