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 ...
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.
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 ...
How Has Empirical Monetary Policy Analysis Changed After the Financial Crisis?
In the wake of the Great Recession, the Federal Reserve lowered the federal funds rate (FFR) target essentially to zero and resorted to unconventional monetary policy. With the nominal FFR constrained by the zero lower bound (ZLB) for an extended period, empirical monetary models cannot be estimated as usual. In this paper, we consider whether the standard empirical model of monetary policy can be preserved without breaks. We consider whether alternative policy instruments (e.g., a long-term interest rate) can be considered substitutes for the FFR over the ZLB period. Furthermore, we compare ...
Business Cycles Across Space and Time
We study the comovement of international business cycles in a time series clustering model with regime-switching. We extend the framework of Hamilton and Owyang (2012) to include time-varying transition probabilities to determine what drives similarities in business cycle turning points. We find four groups, or ?clusters?, of countries which experience idiosyncratic recessions relative to the global cycle. Additionally, we find the primary indicators of international recessions to be fluctuations in equity markets and geopolitical uncertainty. In out-of-sample forecasting exercises, we find ...
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 ...
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 ...
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 ...
Countercyclical policy and the speed of recovery after recessions
We consider the effect of some policies intended to shorten recessions and accelerate recoveries. Our innovation is to analyze the duration of the recoveries of various U.S. states, which gives us a cross-section of both state- and national-level policies. Because we study multiple recessions for the same state and multiple states for the same recession, we can control for differences in the economic conditions preceding recessions and the causes of the recessions when evaluating various policies. We find that expansionary monetary policy at the national level helps to stimulate the exit of ...
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, ...