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Working Paper
Computers, obsolescence, and productivity
This paper examines the role that computers have played in boosting U.S. economic growth in recent years. The paper focuses on two effects--the effect of increased productivity in the computer-producing sector and the effect of investments in computing equipment on the productivity of those who use them--and concludes that together they account for almost all of the recent acceleration in U.S. labor productivity. In calculating the computer-usage effect, standard NIPA measures of the capital stock are inappropriate for growth accounting because they do not account for technological ...
Working Paper
On the relationships between real consumption, income and wealth
The existence of durable goods implies that the welfare flow from consumption cannot be directly associated with total consumption expenditures. As a result, tests of standard theories of consumption (such as the Permanent Income Hypothesis, or PIH) typically focus on nondurable goods and services. Specifically, these studies generally relate real consumption of nondurable goods and services to measures of real income and wealth, where the latter are deflated by a price index for total consumption expenditures. We demonstrate that this procedure is only valid under the assumption that real ...
Working Paper
A guide to the use of chain aggregated NIPA data
In 1996, the U.S. Department of Commerce began using a new method to construct all aggregate ``real'' series in the National Income and Product Accounts (NIPA). This method employs the so-called ``ideal chain index'' pioneered by Irving Fisher. The new methodology has some extremely important implications that are unfamiliar to many practicing empirical economists; as a result, mistaken calculations with NIPA data have become very common. This paper explains the motivation for the switch to chain aggregation and then illustrates the usage of chain-aggregated data with three topical examples, ...
Conference Paper
Should monetary policy target labor's share of income?
In recent work, Woodford (2001) presents evidence that using real unit labor costs (labor's share of income) as a driving variable in the new-Keynesian Phillips curve yields a superior fit for inflation relative to a model that uses deterministically detrended real GDP. This evidence leads him to conclude that the output gap the deviation between actual and potential output is better captured by the labor income share, in turn implying that the monetary authority should raise interest rates in response to increases in this variable. We document that the empirical case for the superiority of ...
Working Paper
Can rational expectations sticky-price models explain inflation dynamics?
The canonical inflation specification in sticky-price rational expectations models (the new-Keynesian Phillips curve) is often criticized on the grounds that it fails to account for the dependence of inflation on its own lags. In response, many recent studies have employed a "hybrid" sticky-price specification in which inflation depends on a weighted average of lagged and expected future values of itself, in addition to a driving variable such as the output gap. In this paper, we consider some simple tests of the hybrid model that are derived from the model's closed-form solution. Our ...
Working Paper
Modelling inflation dynamics: a critical review of recent research
In recent years, a broad academic consensus has arisen around the use of rational expectations sticky-price models to capture inflation dynamics. These models are seen as providing an empirically reasonable characterization of observed inflation behavior once suitable measures of the output gap are chosen; and, moreover, are perceived to be robust to the Lucas critique in a way that earlier econometric models of inflation are not. We review the principal conclusions of this literature concerning: 1) the ability of these models to fit the data; 2) the importance of rational forward-looking ...
Working Paper
A note on the cointegration of consumption, income, and wealth
Lettau and Ludvigson (2001) argue that a log-linearized approximation to an aggregate budget constraint predicts that log consumption, assets, and labor income will be cointegrated. They conclude that this cointegrating relationship is present in U.S. data, and that the estimated cointegrating residual forecasts future asset growth. This note examines whether the cointegrating relationship suggested by Lettau and Ludvigson's theoretical framework actually exists. We demonstrate that we cannot reject the hypothesis that cointegration is absent from the data once we employ measures of ...
Conference Paper
Modeling inflation dynamics: a critical survey of recent research
Working Paper
Does the labor share of income drive inflation?
Woodford (2001) has presented evidence that the new-Keynesian Phillips curve fits the empirical behavior of inflation well when the labor income share is used as a driving variable, but fits poorly when deterministically detrended output is used. He concludes that the output gap--the deviation between actual and potential output--is better captured by the labor income share, in turn implying that central banks should raise interest rates in response to increases in the labor share. We show that the empirical evidence generally suggests that the labor share version of the new-Keynesian ...
Working Paper
Explaining the investment boom of the 1990s
Real equipment investment in the United States has boomed in recent years, led by soaring investment in computers. We find that traditional aggregate econometric models completely fail to capture the magnitude of this recent growth--mainly because these models neglect to address two features that are crucial (and unique) to the current investment boom. First, the pace at which firms replace depreciated capital has increased. Second, investment has been more sensitive to the cost of capital. We document that these two features stem from the special behavior of investment in computers and ...