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Journal Article
New evidence on the output cost of fighting inflation
The Federal Reserve has made significant progress toward price stability over the last two decades. The annual inflation rate has declined from 13 percent in the early 1980s to roughly 2 percent today. But, to be sure, the current low-inflation environment has come at a price.> One key cost of achieving low inflation is the output loss that generally accompanies a permanent decline in inflation, as occurred in the early 1980s and early 1990s. Another more subtle output cost of fighting inflation is the cost of preventing inflation from rising. As incipient inflation pressures build, tighter ...
Working Paper
Business cycle turning points: two empirical business cycle model approaches
This paper compares a set of non-nested empirical business cycle models. The alternative linear models include a VAR and Stock and Watson's (1991) unobserved components model. The alternative nonlinear models include the time-varying transition probability Markov switching model (Filardo 1993) and an integration of the Markov switching model with the Stock and Watson model as proposed by Diebold and Rudebusch (1994) and Chauvet (1994). Generally, this paper finds that no one model dominates in a predictive sense at all times. The nonlinear models, however, tend to outperform the linear models ...
Journal Article
Has the productivity trend steepened in the 1990s?
In the 1990s, conventional measures of productivity growth, or the growth in output per worker, have indicated a dramatic rise. If these measures are correct, the economic benefits are clear. In the short run, sustained, faster productivity growth would enable the economy to expand more rapidly without intensifying inflationary pressures. In the long run, sustained, faster productivity growth would boost real incomes and improve the standard of living.> Despite signs that productivity has recently begun to follow a steeper path, some analysts are skeptical. Episodes of faster productivity ...
Working Paper
Business cycle phases and their transitional dynamics
Working Paper
Choosing information variables for transition probabilities in a time-varying transition probability Markov switching model
This paper discusses a practical estimation issue for time-varying transition probability (TVTP) Markov switching models. Time-varying transition probabilities allow researchers to capture important economic behavior that may be missed using constant (or fixed) transition probabilities. Despite its use, Hamilton?s (1989) filtering method for estimating fixed transition probability Markov switching models may not apply to TVTP models. This paper provides a set of sufficient conditions to justify the use of Hamilton?s method for TVTP models. In general, the information variables that govern ...
Working Paper
The Globalisation of Inflation: the Growing Importance of Global Value Chains
Greater international economic interconnectedness over recent decades has been changing inflation dynamics. This paper presents evidence that the expansion of global value chains (GVCs), ie cross-border trade in intermediate goods and services, is an important channel through which global economic slack influences domestic inflation. In particular, we document the extent to which the growth in GVCs explains the established empirical correlation between global economic slack and national inflation rates, both across countries and over time. Accounting for the role of GVCs, we also find that ...
Working Paper
International co-movements of business cycles
Journal Article
Cyclical implications of the declining manufacturing employment share
Over the last 35 years, the U.S. economy has created service sector jobs at a faster pace than manufacturing sector jobs. Not only has this trend led to a significant shift in the composition of the labor force from manufacturing to services, but it has also fundamentally changed the characteristics of the average workplace. ; Some economists have argued that the ongoing structural shifts from manufacturing employment to services employment may have had the additional consequence of smoothing the business cycle. A smoother cycle would be welcomed and would yield several benefits. The economy ...
Working Paper
Should monetary policy respond to asset price bubbles? : some experimental results
Should central banks respond to asset price bubbles? This paper explores this monetary policy question in a hypothetical economy subject to asset price bubbles. Despite the highly stylized structure of the model, the results reveal several practical monetary policy lessons. First, a monetary authority should generally respond to asset prices as long as asset prices contain reliable information about inflation and output. Second, this finding holds even if a monetary authority cannot distinguish between fundamental and bubble asset price behavior. Third, a monetary authority?s desire to ...
Working Paper
Using near-VARs to examine phase-dependent monetary and fiscal policy
Economic policies are known to have different effects on the economy depending on the size of policy changes and on business cycle conditions. For example, monetary policy might be more stimulative in recessions and around turning points in the business cycle than during expansions. Such dependencies, however, are usually ignored in most empirical research or are placed under the rubric of "long and variable lags." Accounting for phase-dependent policies holds out the possibility not only of better forecasting performance with our macroeconomic models and of more accurate methods to ...