Perturbation methods for Markov-switching DSGE model
The macroeconomic environment often changes repeatedly over time, and often in a recurring manner. For example, the economy may switch between periods of high and low growth, or monetary policy may switch between periods of strong versus weak responses to inflation. An important question for economists is how to model the presence of these switches, and to capture how expectations about switches in the future may impact economic behavior. ; This paper develops a methodology for solving dynamic stochastic general equilibrium (DSGE) models in the presence of switching environments. The approach ...
Perturbation methods for Markov-switching DSGE models
Markov-switching DSGE (MSDSGE) modeling has become a growing body of literature on economic and policy issues related to structural shifts. This paper develops a general perturbation methodology for constructing high-order approximations to the solutions of MSDSGE models. Our new method, called "the partition perturbation method," partitions the Markov-switching parameter space to keep a maximum number of time-varying parameters from perturbation. For this method to work in practice, we show how to reduce the potentially intractable problem of solving MSDSGE models to the manageable problem ...
Sectoral vs. aggregate shocks : a structural factor analysis of industrial production
This paper uses factor analytic methods to decompose industrial production (IP) into components arising from aggregate shocks and idiosyncratic sector-specific shocks. An approximate factor model finds that nearly all (90%) of the variability of quarterly growth rates in IP are associated with common factors. Because common factors may reflect sectoral shocks that have propagated by way of input-output linkages, we then use a multisector growth model to adjust for the effects of these linkages. In particular, we show that neoclassical multisector models, of the type first introduced by Long ...
Idiosyncratic Sectoral Growth, Balanced Growth, and Sectoral Linkages
We study the growth properties of an economy where different sectors are linked by way of intermediates and potentially grow at different rates. We characterize the economy's equilibrium balanced growth path, and derive an analytical expression that summarizes how TFP growth in a given sector affects value added growth in every other sector and, therefore, aggregate GDP growth. We show in a special case that a version of Hulten's (1978) theorem, whereby the effects of changes in sector-specific productivity on GDP are entirely captured by that sector's share in GDP, also holds in growth rates ...
The Changing Input-Output Network Structure of the U.S. Economy
U.S. industries have become less connected over the last 10 years, and service industries have become more central.
Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime-Switching Approach
We estimate a workhorse dynamic stochastic general equilibrium (DSGE) model with an occasionally binding borrowing constraint. First, we propose a new speciﬁcation of the occasionally binding constraint, where the transition between the unconstrained and constrained states is a stochastic function of the leverage level and the constraint multiplier. This speciﬁcation maps into an endogenous regime-switching model. Second, we develop a general perturbation method for the solution of such a model. Third, we estimate the model with Bayesian methods to ﬁt Mexico’s business cycle and ...
Monetary policy regime switches and macroeconomic dynamic
This paper investigates how different monetary policy regime switching types impact macroeconomic dynamics. Policy switches that either affect the inflation target or the response to inflation deviations from target lead to different determinacy regions and different output, inflation, and interest rate distributions. With regime switching, the standard Taylor Principle breaks down in multiple ways; satisfying the Principle period-by-period is neither necessary nor sufficient for determinacy. Switching inflation targets primarily affects the economy's level, whereas switching inflation ...
The asymmetric effects of uncertainty.
Recovery from the recent financial crisis has been sluggish by historical standards, and employment growth has been similarly disappointing. Three periods of heightened economic uncertainty?the European sovereign debt crisis, the U.S. debt ceiling crisis, and, to a lesser extent, 2013's brief "taper tantrum"?may have contributed to this lackluster response. Foerster introduces a statistical model to analyze spikes in stock market volatility during these periods and thus quantify uncertainty's influence. He finds that uncertainty has asymmetric effects, with large increases in uncertainty ...