Using a Bayesian likelihood approach, we estimate a dynamic stochastic general equilibrium model for the US economy using seven macro-economic time series. The model incorporates many types of real and nominal frictions and seven types of structural shocks. We show that this model is able to compete with Bayesian Vector Autoregression models in out-of-sample prediction. We investigate the relative empirical importance of the various frictions. Finally, using the estimated model we address a number of key issues in business cycle analysis: What are the sources of business cycle fluctuations? Can the model explain the cross-correlation between output and inflation? What are the effects of productivity on hours worked? What are the sources of the "Great Moderation"?

/pdf/shocks-and-frictions-in-us-business-cycles-a-bayesian-dsge-d1f6ynd58q.pdf

Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach

We estimate a dynamic stochastic general equilibrium (DSGE) model for the US economy. The model incorporates many types of real and nominal frictions: sticky nominal price and wage setting, habit formation in consumption, investment adjustment costs, variable capital utilisation and fixed costs in production. It also contains many types of shocks including productivity, labour supply, investment, preference, cost-push and monetary policy shocks. Using Bayesian estimation techniques, the relative importance of the various frictions and shocks in explaining the US business cycle are empirically investigated. We also show that this model is able to outperform standard VAR and BVAR models in out-of-sample prediction.

/pdf/shocks-and-frictions-in-us-business-cycles-a-bayesian-dsge-2gcs6kvruw.pdf

Shocks and frictions in US business cycles: A Bayesian DSGE approach

Econometric policy evaluation: A critique

The Theory of Monopolistic Competition.

Over the last two decades, communication has become an increasingly important aspect of monetary policy. These real-world developments have spawned a huge new scholarly literature on central bank communication-mostly empirical, and almost all of it written in this decade. We survey this ever-growing literature. The evidence suggests that communication, can be an important and powerful part of the central bank's toolkit since it has the ability to move financial markets, to enhance the predictability of monetary policy decisions, and potentially to help achieve central banks' macroeconomic objectives. However, the large variation in communication, strategies across central banks suggests that a. consensus has yet to emerge, on what constitutes an optimal communication strategy.

/pdf/central-bank-communication-and-monetary-policy-a-survey-of-qnyqvbkzrj.pdf

Central bank communication and monetary policy: A survey of theory and evidence

Most analyses of the U.S. Great Moderation have been based on structural VAR methods, and have consistently pointed towards good luck as the main explanation for the greater macroeconomic stability of recent years. Based on an estimated New-Keynesian model in which the only source of change is the move from passive to active monetary policy, we show that VARs may misinterpret good policy for good luck. First, the policy shift is sufficient to generate decreases in the theoretical innovation variances for all series, and decreases in the variances of inflation and the output gap, without any need of sunspot shocks. With sunspots, the estimated model exhibits decreases in both variances and innovation variances for all series. Second, policy counterfactuals based on the theoretical structural VAR representations of the model under the two regimes fail to capture the truth, whereas impulse-response functions to a monetary policy shock exhibit little change across regimes. Since these results are in line with those found in the structural VARbased literature on the Great Moderation, our analysis suggests that existing VAR evidence is compatible with the 'good policy' explanation of the Great Moderation.

VAR Analysis and the Great Moderation

https://isiarticles.com/bundles/Article/pre/pdf/26109.pdf

The Fed's monetary policy rule and U.S. inflation: The case of asymmetric preferences

Post-World War II US macroeconomic history is usually divided into two distinct subperiods. The former period, which extends up to the end of the Volcker disinflation, is characterized by a significant extent of macroeconomic turbulence, with highly volatile inflation and output growth. The latter period, from the end of the Volcker disinflation up to the present day, is marked in contrast by significantly smaller volatilities for both inflation and output growth. These dramatic changes in the reduced-form properties of the US economy over the last several decades char acterize a phenomenon known as the "Great Moderation" (see in particular Chang-Jin Kim and Charles Nelson 1999; Margaret McConnell and Gabriel Perez-Quiros 2000). A vast empirical literature has investigated the source(s) of the Great Moderation in an attempt to disentangle the relative contributions of two main explanations: good policy and good luck. Based on (time-varying or Markov-switching) structural VAR methods, the good luck hypoth esis has been advocated by a number of authors, including James H. Stock and Mark W. Watson (2003), Giorgio E. Primiceri (2005), Christopher Sims and Tao Zha (2006), and Luca Gambetti, Evi Pappa, and Fabio Canova (2008).

/pdf/var-analysis-and-the-great-moderation-1cka9c5hd6.pdf

Inflation in the most industrialized economies of the world has an important international common component that accounts for the historical decline in the national rates. Country specific conditions explain the rise in inflation volatility of the late 1970s and early 1980s, and the subsequent fall. During the last decade, the world contribution to the variance of inflation has become increasingly more important than national contributions. Monetary policy was a relevant source of country specific fluctuations. Our conclusions are based on a time-varying dynamic factor model applied to a large panel of inflation indicators.

/pdf/evolving-international-inflation-dynamics-world-and-country-1mea4gl8m9.pdf

Evolving international inflation dynamics: world and country‐specific factors

This paper documents a new stylized fact of the greater macroeconomic stability of the U.S. economy over the last two decades. Using 131 monthly time series, three popular statistical methods and the forecasts of the Federal Reserve's Greenbook and the Survey of Professional Forecasters, we show that the ability to predict several measures of inflation and real activity declined remarkably, relative to naive forecasts, since the mid-1980s. This break down in forecast ability appears to be an inherent feature of the most recent period and thus represents a new challenge for competing explanations of the 'Great Moderation'.

/pdf/un-predictability-and-macroeconomic-stability-381fcml9lk.pdf

Paolo Surico

Papers

VAR Analysis and the Great Moderation

The Fed's monetary policy rule and U.S. inflation: The case of asymmetric preferences

VAR Analysis and the Great Moderation

Evolving international inflation dynamics: world and country‐specific factors

Un)Predictability and macroeconomic stability