The new view of growth and business cycles

Evidence on the cost of business equipment investment supports a new way of understanding growth and business cycles. The equipment price has been falling for most of the last 40 years and it tends to fall more the faster economy is growing. This suggests that technological change embodied in new capital equipment has a substantial effect on growth and business cycles.Business cycles

A real explanation for heterogeneous investment dynamics

Household investment, that is investment in consumer durables and housing, leads non-residential fixed investment over the U.S. business cycle. This observation represents a potent challenge to real business cycle (RBC) theory. First of all the theory has been unable to account for it. In addition, research suggests the observation is driven by monetary shocks, supporting the view that these shocks play a leading role in the U.S. business cycle. This paper shows that RBC theory is consistent with the investment dynamics after all. It does so by generalizing the standard home production environment to take into account the fact that household capital is useful in market production.Monetary theory ; Business cycles

Evaluating the Calvo model of sticky prices

This paper studies the empirical performance of a widely used model of nominal rigidities: the Calvo model of sticky goods prices. We describe an extended version of this model with variable elasticity of demand of the differentiated goods and imperfect capital mobility. We find little evidence against standard versions of the model without the extensions, but the estimated frequency of price adjustment is implausible. With the extended model the estimates are more reasonable. This is especially so if the sample is split to take into account a possible change in monetary regime around 1980.Prices

Testing the Calvo model of sticky prices

This article discusses the empirical performance of a widely used model of nominal rigidities: the Calvo model of sticky good prices. The authors argue that there is overwhelming evidence against this model. But this evidence is generated under three key assumptions: one, there is no lag between the time firms reoptimize their price plans and the time they implement those plans; two, there is no measurement error in inflation; and three, monetary policy is the same in the pre-1979 and post-1982 periods. The authors discuss the impact of relaxing each of these assumptions.Prices ; Macroeconomics

How does an increase in government purchases affect economy?

This article studies the impact on aggregate economic activity of increases in defense purchases which are unrelated to other developments in the economy. The authors use empirical evidence to evaluate the predictions of several prominent models.Economic development ; Macroeconomics ; Labor market ; Expenditures, Public ; Defense industries

Stock market and investment good prices: implications of macroeconomics

Stock market prices are procyclical, while investment good prices are countercyclical. A real business cycle model calibrated to these observations implies that 75% of the cyclical variation in aggregate output is due to an investment-specific technology shock, while the rest is due to an aggregate productivity shock. To test this conclusion, we investigate the model's implications for asset prices and business cycles. The model does not do significantly worse than existing models on these dimensions, and on two dimensions it does notably better. It is consistent with the facts: (i) employment and investment across different sectors comove over the business cycle: and (ii) high interest rates lead low aggregate output. Fact (ii) is often interpreted as reflecting the business cycle effects of monetary policy shocks. Our result suggest that (ii) may, at least to some extent, also reflect the effects of real shocks.Stock - Prices ; Investments

Household debt

Debt ; Income

Idiosyncratic risk and aggregate employment dynamics

This paper studies how producers’ idiosyncratic risks affect an industry’s aggregate dynamics in an environment where certainty equivalence fails. In the model, producers can place workers in two types of jobs, organized and temporary. Workers are less productive in temporary jobs, but creating an organized job requires an irreversible investment of managerial resources. Increasing productivity risk raises the value of an unexercised option to create an organized job. Losing this option is one cost of immediate organized job creation, so an increase in its value induces substitution towards cheaper temporary jobs. Because they are costless to create and destroy, a producer using temporary jobs can be more flexible, responding more to both idiosyncratic and aggregate shocks. If all of an industry’s producers adapt to heightened idiosyncratic risk in this way, the industry as a whole can respond more to a given aggregate shock. This insight is used to better understand the observation from the U.S. manufacturing sector that groups of plants displaying high idiosyncratic variability also have large aggregate fluctuations.Employment (Economic theory) ; Temporary employees

Understanding aggregate job flows

The authors describe how evidence on aggregate job flows challenges standard business cycle theory and discuss recent developments in business cycle theory aimed at accounting for the evidence.Business cycles ; Employment (Economic theory) ; Labor market

Fiscal shocks in an efficiency wage model

This paper illustrates a particular limited information strategy for assessing the empirical plausibility of alternative quantitative general equilibrium business cycle models. The basic strategy is to test whether a model economy can account for the response of actual economy to an exogenous shock. Here we concentrate on the response of aggregate hours worked and real wages to a fiscal policy shock. The fiscal policy shock is identified with the dynamic response of government purchases and averages marginal income tax rates to an exogenous increase in military purchases. Burnside, Eichenbaum and Fisher (1999) show that standard Real business Cycle models cannot account for the salient features of how hours worked and after - tax real wages respond to a fiscal policy shock. In this paper we show that this failure extends to a class of business cycle models in which the labor is characterized by efficiency wages.Fiscal policy ; Wages