http://www.philadelphiafed.org/research-and-data/publications/working-papers/ Intended for the professional researcher, working papers are written by economists in the Bank's Economic Research Department and visiting scholars. en http://www.philadelphiafed.org/research-and-data/publications/working-papers/2012/wp12-3.pdf?utm_source=RSS-CB&utm_medium=TM&utm_campaign=RSS-CB The authors survey Bayesian methods for estimating dynamic stochastic general equilibrium (DSGE) models in this article. They focus on New Keynesian (NK)DSGE models because of the interest shown in this class of models by economists in academic and policy-making institutions. This interest stems from the ability of this class of DSGE model to transmit real, nominal, and fiscal and monetary policy shocks into endogenous fluctuations at business cycle frequencies. Intuition about these propagation mechanisms is developed by reviewing the structure of a canonical NKDSGE model. Estimation and evaluation of the NKDSGE model rests on being able to detrend its optimality and equilibrium conditions, to construct a linear approximation of the model, to solve for its linear approximate decision rules, and to map from this solution into a state space model to generate Kalman filter projections. The likelihood of the linear approximate NKDSGE model is based on these projections. The projections and likelihood are useful inputs into the Metropolis-Hastings Markov chain Monte Carlo simulator that the authors employ to produce Bayesian estimates of the NKDSGE model. They discuss an algorithm that implements this simulator. This algorithm involves choosing priors of the NKDSGE model parameters and fixing initial conditions to start the simulator. The output of the simulator is posterior estimates of two NKDSGE models, which are summarized and compared to results in the existing literature. Given the posterior distributions, the NKDSGE models are evaluated with tools that determine which is most favored by the data. The authors also give a short history of DSGE model estimation as well as pointing to issues that are at the frontier of this research. 2012-02-03T12:00:00Z en Bayesian Estimation of DSGE Models 2012-02-03 PhilaFed PDF version http://www.philadelphiafed.org/research-and-data/publications/working-papers/2011/wp12-4.pdf?utm_source=RSS-CB&utm_medium=TM&utm_campaign=RSS-CB The authors survey Bayesian methods for estimating dynamic stochastic general equilibrium (DSGE) models in this article. They focus on New Keynesian (NK)DSGE models because of the interest shown in this class of models by economists in academic and policy-making institutions. This interest stems from the ability of this class of DSGE model to transmit real, nominal, and fiscal and monetary policy shocks into endogenous fluctuations at business cycle frequencies. Intuition about these propagation mechanisms is developed by reviewing the structure of a canonical NKDSGE model. Estimation and evaluation of the NKDSGE model rests on being able to detrend its optimality and equilibrium conditions, to construct a linear approximation of the model, to solve for its linear approximate decision rules, and to map from this solution into a state space model to generate Kalman filter projections. The likelihood of the linear approximate NKDSGE model is based on these projections. The projections and likelihood are useful inputs into the Metropolis-Hastings Markov chain Monte Carlo simulator that the authors employ to produce Bayesian estimates of the NKDSGE model. They discuss an algorithm that implements this simulator. This algorithm involves choosing priors of the NKDSGE model parameters and fixing initial conditions to start the simulator. The output of the simulator is posterior estimates of two NKDSGE models, which are summarized and compared to results in the existing literature. Given the posterior distributions, the NKDSGE models are evaluated with tools that determine which is most favored by the data. The authors also give a short history of DSGE model estimation as well as pointing to issues that are at the frontier of this research. Pablo Guerron-Quintana Pablo A. Guerron-Quintana James Nason James M. Nason February 3, 2012 Federal Reserve Bank of Philadelphia: Working Papers http://www.philadelphiafed.org/research-and-data/publications/working-papers/2012/wp12-3.pdf?utm_source=RSS-CB&utm_medium=TM&utm_campaign=RSS-CB Using an estimated dynamic stochastic general equilibrium model, the author shows that shocks to a common international stochastic trend explain on average about 10 percent of the variability of output in several small developed economies. These shocks explain roughly twice as much of the volatility of consumption growth as the volatility of output growth. Country-specific disturbances account for the bulk of the volatility in the data. Substantial heterogeneity in the estimated parameters and stochastic processes translates into a rich array of impulse responses across countries. 2012-01-06T12:00:00Z en Common and Idiosyncratic Disturbances in Developed Small Open Economies 2012-01-06 PhilaFed PDF version http://www.philadelphiafed.org/research-and-data/publications/working-papers/2011/wp12-3.pdf?utm_source=RSS-CB&utm_medium=TM&utm_campaign=RSS-CB Using an estimated dynamic stochastic general equilibrium model, the author shows that shocks to a common international stochastic trend explain on average about 10 percent of the variability of output in several small developed economies. These shocks explain roughly twice as much of the volatility of consumption growth as the volatility of output growth. Country-specific disturbances account for the bulk of the volatility in the data. Substantial heterogeneity in the estimated parameters and stochastic processes translates into a rich array of impulse responses across countries. Pablo Guerron-Quintana Pablo A. Guerron-Quintana January 6, 2012 Federal Reserve Bank of Philadelphia: Working Papers http://www.philadelphiafed.org/research-and-data/publications/working-papers/2012/wp12-2.pdf?utm_source=RSS-CB&utm_medium=TM&utm_campaign=RSS-CB This paper assesses how various approaches to modeling the separation margin affect the ability of the Mortensen-Pissarides job matching model to explain key facts about the aggregate labor market. Allowing for realistic time variation in the separation rate, whether exogenous or endogenous, greatly increases the unemployment variability generated by the model. Specifications with exogenous separation rates, whether constant or time-varying, fail to produce realistic volatility and productivity responsiveness of the separation rate and worker flows. Specifications with endogenous separation rates, on the other hand, succeed along these dimensions. In addition, the endogenous separation model with on-the-job search yields a realistic Beveridge curve correlation and performs well in accounting for the productivity responsiveness of market tightness. While adopting the Hagedorn-Manovskii calibration approach improves the behavior of the job finding rate, the volume of job-to-job transitions in the on-the-job search specification becomes essentially zero. 2011-12-29T12:00:00Z en Exogenous vs. Endogenous Separation 2011-12-29 PhilaFed PDF version http://www.philadelphiafed.org/research-and-data/publications/working-papers/2011/wp12-2.pdf?utm_source=RSS-CB&utm_medium=TM&utm_campaign=RSS-CB This paper assesses how various approaches to modeling the separation margin affect the ability of the Mortensen-Pissarides job matching model to explain key facts about the aggregate labor market. Allowing for realistic time variation in the separation rate, whether exogenous or endogenous, greatly increases the unemployment variability generated by the model. Specifications with exogenous separation rates, whether constant or time-varying, fail to produce realistic volatility and productivity responsiveness of the separation rate and worker flows. Specifications with endogenous separation rates, on the other hand, succeed along these dimensions. In addition, the endogenous separation model with on-the-job search yields a realistic Beveridge curve correlation and performs well in accounting for the productivity responsiveness of market tightness. While adopting the Hagedorn-Manovskii calibration approach improves the behavior of the job finding rate, the volume of job-to-job transitions in the on-the-job search specification becomes essentially zero. Shigeru Fujita Shigeru Fujita Garey Ramey Garey Ramey December 29, 2011 Federal Reserve Bank of Philadelphia: Working Papers http://www.philadelphiafed.org/research-and-data/publications/working-papers/2012/wp12-1.pdf?utm_source=RSS-CB&utm_medium=TM&utm_campaign=RSS-CB The authors document that the U.S. non-financial corporate sector became a net lender in the 2000s, using aggregate and firm-level data. They develop a structural model with investment, debt, and equity. Debt is fiscally advantageous but subject to a no-default borrowing constraint. Equity allows the firm to suspend dividends when the cash flow is negative. Firms accumulate financial assets for precautionary reasons, yet value equity as partial insurance against shocks. The calibrated model replicates the prevalence of net savings in the period 2000-2007 and attributes the rise in corporate savings over the past 40 years to lower dividend taxes. 2011-12-15T12:00:00Z en The Macroeconomics of Firms' Savings 2011-12-15 PhilaFed PDF version http://www.philadelphiafed.org/research-and-data/publications/working-papers/2011/wp12-1.pdf?utm_source=RSS-CB&utm_medium=TM&utm_campaign=RSS-CB The authors document that the U.S. non-financial corporate sector became a net lender in the 2000s, using aggregate and firm-level data. They develop a structural model with investment, debt, and equity. Debt is fiscally advantageous but subject to a no-default borrowing constraint. Equity allows the firm to suspend dividends when the cash flow is negative. Firms accumulate financial assets for precautionary reasons, yet value equity as partial insurance against shocks. The calibrated model replicates the prevalence of net savings in the period 2000-2007 and attributes the rise in corporate savings over the past 40 years to lower dividend taxes. Roc Armenter Roc Armenter Viktoria Hnatkovska Viktoria Hnatkovska December 15, 2011 Federal Reserve Bank of Philadelphia: Working Papers http://www.philadelphiafed.org/research-and-data/publications/working-papers/2011/wp11-48.pdf?utm_source=RSS-CB&utm_medium=TM&utm_campaign=RSS-CB The authors examine the optimal labor market-policy mix over the business cycle. In a search and matching model with risk-averse workers, endogenous hiring and separation, and unobservable search effort they first show how to decentralize the constrained-efficient allocation. This can be achieved by a combination of a production tax and three labor-market policy instruments, namely, a vacancy subsidy, a layoff tax and unemployment benefits. The authors derive analytical expressions for the optimal setting of each of these for the steady state and for the business cycle. Their propositions suggest that hiring subsidies, layoff taxes and the replacement rate of unemployment insurance should all rise in recessions. The authors find this confirmed in a calibration targeted to the U.S. economy. 2011-12-01T12:00:00Z en Optimal Labor-Market Policy in Recessions 2011-12-01 PhilaFed PDF version http://www.philadelphiafed.org/research-and-data/publications/working-papers/2011/wp11-48.pdf?utm_source=RSS-CB&utm_medium=TM&utm_campaign=RSS-CB The authors examine the optimal labor market-policy mix over the business cycle. In a search and matching model with risk-averse workers, endogenous hiring and separation, and unobservable search effort they first show how to decentralize the constrained-efficient allocation. This can be achieved by a combination of a production tax and three labor-market policy instruments, namely, a vacancy subsidy, a layoff tax and unemployment benefits. The authors derive analytical expressions for the optimal setting of each of these for the steady state and for the business cycle. Their propositions suggest that hiring subsidies, layoff taxes and the replacement rate of unemployment insurance should all rise in recessions. The authors find this confirmed in a calibration targeted to the U.S. economy. Philip Jung Philip Jung Keith Kuester Keith Kuester December 1, 2011 Federal Reserve Bank of Philadelphia: Working Papers http://www.philadelphiafed.org/research-and-data/publications/working-papers/2011/wp11-47.pdf?utm_source=RSS-CB&utm_medium=TM&utm_campaign=RSS-CB This paper examines how supply-side policies may play a role in fighting a low aggregate demand that traps an economy at the zero lower bound (ZLB) of nominal interest rates. Future increases in productivity or reductions in mark-ups triggered by supply-side policies generate a wealth effect that pulls current consumption and output up. Since the economy is at the ZLB, increases in the interest rates do not undo this wealth effect, as we will have in the case outside the ZLB. The authors illustrate this mechanism with a simple two-period New Keynesian model. They discuss possible objections to this set of policies and the relation of supply-side policies with more conventional monetary and fiscal policies. 2011-10-27T12:00:00Z en Supply-Side Policies and the Zero Lower Bound 2011-10-27 PhilaFed PDF version http://www.philadelphiafed.org/research-and-data/publications/working-papers/2011/wp11-47.pdf?utm_source=RSS-CB&utm_medium=TM&utm_campaign=RSS-CB This paper examines how supply-side policies may play a role in fighting a low aggregate demand that traps an economy at the zero lower bound (ZLB) of nominal interest rates. Future increases in productivity or reductions in mark-ups triggered by supply-side policies generate a wealth effect that pulls current consumption and output up. Since the economy is at the ZLB, increases in the interest rates do not undo this wealth effect, as we will have in the case outside the ZLB. The authors illustrate this mechanism with a simple two-period New Keynesian model. They discuss possible objections to this set of policies and the relation of supply-side policies with more conventional monetary and fiscal policies. Jesus Fernandez-Villaverde Jesus Fernandez-Villaverde Pablo Guerron-Quintana Pablo Guerron-Quintana Juan Rubio-Ramirez Juan F. Rubio-Ramirez October 27, 2011 Federal Reserve Bank of Philadelphia: Working Papers http://www.philadelphiafed.org/research-and-data/publications/working-papers/2011/wp11-46.pdf?utm_source=RSS-CB&utm_medium=TM&utm_campaign=RSS-CB The authors examine investors' reactions to announcements of large seasoned equity offerings (SEOs) by U.S. financial institutions (FIs) from 2000 to 2009. These offerings include market infusions as well as injections of government capital under the Troubled Asset Relief Program (TARP). The sample period covers both business cycle expansions and contractions, and the recent financial crisis. They present evidence on the factors affecting FI decisions to issue capital, the determinants of investor reactions, and post-SEO performance of issuers as well as a sample of matching FIs. The authors find that investors reacted negatively to the news of private market SEOs by FIs, both in the immediate term (e.g., the two days surrounding the announcement) and over the subsequent year, but positively to TARP injections. Reactions differed depending on the characteristics of the FIs, stage of the business cycle, and conditions of financial crisis. Larger institutions were less likely to have raised capital through market offerings during the period prior to TARP, and firms receiving a TARP injection tended to be larger than other issuers. The authors find that while TARP may have allowed FIs to increase their lending (as a share of assets) in the year after the issuance, they took on more credit risk to do so. They find no evidence that banks' capital adequacy increased after the capital injections. 2011-10-07T12:00:00Z en Large Capital Infusions, Investor Reactions, and the Return and Risk Performance of Financial Institutions over the Business Cycle and Recent Financial Crisis 2011-10-07 PhilaFed PDF version http://www.philadelphiafed.org/research-and-data/publications/working-papers/2011/wp11-46.pdf?utm_source=RSS-CB&utm_medium=TM&utm_campaign=RSS-CB The authors examine investors' reactions to announcements of large seasoned equity offerings (SEOs) by U.S. financial institutions (FIs) from 2000 to 2009. These offerings include market infusions as well as injections of government capital under the Troubled Asset Relief Program (TARP). The sample period covers both business cycle expansions and contractions, and the recent financial crisis. They present evidence on the factors affecting FI decisions to issue capital, the determinants of investor reactions, and post-SEO performance of issuers as well as a sample of matching FIs. The authors find that investors reacted negatively to the news of private market SEOs by FIs, both in the immediate term (e.g., the two days surrounding the announcement) and over the subsequent year, but positively to TARP injections. Reactions differed depending on the characteristics of the FIs, stage of the business cycle, and conditions of financial crisis. Larger institutions were less likely to have raised capital through market offerings during the period prior to TARP, and firms receiving a TARP injection tended to be larger than other issuers. The authors find that while TARP may have allowed FIs to increase their lending (as a share of assets) in the year after the issuance, they took on more credit risk to do so. They find no evidence that banks' capital adequacy increased after the capital injections. Elyas Elyasiani Elyas Elyasiani Loretta Mester Loretta J. Mester Michael Pagano Michael S. Pagano October 7, 2011 Federal Reserve Bank of Philadelphia: Working Papers http://www.philadelphiafed.org/research-and-data/publications/working-papers/2011/wp11-45.pdf?utm_source=RSS-CB&utm_medium=TM&utm_campaign=RSS-CB The authors propose several connectedness measures built from pieces of variance decompositions, and they argue that they provide natural and insightful measures of connectedness among financial asset returns and volatilities. The authors also show that variance decompositions define weighted, directed networks, so that their connectedness measures are intimately-related to key measures of connectedness used in the network literature. Building on these insights, the authors track both average and daily time-varying connectedness of major U.S. financial institutions' stock return volatilities in recent years, including during the financial crisis of 2007-2008. 2011-10-03T12:00:00Z en On the Network Topology of Variance Decompositions: Measuring the Connectedness of Financial Firms 2011-10-03 PhilaFed PDF version http://www.philadelphiafed.org/research-and-data/publications/working-papers/2011/wp11-45.pdf?utm_source=RSS-CB&utm_medium=TM&utm_campaign=RSS-CB The authors propose several connectedness measures built from pieces of variance decompositions, and they argue that they provide natural and insightful measures of connectedness among financial asset returns and volatilities. The authors also show that variance decompositions define weighted, directed networks, so that their connectedness measures are intimately-related to key measures of connectedness used in the network literature. Building on these insights, the authors track both average and daily time-varying connectedness of major U.S. financial institutions' stock return volatilities in recent years, including during the financial crisis of 2007-2008. Francis Diebold Francis X. Diebold Kamil Yilmaz Kamil Yilmaz October 3, 2011 Federal Reserve Bank of Philadelphia: Working Papers http://www.philadelphiafed.org/research-and-data/publications/working-papers/2011/wp11-44.pdf?utm_source=RSS-CB&utm_medium=TM&utm_campaign=RSS-CB The purpose of this paper is to identify possible sources of the secular decline in the aggregate job separation rate over the last three decades. The author first shows that aging of the labor force alone cannot account for the entire decline. To explore other sources, he uses a simple labor matching model with two types of workers, experienced and inexperienced, where the former type faces a risk of skill obsolescence during unemployment. When the skill depreciation occurs, the worker is required to restart his career and thus suffers a drop in earnings. The author shows that a higher skill depreciation risk results in a lower aggregate separation rate and a smaller earnings loss. The key mechanisms are that the experienced workers accept lower wages in exchange for keeping the job and that the reluctance to separate from the job produces a larger mass of low-quality matches. He also presents empirical evidence consistent with these predictions. 2011-09-28T12:00:00Z en Declining Labor Turnover and Turbulence 2011-09-28 PhilaFed PDF version http://www.philadelphiafed.org/research-and-data/publications/working-papers/2011/wp11-44.pdf?utm_source=RSS-CB&utm_medium=TM&utm_campaign=RSS-CB The purpose of this paper is to identify possible sources of the secular decline in the aggregate job separation rate over the last three decades. The author first shows that aging of the labor force alone cannot account for the entire decline. To explore other sources, he uses a simple labor matching model with two types of workers, experienced and inexperienced, where the former type faces a risk of skill obsolescence during unemployment. When the skill depreciation occurs, the worker is required to restart his career and thus suffers a drop in earnings. The author shows that a higher skill depreciation risk results in a lower aggregate separation rate and a smaller earnings loss. The key mechanisms are that the experienced workers accept lower wages in exchange for keeping the job and that the reluctance to separate from the job produces a larger mass of low-quality matches. He also presents empirical evidence consistent with these predictions. Shigeru Fujita Shigeru Fujita September 28, 2011 Federal Reserve Bank of Philadelphia: Working Papers http://www.philadelphiafed.org/research-and-data/publications/working-papers/2011/wp11-43.pdf?utm_source=RSS-CB&utm_medium=TM&utm_campaign=RSS-CB The authors analyze the effects of government spending cuts on economic activity in an environment of severe fiscal strain, as reflected by a sizeable risk premium on government debt. Specifically, they consider a "sovereign risk channel," through which sovereign default risk spills over to the rest of the economy, raising funding costs in the private sector. The authors analysis is based on a variant of the model suggested by C'urdia and Woodford (2009). It allows for costly financial intermediation and inter-household borrowing and lending in equilibrium, but maintains the tractability of the baseline New Keynesian model. They show that, if monetary policy is constrained in offsetting the effect of higher sovereign risk on private-sector borrowing conditions, the sovereign risk channel exacerbates indeterminacy problems: private-sector beliefs of a weakening economy can become self-fulfilling. Under these conditions, fiscal retrenchment can limit the risk of macroeconomic instability. In addition, if fiscal strain is very severe and monetary policy is constrained for an extended period, fiscal retrenchment may actually stimulate economic activity. 2011-09-23T12:00:00Z en Sovereign Risk and the Effects of Fiscal Retrenchment in Deep Recessions 2011-09-23 PhilaFed PDF version http://www.philadelphiafed.org/research-and-data/publications/working-papers/2011/wp11-43.pdf?utm_source=RSS-CB&utm_medium=TM&utm_campaign=RSS-CB The authors analyze the effects of government spending cuts on economic activity in an environment of severe fiscal strain, as reflected by a sizeable risk premium on government debt. Specifically, they consider a "sovereign risk channel," through which sovereign default risk spills over to the rest of the economy, raising funding costs in the private sector. The authors analysis is based on a variant of the model suggested by C'urdia and Woodford (2009). It allows for costly financial intermediation and inter-household borrowing and lending in equilibrium, but maintains the tractability of the baseline New Keynesian model. They show that, if monetary policy is constrained in offsetting the effect of higher sovereign risk on private-sector borrowing conditions, the sovereign risk channel exacerbates indeterminacy problems: private-sector beliefs of a weakening economy can become self-fulfilling. Under these conditions, fiscal retrenchment can limit the risk of macroeconomic instability. In addition, if fiscal strain is very severe and monetary policy is constrained for an extended period, fiscal retrenchment may actually stimulate economic activity. Giancarlo Corsetti Giancarlo Corsetti Keith Kuester Keith Kuester Andre Meier Andre Meier Gernot Muller Gernot J. Muller September 23, 2011 Federal Reserve Bank of Philadelphia: Working Papers http://www.philadelphiafed.org/research-and-data/publications/working-papers/2011/wp11-42.pdf?utm_source=RSS-CB&utm_medium=TM&utm_campaign=RSS-CB The authors study the location and productivity of more than 1,000 research and development (R&D) labs located in the Northeast corridor of the U.S. Using a variety of spatial econometric techniques, they find that these labs are substantially more concentrated in space than the underlying distribution of manufacturing activity. Ripley's K-function tests over a variety of spatial scales reveal that the strongest evidence of concentration occurs at two discrete distances: one at about one-quarter of a mile and another at about 40 miles. These findings are consistent with empirical research that suggests that some spillovers depreciate very rapidly with distance, while others operate at the spatial scale of labor markets. The authors also find that R&D labs in some industries (e.g., chemicals, including drugs) are substantially more spatially concentrated than are R&D labs as a whole.Tests using local K-functions reveal several concentrations of R&D labs (Boston, New York-Northern New Jersey, Philadelphia-Wilmington, and Washington, DC) that appear to represent research clusters. The authors verify this conjecture using significance-maximizing techniques (e.g., SATSCAN) that also address econometric issues related to "multiple testing" and spatial autocorrelation.The authors develop a new procedure for identifying clusters — the multiscale core-cluster approach — to identify labs that appear to be clustered at a variety of spatial scales. They document that while locations in these clusters are often related to basic infrastructure, such as access to major roads, there is significant variation in the composition of labs across these clusters. Finally, the authors show that R&D labs located in clusters defined by this approach are, all else equal, substantially more productive in terms of the patents or citation-weighted patents they receive. 2011-09-22T12:00:00Z en The Agglomeration of R&D Labs 2011-09-22 PhilaFed PDF version http://www.philadelphiafed.org/research-and-data/publications/working-papers/2011/wp11-42.pdf?utm_source=RSS-CB&utm_medium=TM&utm_campaign=RSS-CB The authors study the location and productivity of more than 1,000 research and development (R&D) labs located in the Northeast corridor of the U.S. Using a variety of spatial econometric techniques, they find that these labs are substantially more concentrated in space than the underlying distribution of manufacturing activity. Ripley's K-function tests over a variety of spatial scales reveal that the strongest evidence of concentration occurs at two discrete distances: one at about one-quarter of a mile and another at about 40 miles. These findings are consistent with empirical research that suggests that some spillovers depreciate very rapidly with distance, while others operate at the spatial scale of labor markets. The authors also find that R&D labs in some industries (e.g., chemicals, including drugs) are substantially more spatially concentrated than are R&D labs as a whole.Tests using local K-functions reveal several concentrations of R&D labs (Boston, New York-Northern New Jersey, Philadelphia-Wilmington, and Washington, DC) that appear to represent research clusters. The authors verify this conjecture using significance-maximizing techniques (e.g., SATSCAN) that also address econometric issues related to "multiple testing" and spatial autocorrelation.The authors develop a new procedure for identifying clusters — the multiscale core-cluster approach — to identify labs that appear to be clustered at a variety of spatial scales. They document that while locations in these clusters are often related to basic infrastructure, such as access to major roads, there is significant variation in the composition of labs across these clusters. Finally, the authors show that R&D labs located in clusters defined by this approach are, all else equal, substantially more productive in terms of the patents or citation-weighted patents they receive. Gerald Carlino Gerald A. Carlino Jake Carr Jake K. Carr Robert Hunt Robert M. Hunt Tony Smith Tony E. Smith September 22, 2011 Federal Reserve Bank of Philadelphia: Working Papers http://www.philadelphiafed.org/research-and-data/publications/working-papers/2011/wp11-41.pdf?utm_source=RSS-CB&utm_medium=TM&utm_campaign=RSS-CB Two often-divergent U.S. GDP estimates are available, a widely-used expenditure-side version GDPE, and a much less widely-used income-side version GDI . The authors propose and explore a "forecast combination" approach to combining them. They then put the theory to work, producing a superior combined estimate of GDP growth for the U.S., GDPC. The authors compare GDPC to GDPE and GDPI , with particular attention to behavior over the business cycle. They discuss several variations and extensions. 2011-09-20T12:00:00Z en Improving GDP Measurement: A Forecast Combination Perspective 2011-09-20 PhilaFed PDF version http://www.philadelphiafed.org/research-and-data/publications/working-papers/2011/wp11-41.pdf?utm_source=RSS-CB&utm_medium=TM&utm_campaign=RSS-CB Two often-divergent U.S. GDP estimates are available, a widely-used expenditure-side version GDPE, and a much less widely-used income-side version GDI . The authors propose and explore a "forecast combination" approach to combining them. They then put the theory to work, producing a superior combined estimate of GDP growth for the U.S., GDPC. The authors compare GDPC to GDPE and GDPI , with particular attention to behavior over the business cycle. They discuss several variations and extensions. Boragan Aruoba S. Boragan Aruoba Francis Diebold Francis X. Diebold Jeremy Nalewaik Jeremy Nalewaik Frank Schorfheide Frank Schorfheide Dongho Song Dongho Song September 20, 2011 Federal Reserve Bank of Philadelphia: Working Papers http://www.philadelphiafed.org/research-and-data/publications/working-papers/2011/wp11-40.pdf?utm_source=RSS-CB&utm_medium=TM&utm_campaign=RSS-CB The Phillips curve has long been used as a foundation for forecasting inflation. Yet numerous studies indicate that over the past 20 years or so, inflation forecasts based on the Phillips curve generally do not predict inflation any better than a univariate forecasting model. In this paper, the authors take a deeper look at the forecasting ability of Phillips curves from both an unconditional and a conditional view. Namely, they use the test results developed by Giacomini and White (2006) to examine the forecasting ability of Phillips curve models. The authors' main results indicate that forecasts from their Phillips curve models are unconditionally inferior to those of their univariate forecasting models and sometimes the difference is statistically significant. However, the authors do find that conditioning on various measures of the state of the economy does at times improve the performance of the Phillips curve model in a statistically significant way. Of interest is that improvement is more likely to occur at longer forecasting horizons and over the sample period 1984Q1—2010Q3. Strikingly, the improvement is asymmetric — Phillips curve forecasts tend to be more accurate when the economy is weak and less accurate when the economy is strong. It, therefore, appears that forecasters should not fully discount the inflation forecasts of Phillips curve-based models when the economy is weak. 2011-09-20T12:00:00Z en Do Phillips Curves Conditionally Help to Forecast Inflation? 2011-09-20 PhilaFed PDF version http://www.philadelphiafed.org/research-and-data/publications/working-papers/2011/wp11-40.pdf?utm_source=RSS-CB&utm_medium=TM&utm_campaign=RSS-CB The Phillips curve has long been used as a foundation for forecasting inflation. Yet numerous studies indicate that over the past 20 years or so, inflation forecasts based on the Phillips curve generally do not predict inflation any better than a univariate forecasting model. In this paper, the authors take a deeper look at the forecasting ability of Phillips curves from both an unconditional and a conditional view. Namely, they use the test results developed by Giacomini and White (2006) to examine the forecasting ability of Phillips curve models. The authors' main results indicate that forecasts from their Phillips curve models are unconditionally inferior to those of their univariate forecasting models and sometimes the difference is statistically significant. However, the authors do find that conditioning on various measures of the state of the economy does at times improve the performance of the Phillips curve model in a statistically significant way. Of interest is that improvement is more likely to occur at longer forecasting horizons and over the sample period 1984Q1—2010Q3. Strikingly, the improvement is asymmetric — Phillips curve forecasts tend to be more accurate when the economy is weak and less accurate when the economy is strong. It, therefore, appears that forecasters should not fully discount the inflation forecasts of Phillips curve-based models when the economy is weak. Michael Dotsey Michael Dotsey Shigeru Fujita Shigeru Fujita Tom Stark Tom Stark September 20, 2011 Federal Reserve Bank of Philadelphia: Working Papers http://www.philadelphiafed.org/research-and-data/publications/working-papers/2011/wp11-39.pdf?utm_source=RSS-CB&utm_medium=TM&utm_campaign=RSS-CB Is the observed large increase in consumer indebtedness since 1970 beneficial for U.S. consumers? This paper quantitatively investigates the macroeconomic and welfare implications of relaxing borrowing constraints using a model with preferences featuring temptation and self-control. The model can capture two contrasting views: the positive view, which links increased indebtedness to financial innovation and thus better consumption smoothing, and the negative view, which is associated with consumers' over-borrowing. The author finds that the latter is sizable: the calibrated model implies a social welfare loss equivalent to a 0.4 percent decrease in per-period consumption from the relaxed borrowing constraint consistent with the observed increase in indebtedness. The welfare implication is strikingly different from the standard model without temptation, which implies a welfare gain of 0.7 percent, even though the two models are observationally similar. Naturally, the optimal level of the borrowing limit is significantly tighter according to the temptation model, as a tighter borrowing limit helps consumers by preventing over-borrowing. 2011-09-14T12:00:00Z en Rising Indebtedness and Temptation: A Welfare Analysis 2011-09-14 PhilaFed PDF version http://www.philadelphiafed.org/research-and-data/publications/working-papers/2011/wp11-39.pdf?utm_source=RSS-CB&utm_medium=TM&utm_campaign=RSS-CB Is the observed large increase in consumer indebtedness since 1970 beneficial for U.S. consumers? This paper quantitatively investigates the macroeconomic and welfare implications of relaxing borrowing constraints using a model with preferences featuring temptation and self-control. The model can capture two contrasting views: the positive view, which links increased indebtedness to financial innovation and thus better consumption smoothing, and the negative view, which is associated with consumers' over-borrowing. The author finds that the latter is sizable: the calibrated model implies a social welfare loss equivalent to a 0.4 percent decrease in per-period consumption from the relaxed borrowing constraint consistent with the observed increase in indebtedness. The welfare implication is strikingly different from the standard model without temptation, which implies a welfare gain of 0.7 percent, even though the two models are observationally similar. Naturally, the optimal level of the borrowing limit is significantly tighter according to the temptation model, as a tighter borrowing limit helps consumers by preventing over-borrowing. Makoto Nakajima Makoto Nakajima September 14, 2011 Federal Reserve Bank of Philadelphia: Working Papers http://www.philadelphiafed.org/research-and-data/publications/working-papers/2011/wp11-38.pdf?utm_source=RSS-CB&utm_medium=TM&utm_campaign=RSS-CB The authors examine portage sites in the U.S. South, Mid-Atlantic, and Midwest, including those on the fall line, a geomorphological feature in the southeastern U.S. marking the final rapids on rivers before the ocean. Historically, waterborne transport of goods required portage around the falls at these points, while some falls provided water power during early industrialization. These factors attracted commerce and manufacturing. Although these original advantages have long since been made obsolete, the authors document the continuing importance of these portage sites over time. They interpret these results as path dependence and contrast explanations based on sunk costs interacting with decreasing versus increasing returns to scale. 2011-09-09T12:00:00Z en Portage and Path Dependence 2011-09-09 PhilaFed PDF version http://www.philadelphiafed.org/research-and-data/publications/working-papers/2011/wp11-38.pdf?utm_source=RSS-CB&utm_medium=TM&utm_campaign=RSS-CB The authors examine portage sites in the U.S. South, Mid-Atlantic, and Midwest, including those on the fall line, a geomorphological feature in the southeastern U.S. marking the final rapids on rivers before the ocean. Historically, waterborne transport of goods required portage around the falls at these points, while some falls provided water power during early industrialization. These factors attracted commerce and manufacturing. Although these original advantages have long since been made obsolete, the authors document the continuing importance of these portage sites over time. They interpret these results as path dependence and contrast explanations based on sunk costs interacting with decreasing versus increasing returns to scale. Hoyt Bleakley Hoyt Bleakley Jeffrey Lin Jeffrey Lin September 9, 2011 Federal Reserve Bank of Philadelphia: Working Papers