Presentation of two recent papers that revisit the empirical evidence for the Great Moderation and its continuation.

[embeddoc url=”https://blogs.uoregon.edu/macrogroup/files/2016/10/IAAE2016-683-s1i47h.pdf” download=”all” viewer=”google”]

[embeddoc url=”https://blogs.uoregon.edu/macrogroup/files/2016/10/dt1423e-taax0w.pdf” download=”all” viewer=”google”]

Brian Dombeck

Previous structural estimates have found that anticipated shocks are responsible for about half of observed fluctuations in macroeconomic data. But endogenous fluctuations in key macroeconomic variables caused by the arrival of news in rational expectations (RE) news-shock models are qualitatively similar to those generated by the adaptive learning process in models which do not feature news shocks but do allow for boundedly rational agents. This paper allows learning and news shocks to compete as explanations explanations for business cycles in a news-rich medium-scale DSGE model using likelihood-based classical and Bayesian methods to determine whether existing estimates of the relative importance of news shocks have been overstated due to model misspecification stemming directly from the assumption of rational expectations.

Brian’s research website

Presented “Income and Wealth Heterogeneity in the Macroeconomy” by Krusell & Smith (JPE 1998) and “How Important is Discount Rate Heterogeneity for Wealth Inequality” by Lutz Hendricks (JEDC 2007).  Followed the discussion of these papers with a brief overview of the empirical literature on present bias and present bias heterogeneity in an attempt to motivate a research agenda that he will be pursuing this summer

Krusell & Smith (JPE 1998)

Lutz Hendricks (JEDC 2007)

Talk about fiscal foresight and the identification of government spending shocks, i.e. if people anticipate changes in spending/alter their behavior in response to anticipated changes, is using the “standard” VAR approach to estimate the effects of spending an awful idea? Focus was on an entertaining back-and-forth between Roberto Perotti and Valerie Ramey, who both appear to have very strong and very different opinions on the matter.

Papers are attached[embeddoc url=”https://blogs.uoregon.edu/macrogroup/files/2016/04/Perotti-2011-2fy8tje.pdf” download=”all” viewer=”google”], [embeddoc url=”https://blogs.uoregon.edu/macrogroup/files/2016/04/Ramey-2011-zw9g9u.pdf” download=”all” viewer=”google”], [embeddoc url=”https://blogs.uoregon.edu/macrogroup/files/2016/04/Perotti-2014-22f5scf.pdf” download=”all” viewer=”google”],

Blanchard & Perotti (2002)

Abstract: Some technologies save lives—new vaccines, new surgical techniques, safer highways. Others threaten lives—pollution, nuclear accidents, global warming, and the rapid global transmission of disease. How is growth theory altered when technologies involve life and death instead of just higher consumption? This paper shows that taking life into account has first-order consequences. Under standard preferences, the value of life may rise faster than consumption, leading society to value safety over consumption growth. As a result, the optimal rate of consumption growth may be substantially lower than what is feasible, in some cases falling all the way to zero.

Full paper: link

Abstract: News shock models seek to generate positive co-movement between consumption, investment, total labor supply, and output in response to good news about the future state of the economy. Several such models exist, and all rely on the assumption of rational expectations (RE). In this paper the RE solution of the three-sector RBC model introduced in Beaudry and Portier (2004) is analyzed for stability properties related to relaxing the RE assumption. In particular I consider the weaker assumption that agents are endowed with a perceived law of motion (PLM) and behave as econometricians to update their beliefs about the particular coefficients governing the actual law of motion (ALM). If the RE equilibrium obtains under learning it is said to be expectationally stable (E-Stable). I find that regardless of specific assumptions regarding the timing of informational conditioning, the RE solution in this news shock model is E-Stable.

Abstract: Recently empirical research has emphasized that theoretical models of price-setting must distinguish between the effects of aggregate and sector-level shocks, and moreover that they must support heterogeneous behavior across sectors. This paper develops a model that can deliver these features by extending the rational inattention price-setting approach pioneered by Mackowiak and Wiederholt ´ (2009) to a multisector setting. Our analytic solution to a special case of the rational inattention problem allows us to detail attention allocation mechanisms and explore implications. More generally, we find that the multisector setting preserves the desirable characteristic that firms respond differently to different types of shocks, allows for heterogeneous responses, and reduces the need for extreme calibration of key parameters.

Full paper can be found here.