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Do mood swings drive business cycles and is it rational?
This paper provides new evidence in support of the idea that bouts of optimism and pessimism drive much of US business cycles. In particular, we begin by using sign-restriction based identification schemes to isolate innovations in optimism or pessimism and we document the extent to which such episodes explain macroeconomic fluctuations. We then examine the link between these identified mood shocks and subsequent developments in fundamentals using alternative identification schemes (i.e., variants of the maximum forecast error variance approach).> ; We find that there is a very close link between the two, suggesting that agents' feelings of optimism and pessimism are at least partially rational as total factor productivity (TFP) is observed to rise 8?10 quarters after an initial bout of optimism. While this later finding is consistent with some previous findings in the news shock literature, we cannot rule out that such episodes reflect self-fulfilling beliefs. Overall, we argue that mood swings account for over 50 percent of business-cycle fluctuations in hours and output.
AUTHORS: Nam, Deokwoo; Wang, Jian; Beaudry, Paul
Endogenous skill bias in technology adoption: city-level evidence from the IT revolution
This paper focuses on the bi-directional interaction between technology adoption and labor market conditions. We examine cross-city differences in PC adoption, relative wages, and changes in relative wages over the period 1980-2000 to evaluate whether the patterns conform to the predictions of a neoclassical model of endogenous technology adoption. Our approach melds the literature on the effect of the relative supply of skilled labor on technology adoption to the often distinct literature on how technological change influences the relative demand for skilled labor. Our results support the idea that differences in technology use across cities and its effects on wages reflect an equilibrium response to local factor supply conditions. The model and data suggest that cities initially endowed with relatively abundant and cheap skilled labor adopted PCs more aggressively than cities with relatively expensive skilled labor, causing returns to skill to increase most in cities that adopted PCs most intensively. Our findings indicate that neoclassical models of endogenous technology adoption can be very useful for understanding where technological change arises and how it affects markets.
AUTHORS: Lewis, Ethan; Beaudry, Paul; Doms, Mark
Alternative specifications for consumption and the estimation of the intertemporal elasticity of substitution
This paper documents several advantages associated with using state level consumption data to examine consumption behavior and especially to estimate the Intertemporal Elasticity of Substitution (IES). In contrast to the results of Hall (1988) and Campbell and Mankiw (1989), we provide substantial evidence indicating that the IES is significantly different from zero and probably close to one. Since the overidentifying restrictions of the standard Euler equation are generally rejected, we use these data to explore the nature of these rejections and evaluate an alternative specification of consumer behavior proposed by Campbell and Mankiw (1987, 1989, 1990). We take special care of examining the robustness of our results with respect to problems caused by the mismeasurement of the interest rate. In particular, we identify a common time component in expected consumption growth across states which, under the specifications of the theory, should reflect real interest rate movements. We find that the common time component closely matches the expected real return on Treasury bills as should be expected if the IES is different from zero and if the T-bill rate is an appropriate measure of interest rates.
AUTHORS: Beaudry, Paul; Van Wincoop, Eric