Search Results
Working Paper
Drifts and volatilities: monetary policies and outcomes in the post WWII U.S.
For a VAR with drifting coefficients and stochastic volatilities, the authors present posterior densities for several objects that are of interest for designing and evaluating monetary policy. These include measures of inflation persistence, the natural rate of unemployment, a core rate of inflation, and "activism coefficients" for monetary policy rules. Their posteriors imply substantial variation of all of these objects for post WWII U.S. data. After adjusting for changes in volatility, persistence of inflation increases during the 1970s then falls in the 1980s and 1990s. Innovation ...
Working Paper
Estimating dynamic rational expectations models when the trend specification is uncertain
This paper explores various strategies for estimating rational expectations models when the trend specification is uncertain. One approach modified the likelihood function in order to reduce the influence of low-frequency dynamics. Hansen and Sargent (1993) conjectured that this would have little cost in correctly specified models and would improve estimated in mis-specified models. This paper confirms the first part of their conjecture but not the second. Contrary to intuition, the effects of trend-specification errors are spread across the entire frequency domain and are not confined to ...
Working Paper
Panel evidence on the speed of convergence
Estimates of the speed of convergence vary widely and depend on the methodology employed. While cross-sectional regressions typically find slow convergence, time series estimates suggest that incomes converge rapidly. This paper uses panel methods to combine cross-sectional and time series information. Our methods improve on prior research in three ways. Relative to univariate time series estimators, panel methods increase the precision of convergence estimates. Relative to earlier panel studies, this paper tests the key homogeneity assumption needed to bring cross-sectional information to ...
Working Paper
A frequency decomposition of approximation errors in stochastic discount factor models
This paper extends the work of Hansen and Jagannathan (1997) by showing how to decompose approximation errors in stochastic discount factor models by frequency. This decomposition is applied to a number of prominent consumption-based discount factor models top investigate how well they fit at low frequencies. There is some evidence of improved fit at low frequencies, but only in models with high degrees of risk aversion. In models with low degrees of risk aversion, approximation errors at low frequencies are just as severe as those at high frequencies.
Working Paper
Maximum likelihood estimation with HP filtered data: an invariance theorem
Applying the Hodrick-Prescott filter to both the approximating model and the data adds a constant to the log-likelihood function. Thus, maximum likelihood estimates and likelihood ratio statistics are invariant to symmetric HP filtering.
Working Paper
Effects of the Hodrick-Prescott filter on trend and difference stationary time series: implications for business cycle research
This paper studies the effects of applying the Hodrick-Prescott filter to trend and difference stationary time series. Applying the Hodrick-Prescott filter to an integrated process is similar to detrending a random walk. When the data are difference stationary, the Hodrick-Prescott filter can generate business cycle dynamics even if none are present in the original data. We study the implications for interpreting stylized facts about business cycles and for analyzing data generated by real business cycle models.
Working Paper
Output dynamics in real business cycle models
The time series literature reports two stylized facts about output dynamics in the United States. GNP growth is positively autocorrelated over short horizons and negatively autocorrelated over longer horizons, and GNP has an important trend reverting component which has a hump-shaped moving average representation. We consider whether various real business cycle (RBC) models are consistent with these stylized facts. ; We find that many RBC models have weak internal propagation mechanisms and must rely on exogenous factors to replicate both stylized facts. In particular, intertemporal ...
Working Paper
A simple adaptive measure of core inflation
This paper proposes a new measure of core inflation and compares it with several existing measures. The new measure is adaptive and is designed to track sudden and persistent movements inflation, such as those arising from changes in monetary policy regimes. the adaptive measure is a superior predictor of (locally) mean reverting components of inflation, and appears to filter out transients more effectively than existing measures.
Working Paper
Idiosyncratic risk and the equity premium: evidence from the Consumer Expenditure Survey
This paper uses household consumption data to investigate whether uninsurable idiosyncratic risk accounts for the equity premium. The analysis complements and extends prior empirical work by relaxing maintained assumptions about idiosyncratic income shocks. Following Mankiw (1986), the paper develops an equilibrium factor model in which risk premia depend on the covariance between an asset's return and certain moments of the cross-sectional distribution for consumption growth. Cross-sectional consumption factors are constructed using data from the Consumer Expenditure Survey, but they do ...