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Bank:Federal Reserve Bank of Minneapolis  Series:Discussion Paper / Institute for Empirical Macroeconomics 

Discussion Paper
Priors for macroeconomic time series and their application

This paper takes up Bayesian inference in a general trend stationary model for macroeconomic time series with independent Student-t disturbances. The model is linear in the data, but nonlinear in parameters. An informative but nonconjugate family of prior distributions for the parameters is introduced, indexed by a single parameter which can be readily elicited. The main technical contribution is the construction of posterior moments, densities, and odds ratios using a six-step Gibbs sampler. Mappings from the index parameter of the family of prior distribution to posterior moments, ...
Discussion Paper / Institute for Empirical Macroeconomics , Paper 64

Discussion Paper
Modeling trends

Models of low-frequency behavior of time series may have strongly conflicting substantive implications while fitting the data nearly equally well. We should develop methods which display the resulting uncertainty rather than adopt modeling conventions which hide it. One step toward this goal may be to consider overparameterized stationary ARMA models.
Discussion Paper / Institute for Empirical Macroeconomics , Paper 22

Discussion Paper
Relationship between labor-income risk and average return: empirical evidence from the Japanese stock market

In Japan, as in the United States, stocks that are more sensitive to changes in the monthly growth rate of labor income earn a higher return on average. Whereas the stock-index beta can only explain 2 percent of the cross-sectional variation in the average return on stock portfolios, the stock-index beta and the labor-beta together explain 75 percent of the variation. We find that the labor-beta drives out the size effect but not the book-to-market-price effect that is documented in the literature. We explore the extent to which these results are an artifact of seasonal patterns in ...
Discussion Paper / Institute for Empirical Macroeconomics , Paper 117

Discussion Paper
Stock returns and volatility in emerging financial markets

In this paper we study the dynamic behavior of stock returns and volatility in emerging financial markets. In particular, we focus our attention on the following questions: (1) Does stock return volatility in emerging markets change over time? If so, are volatility changes predictable? (2) How frequent are big surprises in emerging stock markets? (3) Is there any relationship between market risk and expected returns? (4) Has liberalization affected return volatility in emerging financial markets? ; Our findings can be summarized as follows. First, there is strong evidence of predictable ...
Discussion Paper / Institute for Empirical Macroeconomics , Paper 93

Discussion Paper
Human capital, aggregate shocks, and panel data estimation

This paper analyses how the wage and employment decisions of females are affected by past workforce participation and hours supplied. Our estimation methods exploit the fact that, when markets are complete, the Lagrange multiplier for an agents lifetime budget constraint always enters multiplicatively with the prices of (contingent claims to) consumption and leisure. Depending on the properties of the equilibrium price process, it is thus possible to predict the behavior of a wealthy agent by observing that of a poorer person living in a more prosperous world. This provides the key to ...
Discussion Paper / Institute for Empirical Macroeconomics , Paper 47

Discussion Paper
A note on dynamic programming with homogeneous functions

This note shows that basic theorems of dynamic programming hold when the return function is homogeneous of degree theta <= 1.
Discussion Paper / Institute for Empirical Macroeconomics , Paper 109

Discussion Paper
Rational herd behavior and the globalization of securities markets

This paper shows that globalization of securities markets exacerbates the volatility of capital flows by strengthening incentives for herding behavior. This is a prediction of a mean-variance portfolio optimization model with imperfect information, in which investors acquire country-specific expertise at a fixed cost and incur variable reputational costs. The model produces equilibria in which incentives to confirm rumors decrease with globalization. Simulations based on equity markets data and country credit ratings suggest that herd behavior can induce large capital outflows from emerging ...
Discussion Paper / Institute for Empirical Macroeconomics , Paper 120

Discussion Paper
A toolkit for analyzing nonlinear dynamic stochastic models easily

This paper describes and implements a procedure for estimating the timing interval in any linear econometric model. The procedure is applied to Taylors model of staggered contracts using annual averaged price and output data. The fit of the version of Taylors model with serially uncorrelated disturbances improves as the timing interval of the model is reduced.
Discussion Paper / Institute for Empirical Macroeconomics , Paper 101

Discussion Paper
A Markov switching model of GNP growth with duration dependence

We use a regime-switching model of real GNP growth to examine the duration dependence of business cycles. The model extends Hamilton (1989) and Durland and McCurdy (1994) and is estimated using both the postwar NIPA data and the secular data constructed by Balke-Gordon. We find that an expansion is more likely to end at a young age, that a contraction is more likely to end at an old age, that output growth slows over the course of an expansion, that a decline in output is mild at the beginning of a contraction, and that long expansions are followed by long contractions. This evidence taken ...
Discussion Paper / Institute for Empirical Macroeconomics , Paper 124

Discussion Paper
Capital accumulation in a model of growth and creative destruction

Capital accumulation and creative destruction is modeled together with risk-averse households. The novel aspect-risk-averse households-allows to use well-known models not only for analyzing long-run growth as in the literature but also short-run fluctuations. The model remains analytically tractable due to a very convenient property of the household's investment decision in this stochastic continuous-time setup.
Discussion Paper / Institute for Empirical Macroeconomics , Paper 139




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