Employment, Hours per Worker and the Business Cycle.

We examine the impact that technology shocks have in a trivariate VAR that includes productivity, hours worked per person and the employment ratio. These last two variables have trends that make them non-stationary. There are three results of interest. First, a technology shock reduces both hours and employment if those two variables are specified in first differences, with the response of employment being stronger than the response of hours. Second, a technology shock increases both hours and employment, when those two variables are specified in levels, although in this case the response of hours worked per person is stronger. Third, considering the possibility of changes in the trend growth rate of productivity reverses the results for the VARs with data in levels only. We also present a real business cycle model capable of replicating some of the results for hours and employment.Business cycles, Employment, Hours worked, Technology shocks

Consumption Theory

There is no doubt that aggregate consumption is a key variable for policy makers. The aim of this handbook is to familiarise the reader with the key theories that have been used to model and forecast consumption and draw out their implications for policy analysis. This handbook is intended to be accessible to those working in policy-related departments without losing economic rigour. Important concepts are highlighted in a series of four boxes and technical details in four appendices. The handbook pays particular attention to the role of forward-looking agents and their reaction to policy announcements; the role of interest rates in consumption and the role of other variables thought to affect consumption behaviour such as taxes, the structure of both the banking system and the stock market, age and wealth distributions and the volatility of economic variables. Unfortunately, different consumption theories can lead to different policy prescriptions and as such a clear message arises from this handbook: there is no single consumption theory that can explain consumption behaviour in all economies; economists must therefore investigate what they think explains consumption in their country.Consumption Theory

The Impact of Trend Inflation in an Open Economy Model

Most New Keynesian models are derived under the assumption that inflation is equal to zero in the steady-state and yet most central banks around the world have inflation targets that are greater than such a number. In this paper we consider the open economy (welfare) implications of non-zero steady-state inflation rates both in the domestic and foreign economies. We show that higher inflation rates in the steady-state, both in the domestic and foreign economies, reduce welfare in the domestic economy. We also show that high domestic inflation rates in the steady-state have a more adverse effect on domestic welfare than high foreign inflation rates.Optimal Monetary Policy, Trend Inflation, Open Economy Macroeconomics

Understanding the macroeconomic effects of working capital in the United Kingdom

In this paper we first document the behaviour of working capital over the business cycle stressing the large negative effect of the recent credit contraction on UK firms working capital positions. In order to understand the effects of working capital on macroeconomic variables, we solve and calibrate an otherwise standard flexibleprice DSGE model that introduces an explicit role for the components of working capital as well as a banking sector which intermediates credit. We find that financial intermediation shocks, similar to those experienced post-2007, have persistent negative effects on economic activity ; these effects are reinforced by reductions in trade credit. Our model admits a crucial role for monetary policy to offset such shocks. Key words: Working capital ; business cycle model ; spreads ; financial crisis. JEL classification: E20 ; E51 ; E52

Solving rational expectations models: a practical approach using Scilab®

This Handbook is about useful numerical methods for models commonly used in central banks. The linear general equilibrium model with rational expectations is a natural part of the central bank economist's toolkit. The appropriate modelling of monetary policy in these models is even more so. This Handbook aims to get people familiar with the methods and then to use them on their own problems by demonstrating exactly how to do it in as simple a way as possible.  The Handbook is structured so that the exercises and suggested variations should help the reader to both understand the techniques being used and the Scilab code itself. The Scilab code forms a useful library of routines than can be reused by economists wishing to investigate the properties of their models. The Handbook first introduces a basic New Keynesian (NK) model, briefly discussing each of the equations that comprise the system. Then is shows how to put the model into state space, how to solve the model for a given calibration, and present results for the model in terms of impulse responses and moments. The remainder of the Handbook builds on this by considering how to handle variations on this simple model, with modifications to the IS curve, the Phillips Curve, the policy rule and extending to an open economy. We also examine alternative forms of modelling monetary policy, in particular how to calculate optimal policies and to optimise the coefficients of a simple policy rule.DSGE; model solution; policy design;

Soft liquidity constraints and precautionary saving

The implications for consumption and saving behaviour are explored, when households are allowed to borrow, but face penalties which increase with the amount borrowed. It is shown that the introduction of this type of constraints (soft liquidity constraints) does not lead to consumers behaving very differently from consumers who face constraints which prevent them from borrowing at any time (hard liquidity constraints). However, when hard constraints are relaxed and become soft, the amount of precautionary saving falls.

Understanding the macroeconomic effects of working capital in the United Kingdom

In this paper we first document the behaviour of working capital over the business cycle stressing the large negative effect of the recent credit contraction on UK firms working capital positions. In order to understand the effects of working capital on macroeconomic variables, we solve and calibrate an otherwise standard flexible-price DSGE model that introduces an explicit role for the components of working capital as well as a banking sector which intermediates credit. We find that financial intermediation shocks, similar to those experienced post-2007, have persistent negative effects on economic activity; these effects are reinforced by reductions in trade credit. Our model admits a crucial role for monetary policy to offset such shocks