Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S,s) Approach

In this paper we derive a model of aggregate investment that builds from the lumpy microeconomic behavior of firms facing stochastic fixed adjustment costs. Instead of the standard (S,s) bands, firms' optimal adjustment policies are probabilistic, with a probability of adjusting (adjustment hazard) that grows smoothly with firms' disequilibria. Depending upon the specification of the distribution of fixed adjustment costs, the adjustment hazards approach encompasses models ranging from the very non-linear (S,s) model to the linear partial adjustment model. Except for the latter extreme, the processes for aggregate investment obtained from adding up the actions of firms subject to aggregate and idiosyncratic shocks, is highly non-linear. Estimating the aggregate model by maximum likelihood, we find clear evidence supporting non-linear models over linear ones for postwar sectoral U.S. manufacturing equipment and structures investment. For a given sequence of aggregate shocks, the nonlinear model estimated generates brisker expansions and - to a lesser extent - sharper contractions than its linear counterpart. These features fit well the observed positive skewness and large kurtosis of U.S. manufacturing sectoral investment/capital ratios.

Forecasting euro area inflation: Does aggregating forecasts by HICP component improve forecast accuracy?

Monitoring and forecasting price developments in the euro area is essential in the light of the second pillar of the ECB's monetary policy strategy. This study analyses whether the forecasting accuracy of forecasting aggregate euro area inflation can be improved by aggregating forecasts of subindices of the Harmonized Index of Consumer Prices (HICP) as opposed to forecasting the aggregate HICP directly. The analysis includes univariate and multivariate linear time series models and distinguishes between different forecast horizons, HICP components and inflation measures. Various model selection procedures are employed to select models for the aggregate and the disaggregate components. The results indicate that aggregating forecasts by component does not necessarily help forecast year-on-year inflation twelve months ahead. JEL Classification: E31, E37, C53, C32Euro Area Inflation, HICP subindex forecast aggregation, linear time series models

The Perverse Response of Interest Rates

We argue that an increase in aggregate demand can lead to a reduction in the interest rate. This apparently perverse optimal response of interest rates can occur when the Phillips curve is non-linear. In that case, an increase in aggregate demand tends to increase inflation and output but also to change the weight on inflation in the optimal monetary policy rule. Although the first two effects tend to increase interest rates, the latter effect can imply lower interest rates. If this effect dominates, interest rates can fall

A smooth-transition model of the Australian unemployment rate

Models of the aggregate unemployment rate have traditionally been estimated from structural models of the labour market or in a linear single-equation framework. However, theory as well as evidence suggest that the unemployment rate is asymmetric and should be modelled in a non-linear framework. In this paper the unemployment rate in Australia is modelled as a non-linear function of aggregate demand and real wages. Negative changes in aggregate demand cause the unemployment rate to rise rapidly, while real wage rigidity contributes its to slow adjustment back towards a lower level of unemployment. The model is developed by exploiting recent developments in automated model-selection procedures.unemployment;non-linearity;dynamic modelling;aggregate demand;real wages

Inflation-Unemployment Tradeoff and Regional Labor Market Data

We estimate a linear and a piecewise linear Phillips curve model with regional labor market data for West German and Neue Länder. Employing regional observations allows us to country difference the data. This eliminates, under the assumption of homogeneous Länder, supply shocks and changes in the formation of expectations as possible identification failures. With seemingly unrelated regressions we find a flat Phillips curve in the Neue Länder. For the West German Länder a piecewise linear model with a higher inflation-unemployment tradeoff for the regime of low unemployment rates fits the data very well. The results hold true if we control for endogeneity of the unemployment rate. With a kinked but upward sloping aggregate supply curve there seems to be room for stabilization policies, at least in the range of aggregate demand shifts that our data covers.inflation-unemployment tradeoff, NAIRU, regional labor market data, seemingly unrelated regression

Moral Hazard, Aggregate Risk and Nominal Linear Financial Contracts

We study competitive equilibria with moral hazard in economies with aggregate risk and where trading occurs with an incomplete set of financial assets. The main conclusion of the paper is that, contrary to the individual risk economies, moral hazard is compatible with trading in competitive linear financial contracts, and gives rise to no manipulation problem. We establish existence of nonmanipulable equilibria provided that there are no relative price effects (e.g., a one-commoditiy economy), and that financial markets display nonlinearly homogeneous payoffs (e.g., nominal), and are sufficiently incomplete. Finally, we justify the linear contract as the optimal pricing schedule in a specific trading game with an auctioneer.moral hazard; linear contracts

First-principles thermoelasticity of bcc iron under pressure

We investigate the elastic and isotropic aggregate properties of ferromagnetic bcc iron as a function of temperature and pressure by computing the Helmholtz free energies for the volume-conserving strained structures using the first-principles linear response linear-muffin-tin-orbital method and the generalized-gradient approximation. We include the electronic excitation contributions to the free energy from the band structures, and phonon contributions from quasi-harmonic lattice dynamics. We make detailed comparisons between our calculated elastic moduli and their temperature and pressure dependences with available experimental and theoretical data.Comment: 5 figures, 2 table

On Aggregation of Linear Dynamic Models

This paper provides a general framework for aggregating linear dynamic models by deriving the aggregate model as an optimal prediction of the aggregate variable of interest with respect to an aggregate information set generated by current and past values of available aggregate observations. The paper shows how the results in the literature can be readily obtained using the proposed forecasting approach, and provides a number of important extensions and generalisations. In particular, it does not require the assumption of independence of the micro distributed lag coefficients, and establishes that in general the long-run coefficients obtained from the optimal aggregate relation are equal to the averages of the long-run coefficients from the micro relations. Finally, the approach advocated in the paper is applied to aggregation of life-cycle decision rules under habit formation, and the implications of the heterogeneity in habit formation coefficients across individuals for the analysis of aggregate consumption are investigated.Aggregation, Heterogeneous dynamic models, Long memory, Life cycle models under habit formation