Search Results
Working Paper
Monetary policy in a Markov-switching VECM: implications for the cost of disinflation and the price puzzle
Monetary policy VARs typically presume stability of the long-run outcomes. We introduce the possibility of switches in the long-run equilibrium in a cointegrated VAR by allowing both the covariance matrix and weighting matrix in the error-correction term to switch. We find that monetary policy alternates between sustaining long-run growth and disinflationary regimes. Allowing state changes can also help explain the price puzzle and justify the use of commodity prices as a corrective measure. Finally, we show that regime-switching has implications for disinflationary monetary policy and can ...
Working Paper
What explains the varying monetary response to technology shocks in G-7 countries?
In a recent paper, Gal, Lpez-Salido, and Valls (2003) examined the Federal Reserve?s response to VAR-identified technology shocks. They found that during the Martin-Burns- Miller era, the Fed responded to technology shocks by overstabilizing output, while in the Volcker-Greenspan era, the Fed adopted an inflation-targeting rule. We extend their analysis to countries of the G-7; moreover, we consider the factors that may contribute to differing monetary responses across countries. Specifically, we find a relationship between the volatility of capital investment, type of monetary policy rule, ...
Working Paper
The local effects of monetary policy
Previous studies have documented disparities in the regional responses to monetary policy shocks; this variation has been found to depend, in part, on differences in the industrial composition of the regional economies. However, because of computational issues, the literature has often neglected the richest level of disaggregation: the city. In this paper, we estimate the city-level responses to monetary policy shocks in a Bayesian VAR. The Bayesian VAR allows us to model the entire panel of metropolitan areas through the imposition of a shrinkage prior. We then seek the origin of the ...
Working Paper
A flexible finite-horizon alternative to long-run restrictions with an application to technology shock
Recent studies using long-run restrictions question the validity of the technology-driven real business cycle hypothesis. We propose an alternative identi cation that maximizes the contribution of technology shocks to the forecast-error variance of labor productivity at a long, but finite, horizon. In small-sample Monte Carlo experiments, our identification outperforms standard long-run restrictions by significantly reducing the bias in the short-run impulse responses and raising their estimation precision. Unlike its long-run restriction counterpart, when our Max Share identification ...
Working Paper
A Flexible Finite-Horizon Identification of Technology Shocks
Recent empirical studies using in finite horizon long-run restrictions question the validity of the technology-driven real business cycle hypothesis. These results have met with their own controversy, stemming from their sensitivity to changes in model specification and the general poor performance of long-run restrictions in Monte Carlo experiments. We propose an alternative identification that maximizes the contribution of technology shocks to the forecast-error variance of labor productivity at a long, but finite horizon. In small samples, our identification outperforms its in finite ...
Working Paper
The use of long-run restrictions for the identification of technology shocks
We survey the recent empirical literature using long run restrictions to identify technology shocks. We provide an illustrative walkthrough of the long-run restricted vector autoregression (VAR) methodology in a bivariate framework. Additionally, we offer an alternative identification of technology shocks that can be imposed by restrictions on the long-run impulse responses. Our results from this methodology compare favorably to the empirical literature that uses structural VARs to identify technology.
Journal Article
Does the United States Lead Foreign Business Cycles?
The U.S. financial crisis of 2007-08 had detrimental and lasting effects on the economies of other nations, reinforcing the leading role played by the United States in the global economy. The authors assess this role by determining whether U.S. output growth informs business cycle turning points in the economies of other nations. They find that U.S. economic growth influences both the timing and duration of business cycle phases for Canada, Germany, the United Kingdom, and, to a lesser extent, Mexico. However, they find no relationship between U.S. output growth and the business cycles of ...
Working Paper
The low-frequency impact of daily monetary policy shocks
With rare exception, studies of monetary policy tend to neglect the timing of the innovations to the monetary policy instrument. Models which do take timing seriously are often difficult to compare to standard VAR models of monetary policy because of the differences in the frequency that they use. We propose an alternative model using MIDAS regressions which nests both ideas: Accurate (daily) timing of innovations to the monetary policy instrument are embedded in a monthly frequency VAR to determine the macroeconomic effects of high frequency changes to policy. We find that taking into ...
Working Paper
An endogenously clustered factor approach to international business cycles
Factor models have become useful tools for studying international business cycles. Block factor models [e.g., Kose, Otrok, and Whiteman (2003)] can be especially useful as the zero restrictions on the loadings of some factors may provide some economic interpretation of the factors. These models, however, require the econometrician to predefine the blocks, leading to potential misspecification. In Monte Carlo experiments, we show that even small misspecifica- tion can lead to substantial declines in t. We propose an alternative model in which the blocks are chosen endogenously. The model is ...
Journal Article
The use of long-run restrictions for the identification of technology shocks
The authors survey the recent empirical literature using long-run restrictions to identify technology shocks and provide an illustrative walk-through of the long-run restricted vector autoregression (VAR) methodology in a bivariate framework. Additionally, they offer an alternative identification of technology shocks that can be imposed by restrictions on the long-run impulse responses to evaluate the robustness of the conclusions drawn by the structural VAR literature. Their results from this methodology compare favorably with the empirical literature that uses structural VARs to identify ...