Online Appendix to "The Equivalence of Wage and Price Staggering in Monetary Business Cycle Models"

This appendix details the derivation of a number of results reported in "The Equivalence of Wage and Price Staggering in Monetary Business Cycle Models," which appears in the Review of Economic Dynamics.

Learning and Shifts in Long-Run Growth

Shifts in the long-run rate of productivity growth--such as those those experienced by the U.S. economy in the 1970s and 1990s--are difficult in real time to distinguish from transitory fluctuations. In this paper, we explore how economists' projections of trend productivity growth gradually evolved during the 1970s and 1990s, and examine the consequences of such real-time learning on the dynamic responses to shifts in trend growth in the context of a dynamic stochastic general equilibrium model. We find that a simple updating rule based on an estimated Kalman filter model using real-time data describes the evolution of economists' long-run growth expectations extremely well. We then show that incorporating learning in this fashion has profound implications for the dynamic effects of shifts in trend productivity growth, whether they are concentrated in the investment-goods sector or affect the entire economy. If immediately recognized, increases in the trend growth rate cause long-term interest rates to rise and produce a sharp decline in employment and investment. In contrast, with learning, a productivity acceleration sets off a sustained boom in employment and investment, and long-term interest rates rise only gradually in a pattern consistent with the experience of the 1990sKalman filter, real-time data, signal extraction

How Useful Are Estimated DSGE Model Forecasts for Central Bankers?

bank, banker, DSGE, forecast, macroeconomic

Welfare-maximizing monetary policy under parameter uncertainty

This paper examines welfare-maximizing monetary policy in an estimated micro-founded general equilibrium model of the U.S. economy where the policymaker faces uncertainty about model parameters. Uncertainty about parameters describing preferences and technology implies not only uncertainty about the dynamics of the economy. It also implies uncertainty about the model's utility-based welfare criterion and about the economy's natural rate measures of interest and output. We analyze the characteristics and performance of alternative monetary policy rules given the estimated uncertainty regarding parameter estimates. We find that the natural rates of interest and output are imprecisely estimated. We then show that, relative to the case of known parameters, optimal policy under parameter uncertainty responds less to natural-rate terms and more to other variables, such as price and wage inflation and measures of tightness or slack that do not depend on natural rates.Monetary policy

New Financial Stability Governance Structures and Central Banks

Part of the Hutchins Center Working Papers Serie

The Output Gap, the Labor Wedge, and the Dynamic Behavior of Hours

We use a standard quantitative business cycle model with nominal price and wage rigidities to estimate two measures of economic ineffciency in recent U.S. data: the output gap - the gap between the actual and effcient levels of output - and the labor wedge - the wedge between households' marginal rate of substitution and firms' marginal product of labor. We establish three results. (i ) The output gap and the labor wedge are closely related, suggesting that most ineffciencies in output are due to the ineffcient allocation of labor. (ii ) The estimates are sensitive to the structural interpretation of shocks to the labor market, which is ambiguous in the model. (iii ) Movements in hours worked are essentially exogenous, directly driven by labor market shocks, whereas wage rigidities generate a markup of the real wage over the marginal rate of substitution that is acyclical. We conclude that the model fails in two important respects: it does not give clear guidance concerning the effciency of business cycle uctuations, and it provides an unsatisfactory explanation of labor market and business cycle dynamics

A Retrospective Look at the U.S. Productivity Growth Resurgence

It is now widely recognized that information technology (IT) was critical to the dramatic acceleration of U.S. labor productivity growth in the mid-1990s. This paper traces the evolution of productivity estimates to document how and when this perception emerged. Early studies concluded that IT was relatively unimportant. It was only after the massive IT investment boom of the late 1990s that this investment and underlying productivity increases in the IT-producing sectors were identified as important sources of growth. Although IT has diminished in significance since the dot-com crash of 2000, we project that private sector productivity growth will average around 2.5 percent per year for the next decade, a pace that is only moderately below the average for the 1995-2005 period