What Do Sectoral Dynamics Tell Us About the Origins of Business Cycles?
We use economic theory to rank the impact of structural shocks across sectors. This ranking helps us to identify the origins of U.S. business cycles. To do this, we introduce a Hierarchical Vector Auto-Regressive model, encompassing aggregate and sectoral variables. We find that shocks whose impact originate in the "demand" side (monetary, household, and government consumption) account for 43 percent more of the variance of U.S. GDP growth at business cycle frequencies than identified shocks originating in the "supply" side (technology and energy). Furthermore, corporate financial ...
Theory Ahead of Measurement? Assessing the Nonlinear Effects of Financial Market Disruptions
An important, yet untested, prediction of many macro models with financial frictions is that financial market disruptions can have highly nonlinear effects on economic activity. This paper presents empirical evidence supporting this prediction, and in particular that financial shocks have substantial (i) asymmetric and (ii) state dependent effects. First, negative shocks to credit supply have large and persistent effects on output, but positive shocks have no significant effect. Second, credit supply shocks have larger and more persistent effects in periods of weak economic growth.
Drifts, Volatilities, and Impulse Responses Over the Last Century
How much have the dynamics of U.S. time series and in particular the transmission of innovations to monetary policy instruments changed over the last century? The answers to these questions that this paper gives are "a lot" and "probably less than you think," respectively. We use vector autoregressions with time-varying parameters and stochastic volatility to tackle these questions. In our analysis we use variables that both influenced monetary policy and in turn were influenced by monetary policy itself, including bond market data (the difference between long-term and short-term ...
A Composite Likelihood Approach for Dynamic Structural Models
We describe how to use the composite likelihood to ameliorate estimation, computational, and inferential problems in dynamic stochastic general equilibrium models. We present a number of situations where the methodology has the potential to resolve well-known problems. In each case we consider, we provide an example to illustrate how the approach works and its properties in practice.
Optimized Taylor Rules for Disinflation When Agents are Learning
Highly volatile transition dynamics can emerge when a central bank disinflates while operating without full transparency. In our model, a central bank commits to a Taylor rule whose form is known but whose coefficient are not. Private agents learn about policy parameters via Bayesian updating. Under McCallum's (1999) timing protocol, temporarily explosive dynamics can arise, making the transition highly volatile. Locally-unstable dynamics emerge when there is substantial disagreement between actual and perceived feedback parameters. The central bank can achieve low average inflation, but its ...
Indeterminacy and Learning: An Analysis of Monetary Policy in the Great Inflation
We argue in this paper that the Great Inflation of the 1970s can be understood as the result of equilibrium indeterminacy in which loose monetary policy engendered excess volatility in macroeconomic aggregates and prices. We show, however, that the Federal Reserve inadvertently pursued policies that were not anti-inflationary enough because it did not fully understand the economic environment it was operating in. Specifically, it had imperfect knowledge about the structure of the U.S. economy and it was subject to data misperceptions. The real-time data flow at that time did not capture the ...
Monetary Policy across Space and Time
In this paper we ask two questions: (i) is the conduct of monetary policy stable across time and similar across major economies, and (ii) do policy decisions of major central banks have international spillover effects. To address these questions, we build on recent semi-parametric advances in time-varying parameter models that allow us to increase the VAR dimension and to jointly model three advanced economies (US, UK, and the Euro Area). In order to study policy spillovers, we jointly identify three economy-specific monetary policy shocks using a combination of sign and magnitude ...
Choosing Prior Hyperparameters
Bayesian inference is common in models with many parameters, such as large VAR models, models with time-varying parameters, or large DSGE models. A common practice is to focus on prior distributions that themselves depend on relatively few hyperparameters. The choice of these hyperparameters is crucial because their influence is often sizeable for standard sample sizes. In this paper we treat the hyperparameters as part of a hierarchical model and propose a fast, tractable, easy-to-implement, and fully Bayesian approach to estimate those hyperparameters jointly with all other parameters in ...
Gaussian Mixture Approximations of Impulse Responses and the Nonlinear Effects of Monetary Shocks
This paper proposes a new method to estimate the (possibly nonlinear) dynamic effects of structural shocks by using Gaussian basis functions to parametrize impulse response functions. We apply our approach to the study of monetary policy and obtain two main results. First, regardless of whether we identify monetary shocks from (i) a timing restriction, (ii) sign restrictions, or (iii) a narrative approach, the effects of monetary policy are highly asymmetric: A contractionary shock has a strong adverse effect on unemployment, but an expansionary shock has little effect. Second, an ...
Learning about fiscal policy and the effects of policy uncertainty
The recent crisis in the United States has often been associated with substantial amounts of policy uncertainty. In this paper we ask how uncertainty about fiscal policy affects the impact of fiscal policy changes on the economy when the government tries to counteract a deep recession. The agents in our model act as econometricians by estimating the policy rules for the different fiscal policy instruments, which include distortionary tax rates. ; Comparing the outcomes in our model to those under full-information rational expectations, we find that assuming the agents are not instantaneously ...