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We use more than one century of Argentine and Mexican data to estimate the structural parameters of a small-open-economy real-business-cycle model driven by nonstationary productivity shocks. We find that the RBC model does a poor job at explaining business cycles in emerging countries. We then estimate an augmented model that incorporates shocks to the country premium and financial frictions. We find that the estimated financial-friction model provides a remarkably good account of business cycles in emerging markets and, importantly, assigns a negligible role to nonstationary productivity shocks.


This paper computes the welfare effect of the Great Moderation, using a representative-agent consumption-based asset pricing model. The Great Moderation is modeled according to the data properties of consumption and dividend growth rates, which display a reduction of their innovation-volatility and increased persistence: the latter is a characteristic that has been largely unaddressed in the literature. The theoretical model (a long-run risk model) is calibrated to match average asset pricing variables, as well as consumption and dividend dynamics before and during the Great Moderation. The model captures the relevant features of the Great Moderation (decreased variance, increased persistence, asset prices). It predicts only a modest welfare gain from Great Moderation (0.38 percent in consumption equivalent), due mainly to the utility cost of a late uncertainty resolution.


In this paper I show that a more accurate analysis of the Great Moderation leads to interesting and novel findings about macroeconomic volatility dynamics in the last decades. The main empirical result of the paper is that the Great Moderation has diversely affected macroeconomic volatility at different horizons (short-run, business-cycle, and medium-run). I refer to this phenomenon as the “heterogeneous Great Moderation” across frequencies. I formally test these findings by defining a frequency domain structural break test that detects the presence of a break in the variance of real macroeconomic variables at different frequencies. I derive its asymptotic and small sample properties, and I apply it to U.S. macroeconomic variables to provide statistical evidence that the Great Moderation is mainly confined to short-run fluctuations. I finally use a DSGE model to investigate which elements of the model can generate the heterogeneous Great Moderation. I find that, whereas just a decline of the magnitude of the shocks and a change in the monetary policy cannot replicate the stylized facts, accounting for the increased persistence of the exogenous disturbances is the key feature for generating the heterogeneous Great Moderation.


The price of capital is a key determinant of the financial accelerator, a transmission mechanism of shocks generated through the capital accumulation process of entrepreneurs that borrow in credit markets with frictions. This paper shows that the procedure of approximating the price of old capital by the net-of-depreciation price of new capital, as used in many articles since Bernanke et al. (1999), has profound implications when the capital depreciation rate is positive. When accounting for the appropriate price of capital, the effects of the financial accelerator are even stronger than originally assessed.


Have conventional monetary policy instruments maintained the same ability to accommodate undesirable effects of shocks throughout the post-war period? Or has the changed economic envi- ronment characterizing the last thirty years diminished the sensitivity of macroeconomic volatility to systematic changes in the conduct of monetary policy? The answer is no to the first question and, consequently, yes to the second question. We estimate a medium-scale New-Keynesian model in two subsamples, 1955-1979 and 1984-2012, and find that the sensitivity of inflation variance to changes in conventional monetary policy has declined. We document that the changed properties of the labor market largely contributed to this decline.


In this paper we propose a novel explanation for the increase in households’ leverage during the U.S. housing boom in the early 2000s. Specifically, we apply the theory of natural expec- tations, proposed by Fuster et al. (2010), to show that biased expectations on the two sides of the credit market have been a key determinant of the surge in households’ leverage but also that inaccurate long-run expectations on behalf of financial intermediaries are a necessary – yet so far overlooked – ingredient for matching the observed debt and interest rates dynamics.

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