Home production meets time-to-build
An innovation in this paper is to introduce a time-to-build technology for the production of market capital into a model with home production. The paper?s main finding is that the two anomalies that have plagued all household production models?the positive correlation between business and household investment, and household investment leading business investment over the business cycle?are resolved when time-to-build is added.
Canada's money targeting experiment
An inquiry into why the Bank of Canada was unable to bridle the inflation of the 1970s by controlling money growth.
Free trade and tariffs—an uneasy mix
When U.S. steel corporations began declaring bankruptcy and laying off thousands of workers, tariffs on foreign steel seemed a reasonable way of preventing further damage to the industry. But why do most economists favor free trade?
In search of the NAIRU
The relationship between the unemployment rate and the nonaccelerating inflation rate of unemployment (NAIRU) is presumed to be an inflationary bellwether, but recent inflation predictions based on it have not been successful. The authors explore the reasons for this failure and suggest that it may be time to replace the NAIRU.
On the cyclical allocation of risk
A real business cycle model with heterogeneous agents is parameterized, calibrated, and simulated to see if it can account for some stylized facts characterizing postwar U.S. business cycle fluctuations, such as the countercyclical movement of labors share of income, and the acyclical behavior of real wages. There are two types of agents in the model, workers and entrepreneurs, who participate on an economy-wide market for contingent claims. On this market workers purchase insurance from entrepreneurs, through optimal labor contracts, against losses in income due to business cycle ...
Measuring labors share of income
Recent Bureau of Labor Statistics (BLS) data show labors share of income at a historic low. This Policy Discussion Paper explores the BLS calculations with an eye to understanding the factors leading to the recent fall in labors share. While data limitations prohibit replication of the BLS series, alternative measures of labors share of income, based on either the nonfinancial corporate business sector or the macroeconomy more generally, are near their historic averages, quite unlike the BLS series.
On the cost of inflation
The FOMC has two objectives: maximizing sustainable economic growth and maintaining price stability. At times-like the past year-these goals appear to be in conflict. This Commentary outlines some economic theory that suggests that in the long run, the FOMC can achieve its two objectives by focusing primarily on its price stability target.
Central bank credibility
Major League Baseball Commissioner Bud Selig announced he would crack down on steroid use in baseball, hoping to stop players from doping. He was forced to discipline stars like Rafael Palmeiro, possibly hurting the game immediately, in order to develop a reputation for being tough on steroids. The Federal Reserve System has worked hard over the past few decades not only to lower inflation and keep it low, but also to convince the public that it is dedicated to delivering low inflation over the long haul. This Commentary explains why credibility is so important to monetary policymakers.
Return to Capital in a Real Business Cycle Model
Can the neoclassical growth model generate fluctuations in the return to capital similar to those observed in the United States? Equating stock market returns with the return to capital, the bulk of the literature concludes that it cannot. This article makes two contributions. First is an equivalence for the neoclassical growth model between a stock market return and a return based on income and capital stock data. While the stock market return is extremely volatile, the income-based return is not. Second is the finding that the neoclassical growth model with shocks to labor productivity ...
Monetary policy regimes and beliefs
Revised. This paper investigates the role of beliefs over monetary policy in propagating the effects of monetary policy shocks within the context of a dynamic, stochastic general equilibrium model. In this model, monetary policy periodically switches between low- and high-money-growth regimes. When individuals cannot observe the regime directly, they must draw inferences over regime type based on historical money growth rates. The authors show that for an empirically plausible money growth process, beliefs evolve slowly in the wake of a regime change. As a result, their model is able to ...