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Working Paper
A, B, C’s, (and D’s) for understanding VARs
The dynamics of a linear (or linearized) dynamic stochastic economic model can be expressed in terms of matrices (A, B, C, D) that define a state-space system. An associated state space system (A, K, C, S) determines a vector autoregression (VAR) for observables available to an econometrician. We review circumstances in which the impulse response of the VAR resembles the impulse response associated with the economic model. We give four examples that illustrate a simple condition for checking whether the mapping from VAR shocks to economic shocks is invertible. The condition applies when there ...
Working Paper
Estimating Hysteresis Effects
In this paper, we identify demand shocks that can have a permanent effect on output through hysteresis effects. We call these shocks permanent demand shocks. They are found to be quantitatively important in the United States, in particular when the sample includes the Great Recession. Recessions driven by permanent demand shocks lead to a permanent decline in employment and investment, although output per worker is largely unaffected. We find strong evidence that hysteresis transmits through a rise in long-term unemployment and a decline in labor force participation and disproportionately ...
Working Paper
Estimating dynamic equilibrium models with stochastic volatility
We propose a novel method to estimate dynamic equilibrium models with stochastic volatility. First, we characterize the properties of the solution to this class of models. Second, we take advantage of the results about the structure of the solution to build a sequential Monte Carlo algorithm to evaluate the likelihood function of the model. The approach, which exploits the profusion of shocks in stochastic volatility models, is versatile and computationally tractable even in large-scale models, such as those often employed by policy-making institutions. As an application, we use our algorithm ...
Working Paper
Comparing dynamic equilibrium economies to data
This paper studies the properties of the Bayesian approach to estimation and comparison of dynamic equilibrium economies. Both tasks can be performed even if the models are nonnested, misspecified, and nonlinear. First, the authors show that Bayesian methods have a classical interpretation: asymptotically the parameter point estimates converge to their pseudotrue values, and the best model under the Kullback-Leibler will have the highest posterior probability. Second, they illustrate the strong small sample behavior of the approach using a well-known application: the U.S. cattle cycle. ...
Working Paper
Inference in Bayesian Proxy-SVARs
Motivated by the increasing use of external instruments to identify structural vector autoregressions (SVARs), we develop an algorithm for exact finite sample inference in this class of time series models, commonly known as Proxy-SVARs. Our algorithm makes independent draws from any posterior distribution over the structural parameterization of a Proxy-SVAR. Our approach allows researchers to simultaneously use proxies and traditional zero and sign restrictions to identify structural shocks. We illustrate our methods with two applications. In particular, we show how to generalize the ...
Working Paper
Convergence properties of the likelihood of computed dynamic models
This paper studies the econometrics of computed dynamic models. Since these models generally lack a closed-form solution, economists approximate the policy functions of the agents in the model with numerical methods. But this implies that, instead of the exact likelihood function, the researcher can evaluate only an approximated likelihood associated with the approximated policy function. What are the consequences for inference of the use of approximated likelihoods? First, we show that as the approximated policy function converges to the exact policy, the approximated likelihood also ...
Working Paper
The Causal Effects of Lockdown Policies on Health and Macroeconomic Outcomes
We assess the causal impact of epidemic-induced lockdowns on health and macroeconomic outcomes and measure the trade-off between containing the spread of an epidemic and economic activity. To do so, we estimate an epidemiological model with time-varying parameters and use its output as information for estimating SVARs and LPs that quantify the causal effects of nonpharmaceutical policy interventions. We apply our approach to Belgian data for the COVID-19 epidemic during 2020. We find that additional government mandated mobility curtailments would have reduced deaths at a very small cost in ...
Working Paper
Estimating Hysteresis Effects
In this paper we identify demand shocks that can have a permanent effect on output through hysteresis effects. We call these shocks permanent demand shocks. They are found to be quantitatively important in the United States, in particular when the Great Recession is included in the sample. Recessions driven by permanent demand shocks lead to a permanent decline in employment and investment, while output per worker is largely unaffected. We find strong evidence that hysteresis transmits through a rise in long-term unemployment and a decline in labor force participation and disproportionately ...
Working Paper
Fiscal policy and minimum wage for redistribution: an equivalence result
In this paper, we derive conditions under which a minimum-wage law combined with anonymous taxes and transfers and an agent-specific tax-transfer scheme are equivalent policies.
Working Paper
Investment-specific technology shocks and international business cycles: an empirical assessment
In this paper, we first introduce investment-specific technology (IST) shocks into an otherwise standard international real business cycle model and show that a thoughtful calibration of them along the lines of Raffo (2009) successfully addresses several of the existing puzzles in the literature. In particular, we obtain a negative correlation of relative consumption and the terms of trade (Backus-Smith puzzle), as well as a more volatile real exchange rate, and cross-country output correlations that are higher than consumption correlations (price and quantity puzzles). Then we use data from ...