Recent Developments in Macroeconomics: Introduction
Per Gunnar Berglund, Queens College CUNY and
Leanne J. Ussher, Queens College CUNY
Abstract
_______________________________________________________________________________________________
Monetary and Social Relationships
Charles Goodhart, London School of Economics
Abstract
_______________________________________________________________________________________________
How Responsive Is Business Capital Formation To Its User Cost? An Explanation with Micro Data
reprinted from Journal of Public Economics 74 (1999) pp. 53-80
Steven M. Fazzari, Washington University, St. Louis, Robert Chirinko, Emory University and Andrew Meyer, Federal Reserve Bank of St. Louis.
Abstract
The response of business capital formation to its user cost is critical to evaluating tax
reform, deficit reduction, and monetary policy. Evidence for a substantial user cost
elasticity, however, is sparse. Most evidence has been based on aggregate data, although
several recent studies with firm-level data report substantial effects. With a particularly rich
micro dataset containing over 26,000 observations, this paper explores what can be learned
about the user cost elasticity. While the results depend to some extent on the specification
and econometric technique, various diagnostics lead us to prefer a precisely estimated but
small elasticity of approximately - 0.25.
Keywords : Business investment; User cost of capital; Taxation
JEL classification : E22; H32; E50
_______________________________________________________________________________________________
From Investment Cycles to Random Shocks: Evidence and Ideology
in Business Cycle Theory
Claude Hillinger, SEMECON, Munich, Germany
Abstract
The paper describes the results of 40 years of research on business cycle stylized facts and their theoretical explanation. Both with regard to methods and findings, this research has been diametrically opposed to the mainstream in macroeconomics. The most basic finding is that macroeconomic fluctuations are in large measure a consequence of the endogenous dynamics of fixed and inventory investment. These fluctuations have irregular, but identifiable periodicities that match the descriptions given in the classical business cycle literature: an inventory cycle of 3-4 years and a fixed investment cycle of 7-10 years.
The paper describes the empirical evidence in relation to the major industrialized economies. The methodology developed for this purpose is based on maximum entropy spectral analysis.
To explain the evidence I developed a simple model of stock/flow interaction. It is embodied in a differential equation referred to as the second order accelerator (SOA). Suitably modified, the SOA can explain both the inventory and the fixed investment cycles.
For the purpose of estimation and testing of the SOA models, a continuous time Kalman filter methodology was developed and implemented. The Estimated models successfully replicated observed stylized facts.
Finally the theory was taken to the micro level in order to show why the microeconomic behavior of firms does not simply average out in the aggregate. For this purpose, the mathematical model of parametric resonance, taken from physics was employed. The theory was confirmed in an application to disaggregated U.S. data. I compare the dynamic theory of economic fluctuations with the evolution of mainstream macroeconomics over the past half century and argue that the latter was driven less by evidence, then by ideology. Specifically, Friedman pushed the neoconservative ideology by arguing that the economy was passive, but disturbed by monetary shocks. This puts the government in the role of the culprit rather than in the more distinguished role of the potential stabilizer. The second ideology is the application of the neoclassical paradigm to macroeconomic data. The prestige of this paradigm, coupled with the prestige of the advanced mathematical methods to which it lends itself, led to the acceptance of rational expectations and real business cycles, irrespective of the lack of empirical success.
Key Words: business cycles, investment cycles, inventory investment, fixed investment, parametric resonance, aggregation, real business cycles, maximum entropy spectral analysis.
JEL Classifications: E32, C32, C5
_______________________________________________________________________________________________
Has the Response of Investment to Financial Market Signals Changed?
Jonathan McCarthy, Federal Reserve Bank of New York
Abstract
Stock market fluctuations during the late 1990s and early 2000s have been given a prominent role in many accounts for investment behavior during that period. In contrast, earlier studies had found little effect of nonfundamental equity price movements on aggregate investment. This paper examines whether the relationship between equipment investment and equity prices has changed over time. We find evidence some changes in this relationship. Perhaps surprisingly given the late 1990s and early 2000s experience, stock price fluctuations appear to have a weaker relationship with investment in the low macroeconomic volatility period that began in the mid-1980s. It appears the tighter relationship in the late 1990s and early 2000s was a temporary phenomenon, perhaps the result of the unusual behavior associated with the Internet equity price “bubble.”
Keywords: Investment, capital expenditures, equity price fluctuations
JEL classification: E22, E32, E44
_______________________________________________________________________________________________
Using Structural Shocks to Identify Models of Investment
John M. Roberts, Board of Governors of the Federal Reserve
Abstract
This paper uses the response of investment to identified structural shocks to distinguish between some competing models of investment. One issue is the nature of adjustment costs: The classical treatments of adjustment costs have focused on costs to adjusting the level of the capital stock and a number of studies using firm-level data have found that capital stock adjustment costs are important. But a number of recent macroeconomic studies have considered only investment adjustment costs. Another issue concerns whether the response of investment to changes in interest rates is smaller than would be predicted by models with the conventional assumption of a unitary elasticity of substitution between labor and capital.
Investment is U.S. business spending on equipment other than information technology, a relatively homogeneous category that accounts for about half of business fixed investment. The empirical approach is to choose the parameters of the investment model to match as closely as possible the impulse responses from an identified VAR.
The results are sensitive to the impulse responses that are matched. In the preferred results, the estimated elasticity of substitution is estimated to be much smaller than one, both investment- and capital-stock adjustment costs are important, and the size of the capital-stock adjustment costs is in line with estimates from firm-level studies. But if the responses to an identified aggregate demand shock are included among those to be matched, the elasticity of substitution is not significantly different from one. Furthermore, only investment adjustment costs are found to be statistically important. This sensitivity turns on a large crowding out effect from the identified AD shock: The shock initially leads to an expansion in hours and output but a contraction in investment.
Keywords: Investment, adjustment costs, putty-clay
JEL classification codes: E22, D92
_______________________________________________________________________________________________
The Discounted Economic Stock of Money with VAR Forecasts
By William Barnett, Unja Chae, and John Keating
University of Kansas
Abstract
We measure the United States capital stock of money implied by the Divisia monetary aggregate service flow, in a manner consistent with the present-value model of economic capital stock. We permit non-martingale expectations and time varying discount rates. Based on Barnett’s (1990, 1991) definition of the economic stock of money, we compute the U.S. economic stock of money by discounting to present value the flow of expected expenditure on the services of monetary assets, where expenditure on monetary services is evaluated at the user costs of the monetary components. As a theoretically consistent measure of money stock, our economic stock of money nests Rotemberg, Driscoll, and Poterba’s (1995) currency equivalent index as a special case, under the assumption of martingale expectations. To compute the economic stock of money without imposing martingale expectations, we use forecasts based on the asymmetric vector autoregressive model and the Bayesian vector autoregressive model. We find the resulting capital-stock growth-rate index to be surprisingly robust to the modeling of expectations.
Keywords: Monetary aggregation, Divisia money aggregate, economic stock of money, user cost of money, currency equivalent index, Bayesian vector autoregression, asymmetric vector autoregression.
JEL Classifications: E4, E5, C43, G12
_______________________________________________________________________________________________
Where Simple Sum and Divisia Monetary Aggregates Part: Illustrations and Evidence for the United States
Michael T. Belongia, University of Mississippi
Abstract
Empirical studies of money continue to use the Federal Reserve's official simple sum indexes, apparently in the belief that their behavior differs
little from patterns exhibited by superlative indexes of money. This paper
illustrates specific periods when this assumption is refuted and offers
explanations for why simple sum and superlative indexes of money are likely
to move differently at economic turning points.
JEL codes: E0, E4, E5, B0
_______________________________________________________________________________________________
Monetary Services Indexes: A Practitioner’s Perspective
Barry Jones, SUNY Binghamton
Abstract
The aggregation-theoretic Divisia indexes have become a widely-accepted alternative to conventional simple sum monetary aggregates produced by many central banks. This article explores some of the issues faced by practitioners interested in applying the techniques of monetary aggregation theory to macroeconomic data. In particular, the article explores alternative empirical proxies for the benchmark rate and methods for determining the optimal level of monetary aggregation. Non-parametric testing is used to determine admissible monetary aggregates for the US for the period 1991-2003. The tests find a range of admissible aggregates including the zero-maturity monetary aggregates, M2M and MZM, and the broader M3 monetary aggregate. The empirical properties of the Divisia and simple sum indexes for the US are compared over two sample periods: 1970-1991 and 1991-2003. The largest and most economically significant differences between the indexes are found during the “monetarist experiment” of 1978-1983.
_______________________________________________________________________________________________
The Role Of Money In The Measurement Of Value
Utz-Peter Reich, Fachhochschule Mainz, Germany
Abstract
The speed of production and consumption in an economy is customarily measured in units of currency per unit of time, Euros/year, for example. The assumption implied by such usage is that the currency unit measures correctly the variation of the observed value flows, while the the currency unit itself remains invariable, measuring the same value no matter by whom, when, where it is expended, and on what. On this assumption macroeconomic aggregates such as gross domestic product and its components are compiled in the national accounts. Money is used here as a measure of economic value. The question is what justifies the choice?
It seems that the answers to the question are not coherent between different departments of economics. The theory of value is essentially microeconomic and based on the assumption that value is not a cardinal figure and different for each person, hence immeasurable. In macroeconomics, in contrast, the matter is so trivial that a simple algebraic operation suffices to deal with it. All values are divided by a letter P and then called “real”. In economic statistics the problem of measurement unit is felt more directly, naturally, but here the departments in charge of it, price statistics and national accounts, cherish their separate traditions making no effort to integrate their concepts and practice of measurement.
The paper investigates the different views under the hypothesis that it may be wise to give up the notion of “measurement” in the situation.
_______________________________________________________________________________________________
The search for the elusive twin goals of monetary and financial stability
Claudio Borio, Bank for International Settlements
Abstract
_______________________________________________________________________________________________
Another Look into the Phillips' Curve?
Philip Arestis, Cambridge University, UK, and Levy Economics Institute and
Malcolm Sawyer, Leeds University Business School, UK
Abstract
The paper begins by remarking on the central role played by the Phillips’ curve in macroeconomic analysis. The paper argues that the reduced form formulation of the Phillips’ curve with the level of economic activity influencing the pace of inflation is unsatisfactory. We consider the initial theoretical backing for the Phillips curve as an excess demand adjustment mechanism, and then the New Keynesian approach, and in each case argue that there is a failure to establish a relationship between inflation and the level of economic activity. We present an alternative view where the inflationary process is viewed as more complex than the reduced form Phillips curve and where the mechanism for changing inflation barrier becomes clear.
_______________________________________________________________________________________________
Monetary and Fiscal Interactions: Short-run and Long-run Implications
Alan G. Isaac, American University
Abstract
Monetary and fiscal policy interact to determine macroeconomic outcomes. This paper models that interaction in a growing economy. Monetary policy is characterized by a Taylor rule. Fiscal policy is characterized by a marginal tendency to deficits or surpluses. We address two questions: can fiscal policy ensure macroeconomic stability when the monetary authority pegs the interest rate, and does the monetary authority have the ability to trade-off some sustained inflation for a long-run improvement in unemployment rates.
_______________________________________________________________________________________________
Betting the Ranch – Some Peculiarities in Recent U.S Household Financial
Behavior
Rob Parenteau, Dresdner RCM Global Investors
Abstract
If periods of strong and rising asset prices can encourage higher private sector spending propensities and increased use of balance sheet leverage, then the converse should also hold true. Oddly enough, US households have persisted on a path of unprecedented deficit spending despite the popping of the late '90s equity bubble. In addition, household balance sheet debt accumulation has continued to mount in excess of that required to finance this deficit spending. During this time, many central bankers have adopted a more explicit asymmetric policy response towards asset bubbles, and identified their ability to influence financial markets as the central transmission mechanism of monetary policy. US households, recognizing these changes in policy, may be gaming the central bank by engaging in a dramatic shift in their spending preferences and their willingness to leverage their portfolios. This may present further challenges to policy in the near future, which suggests that financial stability considerations may need to be given at least an equal billing with inflation stability in the apt execution of monetary policy.
_______________________________________________________________________________________________
Inflation Targeting and Central Bank Independence:
We Are All Keynesians
Now! Or Are We?
Philip Arestis, University of Cambridge and Levy Economics Institute, and
Malcolm Sawyer, Leeds University
Abstract
A number of countries have adopted Inflation Targeting (IT) since
the early 1990s in an attempt to reduce inflation to low levels. A number
of its ingredients can be found in Keynes, especially that of central bank
independence. Is it then the case that we are all Keynesians now? Looking
more closely into the IT, however, we suggest that it is a major policy
prescription closely associated with the New Consensus Macroeconomics
(NCM). The latter's main theoretical ingredients appear to be very
different from Keynes's ideas on central banking and its policy objectives.
Regrettably, we may not be all Keynesians after all, or not yet!
Key Words: central bank independence, Keynesian economics, new consensus
macroeconomics, inflation targeting, monetary policy
JEL Classification: E31, E52
______________________________________________________________________________________________
Planning Costs, Financial Education, and Household Saving Behavior
Annamaria Lusardi, Dartmouth College
Abstract
Many traditional models of saving do not incorporate any planning costs in individual decision-making. However, these costs exit and can influence how households save and accumulate wealth. This paper first reviews the evidence on planning and shows that many households have not planned for retirement. Lack of planning is widespread not only among young workers but also among those who are only 5 to 10 years away from retirement. Planning is an important determinant of savings and portfolio choice. Those who do not plan arrive close to retirement with little private wealth and are less likely to invest in stocks. Consistent with the evidence on lack of planning, the paper shows individual workers are not well informed about Social Security and pensions; often, they do not even know the type of pensions they have. Recent data from financial literacy surveys also suggest that many workers lack basic knowledge about bonds, stocks and mutual funds and the working of interest compounding. While several employers have taken initiatives to improve the financial knowledge of their workers, many researchers have not found any effects of programs such as retirement seminars. This may be due to the fact that rarely data sets provide enough information to assess the effects of such programs. Data from the Health and Retirement Study, that provides a rich set of data on both workers and employers, show that retirement seminars can be effective in stimulating savings, particularly for those with low education and those at the bottom of the wealth distribution. To be able to provide an evaluation of the effectiveness of financial education programs, one needs to have a good understanding of the obstacles individuals face in making saving decisions. The paper also discusses some of the recent models of saving that explicitly incorporate planning costs.
_______________________________________________________________________________________________
What Has Been Learned Since 2001 About Counter-Cyclical Tax Rebates?
Laurence S. Seidman, University of Delaware and
Kenneth A. Lewis, University of Delaware
Abstract
What has been learned from the 2001 recession about the impact of counter-cyclical tax
rebates? Based on their consumer surveys of the 2001 tax rebate, Shapiro and Slemrod estimate
a marginal propensity to consume (MPC) out of rebates of 0.36 over two-and-a-half quarters.
Using a macroeconometric model that contains an MPC of roughly this magnitude, we perform
simulations and find that a rebate twice as large as the 2001 $600 rebate repeated for four
quarters would have reduced the unemployment rate at the end of one year from 5.9% to 5.2%.
Johnson, Parker, and Souleles estimate an MPC of 0.66 over two quarters - an estimate roughly
twice as large as Shapiro and Slemrod. If the Johnson, Parker, and Souleles estimate of the MPC
is correct, then our simulations imply that if the 2001 $600 rebate had been repeated for four
quarters it would have reduced the unemployment rate at the end of one year from 5.9% to 5.2%.
Key Words: Recession, Counter-Cyclical Fiscal Policy, Tax Rebate
JEL Classification: E62
_______________________________________________________________________________________________
The Consumption Wealth Effect
Charles Steindel, Federal Reserve Bank of New York
Abstract
The personal saving rate is now virtually zero, whereas it was above 7% in the early 1990s. The pronounced increase in wealth relative to income since the mid-1990s appears to be linked to the reduction in the saving rate. This broad correlation has often been cited as confirmation of a causal link between increases in wealth and increases in consumer spending. The focus on the role of wealth movements in determining spending stems directly from the original work on the life cycle model of consumer spending of Franco Modigliani and his collaborators. In the typical empirical formulation of the model, consumer spending has been modeled as a linear function of income and wealth; with the coefficient on wealth typically found to be in the neighborhood of .05 Recent research suggests that this line of reasoning is a bit oversimplified. The long-run correlations between wealth, consumption, and saving suggested by the life cycle hypothesis clearly exist. However, it is incorrect to apply these long-run relationships to short-term movements; pronounced changes in wealth need not be associated with any substantive change in spending or saving. It is even inappropriate to assume that long-sustained changes in wealth can always be fully identified with the long-run changes associated with major revisions to spending plans. There is indeed a connection between the increase in wealth over the last decade and the decline in saving. In all likelihood there have been forces (such as the higher productivity trend) that have worked both to increase market valuations and boosted consumer estimates of permanent income relative to realized income, thus increasing spending and reducing saving. As the failure of consumer spending to retreat during the 2000-2002 bear market suggests, these fundamental reassessments of the longer-term outlook can be largely independent of even very large moves in current market valuations.
Key words: Consumption, wealth effect
JEL Classifications: D91, E21
_______________________________________________________________________________________________
*Titles, abstracts and papers are still works in progress and may change.
