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Working Paper
Trade policies and fiscal devaluations
Erceg, Christopher J.; Prestipino, Andrea; Raffo, Andrea (2022-06-22)
Fiscal devaluations—an increase in import tariffs and export subsidies (IX) or an increase in value-added taxes and payroll subsidies (VP)—have been shown to provide as much stimulus under fixed exchange rates as a currency devaluation. We find that if agents expect policies to be reversed and the tax pass-through is large, VP is contractionary and IX provides a modest boost. In our medium-scale DSGE model, both features are crucial in accounting for Germany’s underperformance in response to VP in 2007. These findings cast doubt on fiscal devaluations as a cyclical stabilization tool ...
International Finance Discussion Papers , Paper 1347

Working Paper
Macroelasticities and the U.S. sequestration budget cuts
Zarazaga, Carlos E. (2014-11-01)
Microeconomic studies keep reporting that the intertemporal substitution in consumption and the Frisch elasticity of aggregate labor supply have significantly lower values than macroeconomic models find consistent with the dynamics of aggregate variables. The paper argues that in the U.S. such dynamics have been influenced since 2013 by the temporary spending cuts imposed by the so-called budget sequestration. The paper exploits the "policy experiment" features of that measure to gauge macroelasticity values from the evidence associated with it, adopting to that effect a macroeconomic model ...
Working Papers , Paper 1412

Journal Article
The Phillips Curve during the Pandemic: Bringing Regional Data to Bear
Higgins, Patrick C. (2021-09-09)
The Phillips curve appears to have held up well at the regional level during the COVID-19 era. Areas of the country that took relatively large hits to their unemployment rate and employment-population ratio during the pandemic have had lower inflation, on average, than areas that took relatively small hits. And, just as prior to the pandemic, the inverse relationship between inflation and unemployment continues to be statistically stronger for the prices of services than of goods.The Phillips curve appears to have held up well at the regional level during the COVID-19 era. Areas of the ...
Policy Hub , Volume 2021 , Issue 11 , Pages 20

Working Paper
Inflation and Real Activity over the Business Cycle
Bianchi, Francesco; Nicolo, Giovanni; Song, Dongho (2023-03)
We study the relation between inflation and real activity over the business cycle. We employ a Trend-Cycle VAR model to control for low-frequency movements in inflation, unemployment, and growth that are pervasive in the post-WWII period. We show that cyclical fluctuations of inflation are related to cyclical movements in real activity and unemployment, in line with what is implied by the New Keynesian framework. We then discuss the reasons for which our results relying on a Trend-Cycle VAR differ from the findings of previous studies based on VAR analysis. We explain empirically and ...
Finance and Economics Discussion Series , Paper 2023-038

Report
Evolution of Modern Business Cycle Models: Accounting for the Great Recession
Kehoe, Patrick J.; Pastorino, Elena; Midrigan, Virgiliu (2018-06-14)
Modern business cycle theory focuses on the study of dynamic stochastic general equilibrium models that generate aggregate fluctuations similar to those experienced by actual economies. We discuss how this theory has evolved from its roots in the early real business cycle models of the late 1970s through the turmoil of the Great Recession four decades later. We document the strikingly different pattern of comovements of macro aggregates during the Great Recession compared to other postwar recessions, especially the 1982 recession. We then show how two versions of the latest generation of real ...
Staff Report , Paper 566

Working Paper
Credit, bankruptcy, and aggregate fluctuations
Nakajima, Makoto; Rios-Rull, Jose-Victor (2014-10-20)
We ask two questions related to how access to credit affects the nature of business cycles. First, does the standard theory of unsecured credit account for the high volatility and procyclicality of credit and the high volatility and countercyclicality of bankruptcy filings found in U.S. data? Yes, it does, but only if we explicitly model recessions as displaying countercyclical earnings risk (i.e., rather than having all households fare slightly worse than normal during recessions, we ensure that more households than normal fare very poorly). Second, does access to credit smooth aggregate ...
Working Papers , Paper 14-31

Working Paper
Job Heterogeneity and Aggregate Labor Market Fluctuations
Krolikowski, Pawel (2019-02-01)
This paper disciplines a model with search over match quality using microeconomic evidence on worker mobility patterns and wage dynamics. In addition to capturing these individual data, the model provides an explanation for aggregate labor market patterns. Poor match quality among first jobs implies large fluctuations in unemployment due to a responsive job destruction margin. Endogenous job destruction generates a burst of layoffs at the onset of a recession and, together with on-the-job search, generates a negative comovement between unemployment and vacancies. A significant job ladder, ...
Working Papers , Paper 19-04

Working Paper
Estimates of r* Consistent with a Supply-Side Structure and a Monetary Policy Rule for the U.S. Economy
Laforte, Jean-Philippe; Gonzalez-Astudillo, Manuel (2020-10-08)
We estimate the natural rate of interest (r*) using a semi-structural model of the U.S. economy that jointly characterizes the trend and cyclical factors of key macroeconomic variables such as output, the unemployment rate, inflation, and short- and long-term interest rates. We specify a monetary policy rule and an equation that characterizes the 10-year Treasury yield to exploit the information provided by both interest rates to infer r*. However, the use of a monetary policy rule with a sample that spans the Great Recession and its aftermath poses a challenge because of the effective lower ...
Finance and Economics Discussion Series , Paper 2020-085

Working Paper
Should We Be Puzzled by Forward Guidance?
Bundick, Brent; Smith, Andrew Lee (2020-04-30)
Although a growing literature argues output is too sensitive to future interest rates in standard macroeconomic models, little empirical evidence has been put forth to evaluate this claim. In this paper, we use a range of vector autoregression models to answer the central question of how much output responds to changes in interest rate expectations following a monetary policy shock. Despite distinct identification strategies and sample periods, we find surprising agreement regarding this elasticity across empirical models. We then show that in a standard model of nominal rigidity estimated ...
Research Working Paper , Paper RWP 20-01

Working Paper
Contagious Switching
Owyang, Michael T.; Soques, Daniel; Piger, Jeremy M. (2021-02-28)
We analyze the propagation of recessions across countries. We construct a model that allows for multiple qualitative state variables in a vector autoregression (VAR) setting. The VAR structure allows us to include country-level variables to determine whether policy also propagates across countries. We consider two different versions of the model. One version assumes the discrete state of the economy (expansion or recession) is observed. The other assumes that the state of the economy is unobserved and must be inferred from movements in economic growth. We apply the model to Canada, Mexico, ...
Working Papers , Paper 2019-014

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